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

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

Relevant comparative operating statistics for the three and six months ended June 30, 2022, 2021, and 2019 are included below. The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company’s performance against its results for the prior year period, as well as against the performance of the Company’s peers. For the three and six months ended June 30, 2022, the Company believes a comparison of its 2022 to 2019 (pre-pandemic) operating statistics is relevant and useful as the Company continues to recover from the pandemic. For the three and six months ended June 30, 2021, and 2022, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

Three months ended June 30,
202220212022 Change to 202120192022 Change to 2019
Revenue passengers carried (000s)33,22426,15827.0%34,924(4.9)%
Enplaned passengers (000s)41,28432,78625.9%42,569(3.0)%
Revenue passenger miles (RPMs) (in millions)(a)32,52327,68917.5%34,528(5.8)%
Available seat miles (ASMs) (in millions)(b)37,32233,41411.7%39,985(6.7)%
Load factor(c)87.1%82.9%4.2pts.86.4%0.7pts.
Average length of passenger haul (miles)9791,059(7.6)%989(1.0)%
Average aircraft stage length (miles)727794(8.4)%750(3.1)%
Trips flown326,848268,87921.6%347,684(6.0)%
Seats flown (000s)(d)50,75841,83621.3%52,398(3.1)%
Seats per trip(e)155.3155.6(0.2)%150.73.1%
Average passenger fare$184.17$136.4635.0%$157.1017.2%
Passenger revenue yield per RPM (cents)(f)18.8112.8945.9%15.8918.4%
Operating revenues per ASM (cents)(g)18.0311.9950.4%14.7822.0%
Passenger revenue per ASM (cents)(h)16.3910.6853.5%13.7219.5%
Operating expenses per ASM (cents)(i)14.9210.2246.0%12.3620.7%
Operating expenses per ASM, excluding fuel (cents)10.547.8135.0%9.5210.7%
Operating expenses per ASM, excluding fuel and profitsharing (cents)10.327.5636.5%9.0913.5%
Fuel costs per gallon, including fuel tax$3.36$1.8878.7%$2.1357.7%
Fuel costs per gallon, including fuel tax, economic$3.36$1.9275.0%$2.1357.7%
Fuel consumed, in gallons (millions)48642614.1%532(8.6)%
Active fulltime equivalent Employees(j)62,33354,44814.5%59,7934.2%
Aircraft at end of period(k)730736(0.8)%753(3.1)%
Six months ended June 30,
202220212022 Change to 202120192022 Change to 2019
Revenue passengers carried (000s)59,25340,38346.7%66,220(10.5)%
Enplaned passengers (000s)73,28950,71344.5%80,382(8.8)%
Revenue passenger miles (RPMs) (in millions)(a)59,00642,56538.6%65,232(9.5)%
Available seat miles (ASMs) (in millions)(b)71,70656,56126.8%77,871(7.9)%
Load factor(c)82.3%75.3%7.0pts.83.8%(1.5)pts.
Average length of passenger haul (miles)9961,054(5.5)%9851.1%
Average aircraft stage length (miles)745785(5.1)%751(0.8)%
Trips flown614,599461,28033.2%674,074(8.8)%
Seats flown (000s)(d)95,30571,62733.1%101,871(6.4)%
Seats per trip(e)155.1155.3(0.1)%151.12.6%
Average passenger fare$173.06$130.7932.3%$154.5012.0%
Passenger revenue yield per RPM (cents)(f)17.3812.4140.0%15.6810.8%
Operating revenues per ASM (cents)(g)15.9310.7148.7%14.2012.2%
Passenger revenue per ASM (cents)(h)14.309.3453.1%13.148.8%
Operating expenses per ASM (cents)(i)14.529.3156.0%12.3118.0%
Operating expenses per ASM, excluding fuel (cents)10.847.0653.5%9.5513.5%
Operating expenses per ASM, excluding fuel and profitsharing (cents)10.686.8755.5%9.2116.0%
Fuel costs per gallon, including fuel tax$2.86$1.7860.7%$2.0936.8%
Fuel costs per gallon, including fuel tax, economic$2.86$1.8356.3%$2.0936.8%
Fuel consumed, in gallons (millions)92371229.6%1,026(10.0)%
Active fulltime equivalent Employees(j)62,33354,44814.5%59,7934.2%
Aircraft at end of period(k)730736(0.8)%753(3.1)%

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

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

(c) Revenue passenger miles divided by available seat miles.

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

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

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

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

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

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

(j) Included 1,446 Employees on Extended Emergency Time Off as of June 30, 2021. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

(k) Included four and 39 Boeing 737 Next Generation aircraft in storage as of June 30, 2022 and June 30, 2021, respectively. Included 34 Boeing 737 MAX ("MAX") aircraft in long term storage as of June 30, 2019.

Financial Overview

The Company's financial results in 2021 were impacted and in 2022 have continued to be impacted, by the effects of the COVID-19 pandemic, which began in early 2020, on both an accounting principles generally accepted in the United States ("GAAP") and Non-GAAP basis. Although demand for leisure travel surged in second quarter 2022 and second quarter 2022 Operating revenues exceeded second quarter 2019 Operating revenues, both capacity (or ASMs) and business travel remained below comparable 2019 levels primarily due to available staffing constraints, in particular Pilots. In addition, GAAP results for the three and six months ended June 30, 2021, included impacts associated with payroll funding support ("Payroll Support") programs with the United States Department of the Treasury ("Treasury"), as referenced in Note 2 to the unaudited Condensed Consolidated Financial Statements.

The Company recorded second quarter and year-to-date GAAP and non-GAAP results for 2022, 2021, and 2019 as noted in the following tables. The Company believes comparisons of current year financial results to 2019 continue to be relevant given the significant impacts resulting from the pandemic. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Three months ended June 30,
(in millions, except per share amounts)
GAAP202220212022 Change to 202120192022 Change to 2019
Operating income$1,158$59494.9%$96819.6%
Net income$760$348118.4%$7412.6%
Net income per share, diluted$1.20$0.57110.7%$1.37(12.3)%
Non-GAAP
Operating income (loss)$1,173$(162)n.m.$96821.2%
Net income (loss)$825$(206)n.m.$74111.3%
Net income per share, diluted$1.30$(0.35)n.m.$1.37(4.9)%
Six months ended June 30,
(in millions, except per share amounts)
GAAP202220212022 Change to 202120192022 Change to 2019
Operating income$1,007$79327.0%$1,473(31.6)%
Net income$482$4634.1%$1,128(57.3)%
Net income per share, diluted$0.77$0.760.7%$2.06(62.9)%
Non-GAAP
Operating income (loss)$1,038$(1,431)n.m.$1,473(29.5)%
Net income (loss)$633$(1,221)n.m.$1,128(43.9)%
Net income per share, diluted$1.00$(2.07)n.m.$2.06(51.4)%

The Company's financial results for the three and six months ended June 30, 2022, exceeded the comparative 2021 financial results despite $724 million and $1.9 billion in grant allocations of Payroll Support from Treasury during the three and six months ended June 30, 2021, respectively, utilized to fund a portion of salaries, wages, and benefits. See below and Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. On a non-GAAP basis, the Company's Operating income (loss) and Net income (loss) improved significantly in the three and six months ended June 30, 2022, versus the same prior year period due to the

significant recovery in travel demand, which was aided by a reduction in COVID-19 cases and hospitalizations, an increase in vaccinations, and a decline in travel-related restrictions across the United States. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures. These impacts combined resulted in a 67.9 percent and 88.5 percent increase in Operating revenues for the three and six months ended June 30, 2022, respectively, versus the same prior year periods. Operating revenues for the three and six months ended June 30, 2022, exceeded the comparative 2019 pre-pandemic levels primarily due to higher yields, despite the slight decrease in capacity. Operating expenses for the three and six months ended June 30, 2022, exceeded the comparative pre-pandemic 2019 levels primarily due to higher salaries, wages, and benefits and fuel prices.

2022 Outlook

The following tables present current selected financial guidance for third quarter and full year 2022:

3Q 2022 Estimation
Operating revenue compared with 2019 (a)Up 8% to 12%
ASMs compared with 2019 (b)~Flat
Economic fuel costs per gallon (c)(d)$3.25 to $3.35
Fuel hedging premium expense per gallon$0.02
Fuel hedging cash settlement gains per gallon$0.46
ASMs per gallon (fuel efficiency)76 to 78
CASM-X (e) compared with 2019 (f)Up 12% to 15%
Scheduled debt repayments (millions)~$55
Interest expense (millions)~$90
Aircraft (g)741
2022 Estimation
ASMs compared with 2019 (b)Down ~4%
Economic fuel costs per gallon (c)(d)$2.95 to $3.05
Fuel hedging premium expense per gallon$0.04
Fuel hedging cash settlement gains per gallon$0.51
CASM-X (e) compared with 2019 (f)Up 12% to 16%
Scheduled debt repayments (millions)~$820
Interest expense (millions)~$360
Aircraft (g)765
Effective tax rate24% to 26%
Capital spending (billions) (h)~$4.0

(a) The Company believes that operating revenues compared with 2019 is a relevant measure of performance due to the significant impacts in 2020 and 2021 from the pandemic.

(b) Available seat miles (ASMs, or capacity). The Company's flight schedule is currently published for sale through March 8, 2023. The Company currently expects fourth quarter 2022 capacity to be down in the range of 1 percent to 2 percent compared with fourth quarter 2019, and first quarter 2023 capacity to be up approximately 10 percent, compared with first quarter 2022.

(c) See Note Regarding Use of Non-GAAP Financial Measures for additional information on special items. In addition, information regarding special items and economic results is included in the accompanying table Reconciliation of Reported Amounts to Non-GAAP Items (also referred to as "excluding special items").

(d) Based on the Company's existing fuel derivative contracts and market prices as of July 21, 2022, third quarter, fourth quarter, and full year 2022 economic fuel costs per gallon are estimated to be in the range of $3.25 to $3.35, $3.00 to $3.10, and $2.95 to $3.05, respectively. Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets, the impact of COVID-19 cases on air travel demand, or the impact to its financial statements in future periods. Accordingly, the

Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort. See Note Regarding Use of Non-GAAP Financial Measures.

(e) Operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing.

(f) Projections do not reflect the potential impact of fuel and oil expense, special items, and profitsharing because the Company cannot reliably predict or estimate those items or expenses or their impact to its financial statements in future periods, especially considering the significant volatility of the fuel and oil expense line item. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for these projected results is not meaningful or available without unreasonable effort.

(g) Aircraft on property, end of period. The Company ended second quarter 2022 with 730 Boeing 737 aircraft. During third quarter 2022, the Company expects to take delivery of 23 Boeing 737 MAX 8 (-8) aircraft and retire 12 Boeing 737-700 (-700) aircraft to end the quarter with 741 aircraft. During fourth quarter 2022, the Company expects to take delivery of 31 -8 aircraft and retire seven -700 aircraft to end the year with 765 aircraft. The delivery schedule for the Boeing 737 MAX 7 (-7) is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and approvals to 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. Furthermore, given the current ongoing status of the -7 certification and pace of expected deliveries for the remainder of this year, it is the Company's assumption that it will receive no -7 aircraft deliveries in 2022, and that the remaining 48 Boeing 737 MAX (MAX) aircraft reflected in its 2022 contractual order book will shift into 2023.

(h) Represents the Company's current expectation which assumes the exercise of its five remaining 2022 MAX aircraft delivery options, and a total of 66 -8 aircraft deliveries in 2022, compared with the Company's previous estimation which assumed the delivery of 114 MAX aircraft in 2022. The Company continues to estimate $900 million in non-aircraft capital spending in 2022.

COVID-19 Pandemic Impacts

As detailed in Note 2 to the unaudited Condensed Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, the Company has received significant financial assistance from Treasury in the form of Payroll Support, and this assistance had a significant impact on the Company's reported GAAP financial results in 2021. Such impact ended in third quarter 2021, and the Company's 2022 results do not reflect the benefit of this Payroll Support, and its future periods are not expected to benefit from such Payroll Support. However, future cash flows will be impacted through the portion of Payroll Support that was in the form of loans that will have to be repaid to Treasury.

During second quarter 2020, the Company introduced Voluntary Separation Program 2020 ("Voluntary Separation Program") and the Extended Emergency Time Off ("Extended ETO") program which helped closer align staffing to reduced flight schedules and enabled the Company to avoid involuntary furloughs and layoffs associated with the impacts of the pandemic. Approximately 16,000 Employees elected to participate in one of these programs. All Employees that elected to participate in the Extended ETO program have since returned or been recalled to work, or have chosen to permanently separate from the Company, and no Employees were on Extended ETO past March 31, 2022. The Company realized approximately $1.1 billion of full year 2021 cost savings from the Voluntary Separation Program and Extended ETO but expects no material cost savings from these programs in 2022 and beyond. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

The Company met its 2021 hiring goals and plans to add over 10,000 Employees, net of attrition, in 2022. The Company continues to strive to provide sufficient and optimized staffing to support its anticipated flight schedule plans for 2022 and beyond. For the three and six months ended June 30, 2022, the Company hired approximately 4,000 and 7,300 Employees, respectively, net of attrition, and returned to overall pre-pandemic staffing levels in May 2022. The Company has been making additional investments to attract and retain talent, including the decision in fourth quarter 2021 to further raise the Company's starting hourly pay rates from $15 per hour to $17 per hour for certain of its workgroups, subject, in each case, to acceptance of such change by the applicable union.

Company Overview

The Company has entered into supplemental agreements with The Boeing Company ("Boeing") to increase aircraft orders and accelerate certain options with the goal of improving potential growth opportunities, restoring its network closer to pre-pandemic levels, lowering operating costs, and further modernizing its fleet with less carbon-

intensive aircraft. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information. The Company continues to expect that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 442 Boeing 737-700 ("-700") aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of its environmental sustainability efforts.

For first half 2022, the Company was scheduled to receive 28 -8 aircraft, of which only 12 were received, all during second quarter 2022. The Company ended second quarter 2022 with 730 aircraft, which reflects four owned -700 retirements. In addition, the Company had four -700 aircraft in storage as of June 30, 2022, all of which were subsequently retired from the Company's fleet in July 2022. The Company is experiencing delays in aircraft deliveries from Boeing and now estimates 2022 deliveries to be 66 versus the previously expected 114. The Company is currently assuming 23 and 31 -8 aircraft deliveries in third quarter and fourth quarter 2022, respectively. The Company plans to retire 12 and seven -700 aircraft in third quarter and fourth quarter 2022, respectively. As a result, the Company expects to end third quarter with 741 aircraft and end 2022 with 765 aircraft, compared with its previous guidance of 814 aircraft. The Company now expects to retire 29 -700 aircraft in 2022, compared with its previous guidance of 28 -700 retirements this year.

The Company has published its flight schedule through March 8, 2023. During 2022, the Company is focusing on restoring its network, primarily in cities with a very strong Customer base, by adding city pair frequencies and connecting new service with existing points-of-strength to increase Customer depth.

On March 24, 2022, the Company announced a new fare product, Wanna Get Away Plus™, which became available to Customers in May 2022. Wanna Get Away Plus provides Customers with more flexibility, choice, and rewards for a modest buy-up from the Company's Wanna Get Away® fare product. In addition to all of the usual day of travel benefits and booking flexibility offered to Customers across all of the Company's fares, Wanna Get Away Plus provides additional benefits as compared with the Wanna Get Away fare product, including:

  • Transferable flight credit(s), a new benefit that generally enables Customers to make a one-time transfer of eligible unused flight credit(s) to a new traveler for future use;

  • More flexibility through same-day confirmed change/same-day standby; and

  • More earning power in the Company's Rapid Rewards® loyalty program, with 8X points awarded on flights instead of the 6X points awarded on Wanna Get Away fares.

In July 2022, the Company announced that flight credits will no longer expire. The Company expects that this policy change, combined with its other attractive brand attributes, will contribute to an increase in Customer loyalty. Flight credits result from canceling reservations and previously were valid for no longer than one year from the date of original purchase. Flight credits for non-refundable fares will be issued as long as the reservation is cancelled more than 10 minutes prior to the scheduled departure. Flight credits or refunds for refundable fares will be issued regardless of cancellation time. Flight credits unexpired on, or created on or after July 28, 2022 do not expire and will show an expiration date (12/31/2040) until the Company’s systems are updated. A flight credit with an expiration date on or before July 27, 2022, has expired in accordance with its existing expiration date.

On March 28, 2022, the Company reached a tentative collective-bargaining agreement with the International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM"), which represents the Company's approximately 6,000 Customer Service Agents, Customer Representatives, and Source of Support Representatives. However, during May 2022, the IAM membership voted not to ratify the agreement. The Company will continue to engage in discussions on a new agreement with IAM.

On June 3, 2022, the Company reached a tentative collective-bargaining agreement with the Aircraft Mechanics Fraternal Association ("AMFA"), which represents the Company's nearly 170 Aircraft Appearance Technicians. However, the AMFA membership voted not to ratify the agreement. The Company will continue to engage in discussions on a new agreement with AMFA.

As part of its commitment to corporate sustainability, on April 22, 2022, the Company published its 2021 One Report describing the Company's sustainability strategies, which include the Company’s fuel conservation and emissions mitigation initiatives and other efforts to minimize greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling. The Company also published its first ever Diversity, Equity, and Inclusion ("DEI") Report on April 22, 2022. A companion piece to the One Report, the DEI Report takes a deeper dive into the Company's DEI goals, commitments, and initiatives and highlights the expected path forward. Information contained in the Southwest One Report and/or the DEI Report is not incorporated by reference into, and does not constitute a part of, this Form 10-Q. While the Company believes that the disclosures contained in the Southwest One Report, the DEI Report, and other voluntary disclosures regarding environmental, social, and governance (“ESG”) matters are responsive to various areas of investor interest, the Company believes that these disclosures do not currently address matters that are material in the near term to the Company’s operations, strategy, financial condition, or financial results, although this view may change in the future based on new information that could materially alter the estimates, assumptions, or timelines used to create these disclosures. Given the estimates, assumptions, and timelines used to create the Southwest One Report and other voluntary disclosures, the materiality of these disclosures is inherently difficult to assess in advance.

Material Changes in Results of Operations

Comparison of three months ended June 30, 2022 and June 30, 2021

Operating Revenues

Total operating revenues for second quarter 2022 increased by $2.7 billion, or 67.9 percent, year-over-year, to a quarterly record of $6.7 billion. Second quarter 2022 operating revenues per ASM (RASM) were 18.03 cents, an increase of 50.4 percent, compared with second quarter 2021. The dollar increase was primarily due to the significant improvement in travel demand in second quarter 2022 versus the impacts to demand and bookings from the COVID-19 pandemic in second quarter 2021. For second quarter 2022, the year-over-year RASM increase was primarily driven by a 45.9 percent improvement in yield and an increase in Load factor of 4.2 points. The Company's policy change to eliminate expiration dates on qualifying flight credits, in particular those that were set to expire on September 7, 2022, results in a shift in the timing of revenue recognition. As a result, the breakage benefit to second quarter 2022 Operating revenues associated with flight credits that were set to expire on September 7, 2022 will not recur in third quarter creating a one-time sequential operating revenue growth headwind from second quarter 2022 to third quarter 2022 in the range of $250 million to $300 million, or five points, compared with their respective 2019 levels. The Company does not anticipate a material impact from this policy change beyond third quarter 2022, and estimates that breakage as a percentage of revenue will normalize to pre-pandemic levels. The Company expects that this policy change, combined with its other attractive brand attributes, will contribute to an increase in Customer loyalty and new Customers. See Note 6 to the unaudited Condensed Consolidated Financial Statements for further information.

Passenger revenues for second quarter 2022 increased by $2.6 billion, or 71.4 percent, year-over-year. On a unit basis, Passenger revenues increased 53.5 percent, year-over-year. The year-over-year increase in Passenger revenues on both a dollar and unit basis was primarily due to improvements in Passenger demand and bookings, the majority of which were for leisure oriented travel. The Company's revenue performance in second quarter 2022 was a quarterly record primarily due to a surge in leisure demand, especially in June, which resulted in strong passenger bookings, yields, and load factors. In addition, the Company's second quarter 2022 loyalty program revenue represented a quarterly record. June 2022 managed business revenues were down 19 percent, a sequential improvement compared with April and May 2022 managed business revenues, which were down 31 percent and 23 percent, respectively, all compared with their respective 2019 levels. While second quarter 2022 managed business revenues remained below 2019 levels, the Company was encouraged by the sequential improvement during the quarter, as well as managed business average fares that exceeded 2019 levels. Based on bookings thus far, the Company's third quarter 2022 managed business revenues are currently estimated to be down in the range of 17

percent to 21 percent, compared with third quarter 2019. June 2022 is estimated to represent a monthly peak for 2022 operating revenues based on first half 2022 results and current expectations for second half 2022.

Freight revenues for second quarter 2022 decreased by $3 million, or 6.0 percent, compared with the second quarter 2021, primarily due to capacity challenges driven by an increase in Passenger demand resulting in reduced space for cargo shipments.

Other revenues for second quarter 2022 increased by $173 million, or 44.5 percent, compared with second quarter 2021. On a dollar basis, approximately 59.5 percent of the increase was due to incremental revenue from the Company's new co-brand credit card agreement secured in December 2021. The remaining increase is primarily due to revenue from business partners, and improved retail spend on the Company's co-brand credit card with Chase Bank USA, N.A ("Chase").

Operating Expenses

Operating expenses for second quarter 2022 increased by $2.2 billion, or 63.2 percent, compared with second quarter 2021, while capacity increased 11.7 percent over the same prior year period. Approximately 34 percent of the operating expense increase was due to $724 million in Payroll Support allocated to offset a portion of salaries, wages, and benefits in second quarter 2021, compared with no support received in second quarter 2022. In addition, approximately 39 percent of the increase was due to higher Fuel and oil expense and 18 percent of the increase was due to higher Salaries, wages, and benefits. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for the second quarter of 2022 and 2021, followed by explanations of these changes on a dollar basis. Unless otherwise specified, changes on a per ASM basis were driven by changes in capacity, which increased with the improvement of travel demand, causing the Company's fixed costs to be spread over significantly more ASMs.

Three months ended June 30,Per ASM changePercent change
(in cents, except for percentages)20222021
Salaries, wages, and benefits5.95¢5.46¢0.49¢9.0%
Payroll support and voluntary Employee programs, net—(2.22)2.22n.m.
Fuel and oil4.382.411.9781.7
Maintenance materials and repairs0.560.66(0.10)(15.2)
Landing fees and airport rentals1.041.21(0.17)(14.0)
Depreciation and amortization0.870.94(0.07)(7.4)
Other operating expenses2.121.760.3620.5
Total14.92¢10.22¢4.70¢46.0%

Operating expenses per ASM for second quarter 2022 increased by 46.0 percent, compared with second quarter 2021, primarily due to second quarter 2021 including Payroll Support from the Consolidated Appropriations Act, 2021, and American Rescue Plan Act of 2021. Operating expenses per ASM for second quarter 2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 5.1 percent, compared with second quarter 2021 primarily due to higher salaries and wages due to significantly more trips and step/pay rate increases for certain workgroups. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for second quarter 2022 increased by $395 million, or 21.6 percent, compared with second quarter 2021. On a per ASM basis, second quarter 2022 Salaries, wages, and benefits expense increased 9.0 percent, compared with second quarter 2021. On a dollar basis, the increase was primarily driven by higher salaries and wages due to significantly more trips and step/pay rate increases for certain workgroups.

Payroll support and voluntary Employee programs, net (a reduction to expense) had no amounts for second quarter 2022. Second quarter 2021 consisted primarily of $724 million of Payroll Support proceeds allocated (credit to expense) and a $15 million net reduction in the Extended ETO liability (reduction to expense) relating to certain Employees being recalled prior to their previously elected return dates.

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

Fuel and oil expense for second quarter 2022 increased by $833 million, or 103.7 percent, compared with second quarter 2021. On a per ASM basis, second quarter 2022 Fuel and oil expense increased 81.7 percent. On a dollar basis, approximately 90 percent of the increase was attributable to an increase in jet fuel prices, and the remainder of the increase was due to an increase in fuel gallons consumed. The Company's second quarter 2022 average economic jet fuel price of $3.36 per gallon is net of approximately $332 million in gains from hedging activities. On a per ASM basis, the majority of the change was due to higher jet fuel prices. The following table provides more information on the Company's economic fuel cost per gallon, including the impact of fuel hedging premium expense and fuel derivative contract settlements:

Three months ended June 30,
20222021
Economic fuel costs per gallon$3.36$1.92
Fuel hedging premium expense (in millions)$26$24
Fuel hedging premium expense per gallon$0.05$0.06
Fuel hedging cash settlement gain per gallon$0.68$0.02

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

The Company's second quarter 2022 available seat miles per gallon ("fuel efficiency") decreased 2.3 percent, year-over-year, and increased 2.1 percent when compared with second quarter 2019. The year-over-year decrease was primarily driven by the Company's increased Load factor and operating more of its least fuel-efficient -700 aircraft versus the prior year. The increase when compared with second quarter 2019 was due to operating more MAX aircraft, the Company's most fuel-efficient aircraft, as a percentage of its fleet. The MAX remains critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals. The Company expects third quarter 2022 fuel efficiency to be in the range of 76 to 78 ASMs per gallon, on a nominal basis.

The Company's multi-year fuel hedging program continues to provide insurance against spikes in energy prices and significantly offset the market price increase in jet fuel in second quarter 2022. The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate ("WTI"), Brent crude oil, and refined products, such as heating oil. The economic fuel price per gallon sensitivities provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of July 21, 2022.

Estimated economic fuel price per gallon, including taxes and fuel hedging premiums
Average Brent Crude Oil price per barrel3Q 2022 (b)4Q 2022 (b)
$80$2.85 - $2.95$2.75 - $2.85
$90$3.05 - $3.15$2.95 - $3.05
Current Market (a)$3.25 - $3.35$3.00 - $3.10
$110$3.45 - $3.55$3.35 - $3.45
$120$3.70 - $3.80$3.60 - $3.70
$130$4.00 - $4.10$3.85 - $3.95
Fair market value of fuel derivative instruments$235 million$195 million
Estimated premium costs$13 million$13 million

(a) Brent crude oil average market prices as of July 21, 2022, were $100 and $94 per barrel for third quarter 2022 and fourth quarter 2022, respectively.

(b) Based on the Company's existing fuel derivative contracts and market prices as of July 21, 2022, third quarter, fourth quarter, and full year 2022 economic fuel costs per gallon are estimated to be in the range of $3.25 to $3.35, $3.00 to $3.10, and $2.95 to $3.05, respectively. Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets, the impact of COVID-19 cases on air travel demand, or the impact to its financial statements in future periods. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort. See Note Regarding Use of Non-GAAP Financial Measures.

In addition, the Company is providing its maximum percentage of estimated fuel consumption covered by fuel derivative contracts in the following table:

PeriodMaximum fuel hedged percentage (c)
202263% (a)
202339% (b)
202417% (b)

(a) Based on the Company's available seat mile plans for full year 2022. The Company is currently 59 percent hedged for third quarter 2022 and 62 percent hedged for fourth quarter 2022.

(b) Due to uncertainty regarding available seat mile plans in future years, the Company believes that providing the maximum percent of fuel consumption covered by derivative contracts in 2023 and 2024 relative to 2019 fuel gallons consumed is a more relevant measure for future coverage.

(c) The Company's maximum fuel hedged percentage is calculated using the maximum number of gallons that are covered by derivative contracts divided by the Company's estimate of total fuel gallons to be consumed for each respective period. The Company's maximum number of gallons that are covered by derivative contracts may be at different strike prices and at strike prices materially higher than the current market prices. The volume of gallons covered by derivative contracts that ultimately get exercised in any given period may vary significantly from the volumes used to calculate the Company's maximum fuel hedged percentages, as market prices and the Company's fuel consumption fluctuate.

As a result of applying hedge accounting in prior periods, the Company has amounts in Accumulated other comprehensive income ("AOCI") that will be recognized in earnings in future periods when the underlying fuel derivative contracts settle. The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 4 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at June 30, 2022, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

YearFair value of fuel derivative contracts at June 30, 2022Amount of gains deferred in AOCI at June 30, 2022 (net of tax)
Remainder of 2022$495$373
2023497328
202413579
Total$1,127$780

Maintenance materials and repairs expense for second quarter 2022 decreased by $12 million, or 5.4 percent, compared with second quarter 2021. On a per ASM basis, Maintenance materials and repairs expense decreased 15.2 percent, compared with second quarter 2021. On a dollar basis, the decrease was primarily due to a decrease in engines and components expense driven by the "power-by-the-hour" contract for the -700 engines expiring at the end of 2021, in which expense was incurred based primarily upon engine hours flown. At January 1, 2022, a time and materials contract commenced, pursuant to which -700 engine expense is based on actual repairs. This decrease was partially offset by the timing of regular airframe maintenance checks as some costs had previously been deferred while a portion of the fleet was placed into temporary storage during the COVID-19 pandemic. There were multiple other smaller increases on a dollar basis, primarily related to an increase in various repairs as a result of deferring costs and reduced operations in second quarter 2021 due to the COVID-19 pandemic.

Landing fees and airport rentals expense for second quarter 2022 decreased by $15 million, or 3.7 percent, compared with second quarter 2021. On a per ASM basis, Landing fees and airport rentals expense decreased 14.0 percent, compared with second quarter 2021. Despite the year-over-year increase in trips flown, on both a dollar and per ASM basis, Landing fees and airport rentals expense decreased slightly due to higher settlements and credits from various airports received in second quarter 2022.

Depreciation and amortization expense for second quarter 2022 increased by $10 million, or 3.2 percent, compared with second quarter 2021. On a per ASM basis, Depreciation and amortization expense decreased by 7.4 percent, compared with second quarter 2021. On a dollar basis, the increase was primarily due to higher depreciation expense associated with owned aircraft and engines, including certain -700 aircraft planned for accelerated retirement dates in 2022.

Other operating expenses for second quarter 2022 increased by $205 million, or 35.0 percent, compared with second quarter 2021. Included within this line item was aircraft rentals expense in the amounts of $49 million and $52 million for the three-month periods ended June 30, 2022 and 2021, respectively. On a per ASM basis, Other operating expenses increased 20.5 percent, compared with second quarter 2021. On a dollar basis, approximately 35 percent of the increase was due to higher revenue related expenses (including credit card processing charges) and approximately 20 percent of the increase was due to higher personnel expenses. The majority of the remainder was due to various flight-driven expenses.

The Company expects cost inflation in third quarter 2022, in particular with higher rates for labor, benefits, and airports. The Company also expects cost headwinds from operating at suboptimal productivity levels as headcount is expected to increase in third quarter 2022 while capacity levels are expected to remain relatively in line with third quarter 2019. The Company has increased short-haul trips in second half 2022 in an effort to restore its route network and support the reliability of its operational performance, which results in a decrease to average stage

length, and adds further unit cost headwinds. As a result of its successful hiring efforts and much improved operational reliability, the Company plans to begin moderating hiring where opportunities exist and intensify its focus on returning to historical efficiency levels.

Other

Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses.

Interest expense for second quarter 2022 decreased by $23 million, or 19.8 percent, compared with second quarter 2021, primarily due to elimination of the debt discount as a result of the Company's adoption of ASU 2020-06. See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information.

Capitalized interest for second quarter 2022 increased by $3 million, or 37.5 percent, compared with second quarter 2021, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.

Interest income for second quarter 2022 increased by $26 million, compared with second quarter 2021, primarily due to higher interest rates.

The following table displays the components of Other (gains) losses, net, for the three months ended June 30, 2022 and 2021:

Three months ended June 30,
(in millions)20222021
Mark-to-market impact from fuel contracts settling in current and future periods$(20)$(11)
Premium cost of fuel contracts not designated as hedges—10
Unrealized mark-to-market adjustment on available for sale securities4—
Mark-to-market impact on deferred compensation plan investments39(17)
Loss on partial extinguishment of convertible and unsecured notes43—
Other24
$68$(14)

Income Taxes

The Company's effective tax rate was approximately 26.6 percent in second quarter 2022, compared with 30.7 percent in second quarter 2021. The higher tax rate for second quarter 2021 was primarily due to higher state taxes. The year-over-year decrease was partially offset by the losses on the Company's convertible debt repurchases, which are largely disallowed as a deduction for tax purposes. The Company currently estimates its annual 2022 effective tax rate to be approximately 24 percent to 26 percent.

Comparison of six months ended June 30, 2022 and June 30, 2021

Operating Revenues

Passenger revenues for the six months ended June 30, 2022, increased by $5.0 billion, or 94.1 percent, compared with the first six months of 2021. On a unit basis, Passenger revenues increased 53.1 percent, year-over-year. The increase in Passenger revenues on both a dollar and unit basis were primarily due to easing of negative impacts associated with the COVID-19 pandemic, which resulted in improvements in Passenger demand and bookings, the majority of which were for leisure oriented travel, in the first six months of 2022, compared with the severe impacts to demand and bookings from the COVID-19 pandemic for the majority of the first six months of 2021.

Freight revenues for the six months ended June 30, 2022, decreased by $3 million, or 3.3 percent, compared with the six months ended June 30, 2021, primarily due to capacity challenges driven by an increase in Passenger demand resulting in reduced space for cargo shipments.

Other revenues for the six months ended June 30, 2022, increased by $393 million, or 57.3 percent, year-over-year. On a dollar basis, approximately half of the increase was associated with additional revenues generated from the Company's new co-brand credit card agreement secured in December 2021. The remaining increase in Other revenues is primarily due to income from business partners, including Chase, as the rebound in travel demand also resulted in higher spend on the Company's co-brand credit card, as well as additional revenues earned through the Company's rental car and hotel partners.

Operating Expenses

Operating expenses for the six months ended June 30, 2022, increased by $5.1 billion, or 97.7 percent, compared with the first six months of 2021, while capacity increased 26.8 percent over the same prior year period. Approximately 37 percent of the operating expense increase was due to $1.9 billion in Payroll Support allocated to offset a portion of salaries, wages, and benefits in the first six months of 2021, compared with no support received in the first six months of 2022. In addition, approximately 25 percent of the increase was due to higher Fuel and oil expense and approximately 20 percent of the increase was due to higher Salaries, wages, and benefits. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for the first six months of 2022 and 2021, followed by explanations of these changes on a dollar basis. Unless otherwise specified, changes on a per ASM basis were driven by changes in capacity, which increased with the improvement of travel demand, causing the Company's fixed costs to be spread over significantly more ASMs.

Six months ended June 30,Per ASMPercent
(in cents, except for percentages)20222021changechange
Salaries, wages, and benefits6.20¢6.00¢0.20¢3.3%
Payroll support and voluntary Employee programs, net—(3.87)3.87n.m.
Fuel and oil3.682.251.4363.6
Maintenance materials and repairs0.590.70(0.11)(15.7)
Landing fees and airport rentals1.021.27(0.25)(19.7)
Depreciation and amortization0.901.11(0.21)(18.9)
Other operating expenses2.131.850.2815.1
Total14.52¢9.31¢5.21¢56.0%

Operating expenses per ASM for the first six months of 2022 increased by 56.0 percent, compared with the first six months of 2021. The majority of the year-over-year unit cost increase was driven by the first six months of 2021 including Payroll Support from the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021. Operating expenses per ASM for the first six months of 2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), decreased 1.0 percent, year-over-year. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for the first six months of 2022 increased by $1.1 billion, or 31.1 percent, compared with the first six months of 2021. On a per ASM basis, Salaries, wages, and benefits expense for the first six months of 2022 increased 3.3 percent, compared with the first six months of 2021. On a dollar basis, the increase was primarily driven by higher salaries and wages due to significantly more trips and step/pay rate increases for certain workgroups, and $127 million of additional salaries, wages, and benefits expense as a result of incentive pay offered to the Company's Operations Employees through early February 2022 in an effort to address available staffing challenges related to the Omicron variant.

Payroll support and voluntary Employee programs, net (a reduction to expense) had no amounts for the first six months of 2022. The first six months of 2021 consisted of the following items:

  • $1.9 billion of Payroll Support proceeds allocated (credit to expense);

  • A $130 million net reduction in the Extended ETO liability (reduction to expense) relating to certain Employees being recalled prior to their previously elected return dates; and

  • $117 million credit to expense associated with the Employee Retention Tax Credit for continuing to pay Employees' salaries during the time they were not working, as allowed under the CARES Act, and subsequent legislation.

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

Fuel and oil expense for the first six months of 2022 increased by $1.4 billion, or 107.5 percent, compared with the first six months of 2021. On a per ASM basis, Fuel and oil expense for the first six months of 2022 increased 63.6 percent. On a dollar basis, approximately 75 percent of the increase was attributable to an increase in jet fuel prices per gallon, and the remainder of the increase was due to an increase in fuel gallons consumed. On a per ASM basis, the increase was primarily due to higher jet fuel prices. The following table provides more information on the Company's economic fuel cost per gallon, including the impact of fuel hedging premium expense and fuel derivative contracts:

Six months ended June 30,
20222021
Economic fuel costs per gallon$2.86$1.83
Fuel hedging premium expense (in millions)$53$50
Fuel hedging premium expense per gallon$0.06$0.07
Fuel hedging cash settlement gains per gallon$0.61$0.01

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

Maintenance materials and repairs expense for the first six months of 2022 increased by $25 million, or 6.3 percent, compared with the first six months of 2021. On a per ASM basis, Maintenance materials and repairs expense decreased 15.7 percent, compared with the first six months of 2021. On a dollar basis, the increase was primarily due to the timing of regular airframe maintenance checks as some costs had previously been deferred while a portion of the fleet was placed into temporary storage during the COVID-19 pandemic. There were multiple other increases on a dollar basis, primarily related to an increase in various repairs as a result of deferring costs and reduced operations in the first six months of 2021 due to the COVID-19 pandemic. These increases were partially offset by a decrease in engines and components expense due to the "power-by-the-hour" contract for the Company's -700 engines expiring at the end of 2021.

Landing fees and airport rentals expense for the first six months of 2022 increased by $17 million, or 2.4 percent, compared with the first six months of 2021. On a per ASM basis, Landing fees and airport rentals expense decreased 19.7 percent, compared with the first six months of 2021. On a dollar basis, the increase was primarily due to an increase in landing fees from the increased number of trips flown, partially offset by higher settlements and credits from various airports received in 2022.

Depreciation and amortization expense for the first six months of 2022 increased by $22 million, or 3.5 percent, compared with the first six months of 2021. On a per ASM basis, Depreciation and amortization expense decreased 18.9 percent, compared with the first six months of 2021. On a dollar basis, the increase was primarily due to higher depreciation expense associated with owned aircraft and engines, including certain -700 aircraft planned for accelerated retirement dates in 2022.

Other operating expenses for the first six months of 2022 increased by $474 million, or 45.2 percent, compared with the first six months of 2021. Included within this line item was aircraft rentals expense in the amount of $98 million and $103 million for the six month periods ended June 30, 2022 and 2021, respectively. On a per ASM basis, Other operating expenses increased 15.1 percent, compared with the first six months of 2021. On a dollar basis, approximately 25 percent of the increase was due to higher revenue related expenses (including credit card processing charges) and approximately 20 percent of the increase was due to higher personnel expenses. The majority of the remaining increase was due to various flight-driven expenses.

Other

Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses.

Interest expense for the first six months of 2022 decreased by $43 million, or 18.8 percent, compared with the first six months of 2021, primarily due to elimination of the debt discount due to the adoption of ASU 2020-06. See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information.

Capitalized interest for the first six months of 2022 increased by $1 million, or 5.3 percent, compared with the first six months of 2021, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.

Interest income for the first six months of 2022 increased by $27 million, compared with the first six months of 2021, due to higher interest rates.

The following table displays the components of Other (gains) losses, net, for the six months ended June 30, 2022 and 2021:

Six months ended June 30,
(in millions)20222021
Mark-to-market impact from fuel contracts settling in current and future periods$15$(9)
Premium cost of fuel contracts not designated as hedges—21
Unrealized mark-to-market adjustment on available for sale securities7—
Mark-to-market impact on deferred compensation plan investment72(18)
Correction on investment gains related to prior periods—(60)
Loss on partial extinguishment of convertible and unsecured notes116—
Other25
$212$(61)

Income Taxes

The Company's effective tax rate was approximately 26.9 percent for the first six months of 2022, compared with 28.4 percent for the first six months of 2021. The higher tax rate for the first six months of 2021 was primarily due to higher state taxes. The year-over-year decrease was partially offset by the losses on the Company's convertible debt repurchases, which are largely disallowed as a deduction for tax purposes.

Reconciliation of Reported Amounts to Non-GAAP Financial Measures (excluding special items) (unaudited)

(in millions, except per share amounts and per ASM amounts)

Three months ended June 30,PercentSix months ended June 30,Percent
20222021Change20222021Change
Fuel and oil expense, unhedged$1,942$802$3,148$1,266
Add: Premium cost of fuel contracts designated as hedges26145329
Deduct: Fuel hedge gains included in Fuel and oil expense, net(332)(13)(561)(23)
Fuel and oil expense, as reported$1,636$803$2,640$1,272
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)—5—14
Add: Premium cost of fuel contracts not designated as hedges—10—21
Fuel and oil expense, excluding special items (economic)$1,636$818100.0$2,640$1,307102.0
Total operating expenses, net, as reported$5,570$3,414$10,415$5,267
Add: Payroll support and voluntary Employee programs, net—740—2,187
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)—5—14
Add: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)—1—2
Add: Premium cost of fuel contracts not designated as hedges—10—21
Deduct: Impairment of long-lived assets(15)$—$(31)$—
Total operating expenses, excluding special items$5,555$4,17033.2$10,384$7,49138.6
Deduct: Fuel and oil expense, excluding special items (economic)(1,636)(818)(2,640)(1,307)
Operating expenses, excluding Fuel and oil expense and special items$3,919$3,35216.9$7,744$6,18425.2
Deduct: Profitsharing expense(81)(85)(118)(109)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing$3,838$3,26717.5$7,626$6,07525.5
Operating income, as reported$1,158$594$1,007$793
Deduct: Payroll support and voluntary Employee programs, net—(740)—(2,187)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)—(5)—(14)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)—(1)—(2)
Deduct: Premium cost of fuel contracts not designated as hedges—(10)—(21)
Add: Impairment of long-lived assets15—31$—
Operating income (loss), excluding special items$1,173$(162)n.m.$1,038$(1,431)n.m.
Three months ended June 30,PercentSix months ended June 30,Percent
20222021Change20222021Change
Other (gains) losses, net, as reported$68$(14)$212$(61)
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a)2011(15)9
Deduct: Premium cost of fuel contracts not designated as hedges—(10)—(21)
Deduct: Unrealized mark-to-market adjustment on available for sale securities(4)—(7)—
Deduct: Loss on partial extinguishment of convertible and unsecured notes(43)—(116)—
Other (gains) losses, net, excluding special items$41$(13)n.m.$74$(73)n.m.
Income before income taxes, as reported$1,036$502$660$648
Deduct: Payroll support and voluntary Employee programs, net—(740)—(2,187)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)—(5)—(14)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)—(1)—(2)
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a)(20)(11)15(9)
Add: Impairment of long-lived assets15—31—
Add: Unrealized mark-to-market adjustment on available for sale securities4—7—
Add: Loss on partial extinguishment of convertible and unsecured notes43—116—
Income (loss) before income taxes, excluding special items$1,078$(255)n.m.$829$(1,564)n.m.
Provision for income taxes, as reported$276$154$178$185
Add (Deduct): Net income (loss) tax impact of fuel and special items (b)(23)(203)18(528)
Provision (benefit) for income taxes, net, excluding special items$253$(49)n.m.$196$(343)n.m.
Three months ended June 30,PercentSix months ended June 30,Percent
20222021Change20222021Change
Net income, as reported$760$348$482$463
Deduct: Payroll support and voluntary Employee programs, net—(740)—(2,187)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)—(5)—(14)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)—(1)—(2)
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a)(20)(11)15(9)
Add: Loss on partial extinguishment of convertible and unsecured notes43—116—
Add: Impairment of long-lived assets15—31—
Add: Unrealized mark-to-market adjustment on available for sale securities4—7—
Add (Deduct): Net income (loss) tax impact of special items (b)23203(18)528
Net income (loss), excluding special items$825$(206)n.m.$633$(1,221)n.m.
Net income per share, diluted, as reported$1.20$0.57$0.77$0.76
Add (Deduct): Impact of special items0.08(1.21)0.24(3.59)
Add (Deduct): Net impact of net income (loss) above from fuel contracts divided by dilutive shares(0.03)(0.03)0.02(0.04)
Add (Deduct): Net income (loss) tax impact of special items (b)0.050.33(0.03)0.87
Deduct: GAAP to Non-GAAP diluted weighted average shares difference (c)—(0.01)—(0.07)
Net income (loss) per share, diluted, excluding special items$1.30$(0.35)n.m.$1.00$(2.07)n.m.
Operating expenses per ASM (cents)14.92¢10.22¢14.52¢9.31¢
Add (Deduct): Impact of special items(0.04)2.22(0.05)3.87
Deduct: Fuel and oil expense divided by ASMs(4.38)(2.41)(3.68)(2.25)
Deduct: Profitsharing expense divided by ASMs(0.22)(0.25)(0.16)(0.19)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)10.28¢9.78¢5.110.63¢10.74¢(1.0)

(a) See Note 4 to the unaudited Condensed Consolidated Financial Statements for further information.

(b) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.

(c) Adjustment related to GAAP and Non-GAAP diluted weighted average shares difference, due to the Company being in a Net income position on a GAAP basis versus a Net loss position on a Non-GAAP basis for the three and six months ended June 30, 2021. See Note 7 to the unaudited Condensed Consolidated Financial Statements for further information.

Note Regarding Use of Non-GAAP Financial Measures

The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP. These GAAP financial statements may include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.

As a result, the Company also provides financial information in this filing that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company’s performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating income (loss), non-GAAP; Other (gains) losses, net, non-GAAP; Income (loss) before income taxes, non-GAAP; Provision (benefit) for income taxes, net, non-GAAP; Net income (loss), non-GAAP; Net income (loss) per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents). The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts that are designated as hedges are reflected as a component of Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude any unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and Note 4 to the unaudited Condensed Consolidated Financial Statements.

The Company’s GAAP results in the applicable periods may include other charges or benefits that are also deemed "special items," that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends. Financial measures identified as non-GAAP (or as excluding special items) have been adjusted to exclude special items. For the periods presented, in addition to the items discussed above, special items include:

1.Proceeds related to the Payroll Support programs, which were used to pay a portion of Employee salaries, wages, and benefits;

2.Charges and adjustments to previously accrued amounts related to the Company's extended leave programs;

3.Adjustments for prior period losses reclassified from AOCI associated with forward-starting interest rate swap agreements that were terminated in prior periods related to 12 -8 aircraft leases;

4.Noncash impairment charges, primarily associated with adjustments to the salvage values for previously retired airframes;

5.Unrealized mark-to-market adjustment associated with certain available for sale securities; and

6.Losses associated with the partial extinguishment of the Company's Convertible Notes and early prepayment of debt.

Because management believes special items can distort the trends associated with the Company’s ongoing performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of special items in order to enhance consistency and comparativeness with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. The following measures are often provided, excluding special items, and utilized by the Company’s management, analysts, and investors to enhance comparability of year-over-year results, as well as to industry trends: Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating income (loss), non-GAAP; Other (gains) losses, net, non-GAAP; Income (loss) before income taxes, non-GAAP; Provision (benefit) for income taxes, net, non-GAAP; Net income (loss), non-GAAP; Net income (loss) per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

Liquidity and Capital Resources

The enormous impact of the COVID-19 pandemic on the U.S. travel industry created an urgent liquidity crisis for the entire airline industry, including the Company. However, due to the Company's pre-pandemic low balance sheet leverage, large base of unencumbered assets, and investment-grade credit ratings, the Company was able to quickly access additional liquidity during 2020, as Customer cancellations and ticket refunds spiked and sales and revenues dropped while the Company continued to experience significant fixed operating expenses. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information regarding the impact of the COVID-19 pandemic and assistance obtained under Payroll Support programs.

Net cash provided by operating activities was $1.9 billion for the three months ended June 30, 2022, compared with $2.0 billion provided by operating activities in the same prior year period. Net cash provided by operating activities was $3.0 billion for the six months ended June 30, 2022, compared with $2.7 billion provided by operating activities in the same prior year period. Operating cash inflows are historically primarily derived from providing air transportation to Customers. The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date. Operating cash outflows are related to the recurring expenses of airline operations. The operating cash flows for the six months ended June 30, 2022, were largely impacted by the Company's net income (as adjusted for noncash items), a $793 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, a $284 million increase in cash collateral received from derivative counterparties due to an increase in the fuel hedge portfolio, driven by increases in the forward curve market prices for energy commodities year-to-date, and a $472 million cash tax refund from the Internal Revenue Service associated with the 2020 tax year. Operating cash flows for the six months ended June 30, 2021, included $2.7 billion in Payroll Support program grant proceeds, of which $1.9 billion was used to offset eligible costs through June 30, 2021, and was thus included in operating activities, as well as $45 million allocated to the value of warrants issued and thus included in financing activities. The operating cash flows for the six months ended June 30, 2021, were also driven by an increase in Air traffic liability of $1.5 billion as a result of increased ticket sales from the increase in leisure travel demand. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, and provide working capital. Historically, the Company also used Net cash provided by operating activities to fund stock repurchases and pay dividends; however these shareholder return activities have been suspended due to restrictions associated with the payroll assistance under the Payroll Support programs and the Company's amended and restated revolving credit facility. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

Net cash used in investing activities totaled $1.6 billion during the three months ended June 30, 2022, compared with $469 million used in investing activities in the same prior year period. Net cash used in investing activities was $1.7 billion during the six months ended June 30, 2022, compared with $670 million used in investing activities in the same prior year period. Investing activities in both years included Capital expenditures and changes in the balance of the Company's short-term and noncurrent investments. During the six months ended June 30, 2022, Capital expenditures were $1.5 billion, compared with $190 million in the same prior year period. Capital expenditures increased, year-over-year, largely due to an increase in progress and delivery payments made for current period and future aircraft deliveries during the six months ended June 30, 2022, compared to the same prior year period, when progress payments were not made due to delivery credits provided by Boeing to the Company resulting from the settlement of 2020 estimated damages relating to the FAA grounding of the MAX aircraft.

The Company now estimates its 2022 capital spending to be approximately $4.0 billion, which assumes the exercise of its five remaining 2022 aircraft options, and a total of 66 -8 aircraft deliveries in 2022, compared with its previous 2022 capital spending guidance of approximately $5.0 billion which assumed the delivery of 114 MAX aircraft in 2022. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information. The Company’s 2022 capital spending guidance continues to include approximately $900 million in non-aircraft capital spending.

Net cash used in financing activities was $215 million during the three months ended June 30, 2022, compared with $617 million provided by financing activities for the same prior year period. Net cash used in financing activities

was $530 million during the six months ended June 30, 2022, compared with $1.1 billion provided by financing activities for the same year period. The Company repaid $555 million in debt and finance lease obligations, including the extinguishment of $302 million in principal of its Convertible Notes for a cash payment of $409 million during the six months ended June 30, 2022, and is scheduled to repay approximately $55 million in debt and finance lease obligations during third quarter 2022. The Company may engage in debt repurchases from time to time and future repurchases are not included in the scheduled to repay third quarter 2022 amount. During the six months ended June 30, 2021, the Company borrowed $1.1 billion of loan proceeds under Payroll Support programs. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. The Company also repaid $109 million in debt and finance lease obligations during the six months ended June 30, 2021.

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

The Company has access to $1.0 billion under its amended and restated revolving credit facility (the "Amended A&R Credit Agreement"). In July 2022, this facility was amended to extend the expiration date to August 2025, and to change the benchmark rate from the London Interbank Offered Rate to the Secured Overnight Financing Rate ("SOFR"). The Amended A&R 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. Interest on the facility is based on the Company's credit ratings at the time of borrowing. At the Company's current ratings, the interest cost would be SOFR plus a credit spread adjustment of 10 basis points plus 200 basis points. The facility contains a financial covenant to maintain total liquidity, as defined in the Amended A&R Credit Agreement, of $1.5 billion at all times under the Amended A&R Credit Agreement; the Company was compliant with this requirement as of June 30, 2022. There were no amounts outstanding under the Amended A&R Credit Agreement as of June 30, 2022.

Although not the case at June 30, 2022 due to the Company's significant financing activities throughout the early stages of the pandemic, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets. This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused funds available to Customers, and loyalty deferred revenue, which are performance obligations for future Customer flights, do not require future settlement in cash, and are mostly nonrefundable. See Note 6 to the unaudited Condensed Consolidated Financial Statements for further information.

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $16.4 billion as of June 30, 2022, and anticipated future internally generated funds from operations. However, the COVID-19 pandemic continues to evolve and could have a material adverse impact on the Company's ability to meet its capital and operating commitments. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on the impacts of the COVID-19.

As of June 30, 2022, the Company's total firm and option order book was 632 aircraft. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

The following table details information on the aircraft in the Company's fleet as of June 30, 2022:

Average Age (Yrs)Number of AircraftNumber OwnedNumber Leased
TypeSeats
737-70014318442(a)36082
737-800175720719017
737 -81752815229
Totals13730602128

(a) Included four Boeing 737 Next Generation aircraft in storage as of June 30, 2022.

Critical Accounting Policies and Estimates

For information regarding the Company’s Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on, and include statements about, the Company's estimates, expectations, beliefs, intentions, and strategies for the future, and the assumptions underlying these forward-looking statements. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, statements related to the following:

  • the Company’s financial guidance for third quarter and full year 2022 and factors that could impact the Company’s financial results;

  • the Company’s capacity guidance;

  • the Company’s estimated fuel costs, hedging gains, and fuel efficiency and the assumptions underlying the Company’s fuel-related expectations and estimates, including expectations related to the Company’s fuel derivative contracts;

  • the Company’s plans for the repayment of debt;

  • the Company’s fleet plans, including underlying expectations and dependencies;

  • the Company’s fleet and network-related goals, including without limitation with respect to growth opportunities, better optimized staffing, restoration of the Company’s network, reduction of operating costs, and further fleet modernization with less carbon-intensive aircraft;

  • the Company’s cash flow expectations and capital spending guidance, in particular with respect to aircraft capital expenditures and underlying aircraft delivery expectations;

  • the Company’s hiring plans and expectations;

  • the Company’s expectations related to its policy change with respect to the expiration of flight credits;

  • the Company’s expectations with respect to its ability to meet its ongoing capital and operating commitments, including underlying assumptions and factors that could impact this ability;

  • the Company's assessment of market risks; and

  • the Company's plans and expectations related to legal and regulatory proceedings.

While management believes these forward-looking statements are reasonable as and when made, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual results may differ materially from what is expressed in or indicated by the Company's forward-looking statements or from historical experience or the Company's present expectations. Factors that could cause these differences include, among others:

  • the Company's dependence on Boeing and the FAA with respect to the Company's fleet, fuel, and other operational strategies and goals;

  • the impact of labor and hiring matters on the Company’s business decisions, plans, and strategies;

  • the impact of fuel price changes, fuel price volatility, volatility of commodities used by the Company for hedging jet fuel, and any changes to the Company’s fuel hedging strategies and positions on the Company's business plans and results of operations;

  • any further negative developments related to the COVID-19 pandemic, including, for example, with respect to (i) the duration, spread, severity, or any recurrence of the COVID-19 pandemic or any new variant strains of the underlying virus; (ii) the effectiveness, availability, and usage of COVID-19 vaccines; (iii) the impact of government mandates, directives, orders, regulations, and other governmental actions related to COVID-19 on the Company’s business plans and its ability to retain key Employees; (iv) the extent of the impact of COVID-19 on overall demand for air travel and the Company's related business plans and decisions; and (v) the impact of the COVID-19 pandemic on the Company's access to capital;

  • the impact of governmental actions and governmental regulations on the Company's plans, strategies, financial results, and operations;

  • the impact of fears or actual outbreaks of other diseases, extreme or severe weather and natural disasters, actions of competitors (including, without limitation, pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), consumer perception, economic conditions, fears of terrorism or war, socio-demographic trends, and other factors beyond the Company's control on consumer behavior and the Company's results of operations and business decisions, plans, strategies, and results;

  • the impact of fears or actual acts of terrorism or war, political instability, cyber-attacks, and other factors beyond the Company’s control on the Company’s plans, financial results, operations, and ability to adequately insure against risks;

  • the Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives;

  • the Company's dependence on third parties, in particular with respect to its fuel supply, and the impact on the Company's operations and results of operations of any third party delays or non-performance; and

  • other factors as set forth in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 and in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.

Caution should be taken not to place undue reliance on the Company's forward-looking statements, which represent the Company's views only as of the date this report is filed. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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