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, 2023 and 2022 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.

						Three months ended June 30,
						2023						2022						Change
Revenue passengers carried (000s)						35,715						33,224						7.5		%
Enplaned passengers (000s)						44,787						41,284						8.5		%
Revenue passenger miles (RPMs) (in millions)(a)						35,505						32,523						9.2		%
Available seat miles (ASMs) (in millions)(b)						42,579						37,322						14.1		%
Load factor(c)						83.4		%				87.1		%				(3.7)			pts.
Average length of passenger haul (miles)						994						979						1.5		%
Average aircraft stage length (miles)						728						727						0.1		%
Trips flown						365,089						326,848						11.7		%
Seats flown (000s)(d)						57,904						50,758						14.1		%
Seats per trip(e)						158.6						155.3						2.1		%
Average passenger fare						$	179.44					$	184.17					(2.6)		%
Passenger revenue yield per RPM (cents)(f)						18.05						18.81						(4.0)		%
Operating revenues per ASM (cents)(g)						16.53						18.03						(8.3)		%
Passenger revenue per ASM (cents)(h)						15.05						16.39						(8.2)		%
Operating expenses per ASM (cents)(i)						14.66						14.92						(1.7)		%
Operating expenses per ASM, excluding fuel (cents)						11.37						10.54						7.9		%
Operating expenses per ASM, excluding fuel and profitsharing (cents)						11.08						10.32						7.4		%
Fuel costs per gallon, including fuel tax						$	2.60					$	3.36					(22.6)		%
Fuel costs per gallon, including fuel tax, economic						$	2.60					$	3.36					(22.6)		%
Fuel consumed, in gallons (millions)						538						486						10.7		%
Active fulltime equivalent Employees						71,299						62,289						14.5		%
Aircraft at end of period(j)						803						730						10.0		%

						Six months ended June 30,
						2023						2022						Change
Revenue passengers carried (000s)						65,947						59,253						11.3		%
Enplaned passengers (000s)						82,452						73,289						12.5		%
Revenue passenger miles (RPMs) (in millions)(a)						65,052						59,006						10.2		%
Available seat miles (ASMs) (in millions)(b)						80,641						71,706						12.5		%
Load factor(c)						80.7		%				82.3		%				(1.6)			pts.
Average length of passenger haul (miles)						986						996						(1.0)		%
Average aircraft stage length (miles)						722						745						(3.1)		%
Trips flown						699,210						614,599						13.8		%
Seats flown (000s)(d)						110,622						95,305						16.1		%
Seats per trip(e)						158.2						155.1						2.0		%
Average passenger fare						$	174.60					$	173.06					0.9		%
Passenger revenue yield per RPM (cents)(f)						17.70						17.38						1.8		%
Operating revenues per ASM (cents)(g)						15.80						15.93						(0.8)		%
Passenger revenue per ASM (cents)(h)						14.28						14.30						(0.1)		%
Operating expenses per ASM (cents)(i)						15.17						14.52						4.5		%
Operating expenses per ASM, excluding fuel (cents)						11.51						10.84						6.2		%
Operating expenses per ASM, excluding fuel and profitsharing (cents)						11.36						10.68						6.4		%
Fuel costs per gallon, including fuel tax						$	2.88					$	2.86					0.7		%
Fuel costs per gallon, including fuel tax, economic						$	2.88					$	2.86					0.7		%
Fuel consumed, in gallons (millions)						1,021						923						10.6		%
Active fulltime equivalent Employees						71,299						62,289						14.5		%
Aircraft at end of period(j)						803						730						10.0		%

(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 three and four Boeing 737 Next Generation aircraft in storage as of June 30, 2023 and June 30, 2022, respectively.

Financial Overview

In late December 2022, the Company experienced a wide-scale operational disruption as historically extreme winter weather across a significant portion of the United States impacted its operational plan and flight schedules. Subsequent to Winter Storm Elliott, the Company was challenged to realign flight crews, flight schedules, and aircraft for a period of several days during this peak demand travel period. This disruption and subsequent recovery efforts resulted in the cancellation of more than 16,700 flights during the period from December 21 through December 31, 2022. For first quarter 2023, these events also created a deceleration in bookings, primarily isolated to January and February 2023, as well as increased expenses primarily in the form of reimbursing Customers for costs incurred as a result of the flight cancellations. The financial impact of this disruption on the first quarter 2023 results was approximately $380 million on a pre-tax basis. There were no material impacts to operating revenues or expenses for the three months ended June 30, 2023, as a result of this disruption.

To boost operational resiliency in key areas across the Company and to mitigate the risk of a recurrence, the Company developed a three-part tactical action plan focused on improving winter operations, accelerating operational-related investments, and enhancing cross-team collaboration. The Company's action plan was released in March 2023.

No assurance can be given that these efforts to boost operational resiliency in key areas across the Company will be successful in eliminating the risk of a recurrence. See "Risk Factors – The airline industry is made up of inherently complex systems, and is affected by many conditions that are beyond its control, which can impact the Company's business strategies and results of operations" included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The Company recorded second quarter and year-to-date results for 2023 and 2022 on an accounting principles generally accepted in the United States ("GAAP") and non-GAAP basis, as noted in the following tables. 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)
GAAP						2023						2022						2023 Change to 2022
Operating income						$	795					$	1,158					(31.3)		%
Net income						$	683					$	760					(10.1)		%
Net income per share, diluted						$	1.08					$	1.20					(10.1)		%
Non-GAAP
Operating income						$	807					$	1,173					(31.2)
Net income						$	693					$	825					(16.0)
Net income per share, diluted						$	1.09					$	1.30					(16.2)

The Company's financial results for the three months ended June 30, 2023, on a GAAP and non-GAAP basis, decreased compared to the same prior year period primarily due to higher salaries, wages, and benefits expense. Additionally, the same prior year period included approximately $300 million of additional breakage revenue driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits. The percentage of breakage revenue normalized to historical levels beginning in third quarter 2022.

						Six months ended June 30,
(in millions, except per share amounts)
GAAP						2023						2022						2023 Change to 2022
Operating income						$	511					$	1,007					(49.3)		%
Net income						$	524					$	482					8.7		%
Net income (loss) per share, diluted						$	0.84					$	0.77					9.8		%
Non-GAAP
Operating income						$	523					$	1,038					(49.6)		%
Net income						$	530					$	633					(16.3)		%
Net income per share, diluted						$	0.85					$	1.00					(15.0)		%

The Company's financial results, as shown above on a GAAP and non-GAAP basis, for the six months ended June 30, 2023 included a negative financial impact of approximately $380 million on a pre-tax basis related to the December 2022 operational disruption. The same prior year period included additional breakage revenue driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits. The percentage of breakage revenue normalized to historical levels beginning in third quarter 2022. This additional revenue for the six months ended June 30, 2022 was partially offset by the effects of the Omicron variant of COVID-19, which reduced travel demand, particularly during January and February 2022. Operating income for the first six months ended June 30, 2023 also decreased compared to the same prior year period primarily due to higher salaries, wages, and benefits expense, partially offset by higher interest income. On a GAAP basis, the Company's results for the six months ended June 30, 2022 also included a $116 million loss on extinguishment of debt due to the repurchase of a portion of the Company's Convertible Senior Notes (the "Convertible Notes"). 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.

2023 Outlook

The following tables present current selected financial guidance for third quarter and full year 2023:

									3Q 2023 Estimation
RASM (a), year-over-year									Down 3% to 7%
ASMs (b), year-over-year									Up ~12%
Economic fuel costs per gallon (c)(d)									$2.55 to $2.65
Fuel hedging premium expense per gallon									$0.05
Fuel hedging cash settlement gains per gallon									$0.08
ASMs per gallon (fuel efficiency)									79 to 80
CASM-X (c)(e), year-over-year (f)									Up 3.5% to 6.5%
Scheduled debt repayments (millions)									~$8
Interest expense (millions)									~$63

									2023 Estimation
ASMs (b), year-over-year									Up 14% to 15%
Economic fuel costs per gallon (c)(d)									$2.70 to $2.80
Fuel hedging premium expense per gallon									$0.06
Fuel hedging cash settlement gains per gallon									$0.09
CASM-X (c)(e), year-over-year (f)									Down 1% to 2%
Scheduled debt repayments (millions)									~$83
Interest expense (millions)									~$255
Aircraft (g)									814
Effective tax rate									23% to 24%
Capital spending (billions)									~$3.5

(a) Operating revenue per available seat mile ("RASM" or "unit revenues").

(b)Available seat miles ("ASMs" or "capacity"). The Company's flight schedule is currently published for sale through March 6, 2024. The Company continues to expect fourth quarter 2023 capacity to increase in the range of 20 percent to 22 percent, year-over-year, and currently expects first quarter 2024 capacity to increase in the range of 14 percent to 16 percent, year-over-year, of which nearly 90 percent is from the carryover effect of capacity growth in 2023.

(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 Measures (also referred to as "excluding special items").

(d) Based on the Company's existing fuel derivative contracts and market prices as of July 19, 2023, third quarter, fourth quarter, and full year 2023 economic fuel costs per gallon are estimated to be in the range of $2.55 to $2.65, $2.50 to $2.60, and $2.70 to $2.80, 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, 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 ("CASM-X").

(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 continues to plan for approximately 70 Boeing 737-8 ("-8") aircraft deliveries and 26 Boeing 737-700 ("-700") aircraft retirements in 2023, ending the year with 814 aircraft. The delivery schedule for the Boeing 737-7 ("-7") is dependent on the Federal Aviation Administration ("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 Boeing may continue to experience supply chain challenges, so the Company therefore offers no assurances that current estimations and timelines are correct.

Thus far, the Company has experienced strong leisure demand and yields for July travel. Based on current booking and revenue trends, the Company anticipates a third quarter 2023 RASM decline of 3 percent to 7 percent, year-over-year, driven by challenging comparisons from the pent-up travel demand surge in 2022, and higher than seasonally-normal growth, as the Company works to close out the restoration of the network and normalizes the utilization of the fleet.

The Company expects third quarter 2023 CASM-X to increase in the range of 3.5 percent to 6.5 percent, year-over-year, primarily due to continued inflationary cost pressures, including higher labor rates for all Employee workgroups and increased market wage rate accruals. Overall, nominal cost trends are expected to remain fairly consistent sequentially from second quarter 2023. The Company currently expects its full year 2023 CASM-X to decrease in the range of 1 percent to 2 percent, year-over-year.

Company Overview

For the six months ended June 30, 2023, the Company hired approximately 4,400 Employees, net of attrition. The Company's number of active full-time equivalent Employees increased by 14.4 percent from June 30, 2022 to June 30, 2023, primarily to support the Company's restoration of its flight schedule after emerging from the pandemic, as well as the year-over-year growth in capacity. The Company has made additional investments to attract and retain talent, including raising the Company's starting hourly pay rates for certain of its workgroups, subject, in each case, to acceptance of such change by the applicable union.

On April 30, 2023, the Company's 12 Meteorologists, represented by the Transportation Workers Union Local 550 (“TWU 550”), ratified a new five-year collective bargaining agreement with the Company. The newly ratified agreement becomes amendable in May 2028.

On July 27, 2023, the Company's 2,865 Mechanics & Related Employees, represented by the Aircraft Mechanics Fraternal Association ("AMFA"), voted to ratify a four-year contract extension with the Company. The newly ratified agreement becomes amendable in August 2027.

The Company ended second quarter 2023 with 803 Boeing 737 aircraft, including 188 -8 aircraft. During second quarter 2023, the Company retired 11 -700 aircraft and took delivery of 21 -8 aircraft. While the Company was contractually scheduled to receive 114 MAX deliveries in 2022, a portion of these deliveries shifted out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification, and aircraft delivery delays extended into 2023. As a result, the Company continues to expect to end 2023 with 814 aircraft. For information about potential impacts resulting from prolonged delays related to the 737 MAX family of aircraft, see "Risk Factors – Operational Risks" included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The Company entered into supplemental agreements in 2022 with Boeing to increase aircraft orders and accelerate certain options with the goals of improving potential growth opportunities and frequencies to better align with the pre-pandemic operational route network, lowering operating costs, and further modernizing its fleet with less carbon-intensive aircraft. See Note 9 to the unaudited Condensed Consolidated Financial Statements for further information. The Company expects that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 408 -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. The Company's order book with Boeing as of June 30, 2023, consists of a total of 462 MAX firm orders (192 -7 aircraft and 270 -8 aircraft) for the years 2023 through 2030 and 102 MAX options (-7s or -8s) for the years 2025 through 2027. The Company is working to reflow its order book with Boeing in a way that provides orderly and measured growth in 2024 and beyond.

The Company has published its flight schedule for sale through March 6, 2024. Although the Company's network is largely restored, it is not yet optimized. The Company is working to align its network, fleet plans, and staffing to better reflect the current business environment. While business revenues continue to recover, they are not back to pre-pandemic levels—therefore, the Company is revamping its 2024 flight schedules to reflect post-pandemic changes to Customer travel patterns. The Company estimates these meaningful network optimization efforts and the continued maturation of its development markets will contribute roughly $500 million in incremental year-over-year pre-tax profits in 2024, which the Company believes will support another year of margin expansion.

As part of its commitment to corporate sustainability, the Company published its 2022 One Report describing the Company's sustainability strategies on May 3, 2023, 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 Diversity, Equity, and Inclusion ("DEI") Report on May 3, 2023. A companion piece to the One Report, the DEI Report takes a deeper dive into the Company's DEI goals and initiatives and highlights the Company's DEI plans for the future. 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 certain of 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, the DEI Report, and other voluntary disclosures, the materiality of these disclosures is inherently difficult to assess.

Material Changes in Results of Operations

Comparison of three months ended June 30, 2023 and June 30, 2022

Operating Revenues

Total operating revenues for second quarter 2023 increased by $309 million, or 4.6 percent, year-over-year, to achieve an all-time quarterly Company record of $7.0 billion. The Company's Rapid Rewards® loyalty program also continues to be a point of strength, with record second quarter new Member additions, a record level of Member engagement, and record second quarter spend on the Company's co-branded Chase® Visa credit card. Second quarter 2023 RASM was 16.53 cents, a decrease of 8.3 percent, compared with second quarter 2022. This year-over-year RASM decrease was primarily driven by a decrease in yield of 4.0 percent coupled with a decrease in Load factor of 3.7 points. The decrease in yield was primarily due to both the Company's and other domestic carriers' significant year-over-year capacity growth coming out of the pandemic to meet demand, and the Company's additional breakage revenue in second quarter 2022. The higher breakage in second quarter 2022 was driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits. The percentage of breakage revenue normalized to historical levels beginning in third quarter 2022.

Passenger revenues for second quarter 2023 increased by $290 million, or 4.7 percent, year-over-year. Holding other factors constant, the increase was primarily due to a 14.1 percent increase in capacity and an improvement in leisure and business demand in second quarter 2023. On a unit basis, Passenger revenues decreased 8.2 percent, year-over-year. The decrease was largely driven by a 4.0 percent decrease in Passenger revenue yield as a result of the significant year-over-year capacity increases by the Company and other domestic carriers, as well as higher breakage amounts recorded in second quarter 2022, prior to the Company's policy change regarding the expiration of flight credits.

Other revenues for second quarter 2023 increased by $19 million, or 3.4 percent, compared with second quarter 2022. On a dollar basis, the increase was primarily due to additional marketing revenue from Chase Bank USA, N.A ("Chase"), driven by improved retail spend on the Company's co-brand credit card.

Operating Expenses

Operating expenses for second quarter 2023 increased by $672 million, or 12.1 percent, compared with second quarter 2022, while capacity increased 14.1 percent over the same prior year period. The vast majority of the dollar increase was due to higher Salaries, wages, and benefits, partially offset by a year-over-year decrease in Fuel and oil expense. 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 2023 and 2022, 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 change						Percent change
(in cents, except for percentages)			2023						2022
Salaries, wages, and benefits			6.55		¢				5.95		¢				0.60		¢				10.1		%
Fuel and oil			3.29						4.38						(1.09)						(24.9)
Maintenance materials and repairs			0.64						0.56						0.08						14.3
Landing fees and airport rentals			1.08						1.04						0.04						3.8
Depreciation and amortization			0.86						0.87						(0.01)						(1.1)
Other operating expenses			2.24						2.12						0.12						5.7
Total			14.66		¢				14.92		¢				(0.26)		¢				(1.7)		%

Operating expenses per ASM for second quarter 2023 decreased by 1.7 percent, compared with second quarter 2022, primarily due to a significant decrease in the Company's fuel cost per gallon. Operating expenses per ASM for second quarter 2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 7.5 percent, compared with second quarter 2022, primarily due to general inflationary cost pressures, in particular higher labor rates for all Employee workgroups, including market wage rate accruals for open collective bargaining agreements, as well as the timing of planned maintenance expenses for the Company's Boeing 737-800 fleet.

Salaries, wages, and benefits expense for second quarter 2023 increased by $566 million, or 25.5 percent, compared with second quarter 2022. On a per ASM basis, second quarter 2023 Salaries, wages, and benefits expense increased 10.1 percent, compared with second quarter 2022. On a dollar basis, approximately 50 percent of the increase was due to step/pay rate increases for certain workgroups, including market wage rate accruals for open collective bargaining agreements, and approximately 25 percent of the increase was driven by an increase in capacity and/or number of trips flown.

Fuel and oil expense for second quarter 2023 decreased by $233 million, or 14.2 percent, compared with second quarter 2022. On a per ASM basis, second quarter 2023 Fuel and oil expense decreased 24.9 percent. On a dollar basis, the decrease was primarily attributable to a decrease in the Company's average economic jet fuel cost per gallon, partially offset by an increase in fuel gallons consumed. The Company's second quarter 2023 average economic jet fuel price of $2.60 per gallon is net of approximately $45 million in cash settlements from hedging activities. On a per ASM basis, the majority of the change was also due to lower average economic 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,
			2023						2022
Economic fuel costs per gallon			$	2.60					$	3.36
Fuel hedging premium expense (in millions)			$	30					$	26
Fuel hedging premium expense per gallon			$	0.06					$	0.05
Fuel hedging cash settlement gain per gallon			$	0.09					$	0.68

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 2023 available seat miles per gallon ("fuel efficiency") increased 3.3 percent, year-over-year, due to the Company operating more of its most fuel-efficient MAX aircraft within its fleet. The continued deliveries of MAX aircraft are expected to remain critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals.

The Company's multi-year fuel hedging program continues to provide protection against spikes in energy prices. The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate and 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 19, 2023.

			Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (b)
Average Brent Crude Oil price per barrel			3Q 2023			4Q 2023
$60			$2.00 - $2.10			$2.00 - $2.10
$70			$2.30 - $2.40			$2.30 - $2.40
Current Market (a)			$2.55 - $2.65			$2.50 - $2.60
$90			$2.80 - $2.90			$2.80 - $2.90
$100			$3.00 - $3.10			$3.00 - $3.10
$110			$3.25 - $3.35			$3.25 - $3.35
Fair market value			$47 million			$55 million
Estimated premium costs			$30 million			$30 million

(a) Brent crude oil average market prices as of July 19, 2023, was $79 per barrel for each of third quarter and fourth quarter 2023.

(b) Based on the Company's existing fuel derivative contracts and market prices as of July 19, 2023, third quarter, fourth quarter, and full year 2023 economic fuel costs per gallon are estimated to be in the range of $2.55 to $2.65, $2.50 to $2.60, and $2.70 to $2.80, 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, 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:

Period			Maximum fuel hedged percentage (a)(b)
2023			51%
2024			54%
2025			41%
2026			Less than 10%

(a) Based on the Company's current available seat mile plans. The Company is currently 49 percent hedged for third quarter 2023 and 47 percent hedged for fourth quarter 2023.

(b) 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 3 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI as of June 30, 2023, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year						Fair value of fuel derivative contracts at June 30, 2023						Amount of gains (losses) deferred in AOCI at June 30, 2023 (net of tax)
Remainder of 2023						$	73					$	15
2024						109						(38)
2025						113						(27)
2026						$	21					$	—
Total						$	316					$	(50)

Maintenance materials and repairs expense for second quarter 2023 increased by $61 million, or 29.0 percent, compared with second quarter 2022. On a per ASM basis, Maintenance materials and repairs expense increased 14.3 percent, compared with second quarter 2022. On a dollar and per ASM basis, the increase was primarily due to an increase in engine shop visits and various other engine repairs. The majority of these increases are associated with the Company’s 737-800 fleet, as -800 aircraft emerge from their maintenance “honeymoon” period, during which the aircraft have required significantly lower levels of maintenance while in the early phases of their useful lives.

Landing fees and airport rentals expense for second quarter 2023 increased by $71 million, or 18.3 percent, compared with second quarter 2022. On a per ASM basis, Landing fees and airport rentals expense increased 3.8 percent, compared with second quarter 2022. On a dollar basis, approximately 50 percent of the increase was attributable to higher landing fees, primarily driven by the increase in trips flown and higher rates charged by airports. The remainder of the increase was largely due to higher rental expense throughout the network, associated with both higher rates and additional space leased at airports.

Depreciation and amortization expense for second quarter 2023 increased by $42 million, or 12.9 percent, compared with second quarter 2022. On a per ASM basis, Depreciation and amortization expense decreased by 1.1 percent, compared with second quarter 2022. On a dollar basis, approximately 70 percent of the increase was primarily due to the acquisition of 107 -8 aircraft since second quarter 2022, and the remaining increase was primarily due to decreasing the airframe salvage value for the entire -700 fleet, which was a change in estimate made in third quarter 2022. This change in estimate was not material to second quarter 2023, nor is it expected to have a material impact on future periods.

Other operating expenses for second quarter 2023 increased by $165 million, or 20.9 percent, compared with second quarter 2022. Included within this line item was aircraft rentals expense in the amounts of $49 million for each of the three-month periods ended June 30, 2023 and 2022. On a per ASM basis, Other operating expenses increased 5.7 percent, compared with second quarter 2022. On a dollar basis, approximately 20 percent of the increase was due to higher professional fees driven by an increase in technology spending, approximately 15 percent of the increase was due to higher personnel expenses driven by an increase in Crew overnights associated with the increase in capacity and inflationary pressure, and approximately 15 percent of the increase was due to higher advertising expenses. The majority of the remainder of the year-over-year increase was due to various flight-driven expenses.

Other expenses (income)

Interest expense for second quarter 2023 decreased by $28 million, or 30.1 percent, compared with second quarter 2022, primarily due to various debt repurchases since second quarter 2022. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

Capitalized interest for second quarter 2023 decreased by $6 million, or 54.5 percent, compared with second quarter 2022, primarily due to a significant amount of assets being placed into service since second quarter 2022, most notably the delivery of 21 -8 aircraft in second quarter 2023.

Interest income for second quarter 2023 increased by $116 million, compared with second quarter 2022, primarily due to higher interest rates earned on the Company's cash and short-term investments.

Loss on extinguishment of debt for second quarter 2023 decreased by $43 million compared with second quarter 2022, primarily due to the partial extinguishment of the Company's Convertible Notes in second quarter 2022, compared to none in second quarter 2023.

The following table displays the components of Other (gains) losses, net, for the three months ended June 30, 2023 and 2022:

			Three months ended June 30,
(in millions)			2023						2022
Mark-to-market impact from fuel contracts settling in current and future periods			$	6					$	(20)
Unrealized mark-to-market adjustment on available for sale securities			—						4
Mark-to-market impact on deferred compensation plan investments			(16)						39
Other			3						2
			$	(7)					$	25

Income Taxes

The Company's effective tax rate was 22.9 percent in second quarter 2023, compared with 26.6 percent in second quarter 2022. The year-over-year decline in the tax rate was primarily due to the absence of losses on convertible debt repurchases, which were largely disallowed as a tax deduction in 2022. The Company currently estimates its annual 2023 effective tax rate to be in the range of 23 percent to 24 percent.

Comparison of six months ended June 30, 2023 and June 30, 2022

Operating Revenues

Passenger revenues for the six months ended June 30, 2023, increased by $1.3 billion, or 12.3 percent, compared with the first six months of 2022. On a unit basis, Passenger revenues decreased 0.1 percent, year-over-year. The dollar increase was primarily due to a 12.5 percent increase in capacity and improvement in leisure and business travel demand for the six months ended June 30, 2023 versus 2022. For the six months ended June 30, 2023, the year-over-year Passenger revenue yield per ASM decrease was due to additional breakage revenue in the six months ended June 30, 2022, primarily driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits. The percentage of breakage revenue normalized to historical levels beginning in third quarter 2022.

Other revenues for the six months ended June 30, 2023, increased by $63 million, or 5.8 percent, year-over-year. On a dollar basis, the increase was primarily due to additional marketing revenue from Chase, driven by improved retail spend on the Company's co-brand credit card.

Operating Expenses

Operating expenses for the six months ended June 30, 2023, increased by $1.8 billion, or 17.4 percent, compared with the first six months of 2022, while capacity increased 12.5 percent over the same prior year period. Approximately 45 percent of the increase was due to higher Salaries, wages, and benefits expense and approximately 17 percent of the increase was due to higher Fuel and oil expense. 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 2023 and 2022, 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 ASM						Percent
(in cents, except for percentages)			2023						2022						change						change
Salaries, wages, and benefits			6.53		¢				6.20		¢				0.33		¢				5.3		%
Fuel and oil			3.66						3.68						(0.02)						(0.5)
Maintenance materials and repairs			0.63						0.59						0.04						6.8
Landing fees and airport rentals			1.08						1.02						0.06						5.9
Depreciation and amortization			0.91						0.90						0.01						1.1
Other operating expenses			2.36						2.13						0.23						10.8
Total			15.17		¢				14.52		¢				0.65		¢				4.5		%

Operating expenses per ASM for the first six months of 2023 increased by 4.5 percent, compared with the first six months of 2022. The majority of the year-over-year unit cost increase was driven by higher Salaries, wages, and benefits expense. Operating expenses per ASM for the first six months of 2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 6.8 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 2023 increased by $814 million, or 18.3 percent, compared with the first six months of 2022. On a per ASM basis, Salaries, wages, and benefits expense for the first six months of 2023 increased 5.3 percent, compared with the first six months of 2022. On a dollar basis, approximately 50 percent of the increase was due to step/pay rate increases for certain workgroups, including market wage rate accruals for open collective bargaining agreements, and approximately 35 percent of the increase was driven by an increase in capacity and/or number of trips flown.

Fuel and oil expense for the first six months of 2023 increased by $310 million, or 11.7 percent, compared with the first six months of 2022. On a per ASM basis, Fuel and oil expense for the first six months of 2023 decreased 0.5 percent. On a dollar basis, the increase was primarily attributable to an increase in fuel gallons consumed. 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,
			2023						2022
Economic fuel costs per gallon			$	2.88					$	2.86
Fuel hedging premium expense (in millions)			$	61					$	53
Fuel hedging premium expense per gallon			$	0.06					$	0.06
Fuel hedging cash settlement gains per gallon			$	0.11					$	0.61

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 2023 increased by $91 million, or 21.7 percent, compared with the first six months of 2022. On a per ASM basis, Maintenance materials and repairs expense increased 6.8 percent, compared with the first six months of 2022. On a dollar and per ASM basis, the increase was primarily due to an increase in engine shop visits and various other engine repairs. The majority of these increases are associated with the Company’s 737-800 fleet, as -800 aircraft emerge from their maintenance “honeymoon” period, during which the aircraft have required significantly lower levels of maintenance while in the early phases of their useful lives.

Landing fees and airport rentals expense for the first six months of 2023 increased by $134 million, or 18.3 percent, compared with the first six months of 2022. On a per ASM basis, Landing fees and airport rentals expense increased 5.9 percent, compared with the first six months of 2022. On a dollar basis, approximately 55 percent of the increase was attributable to higher landing fees, primarily driven by the increase in trips flown and higher rates charged by airports. The remainder of the increase was largely due to higher rental expense throughout the network, associated with both higher rates and additional space leased at airports.

Depreciation and amortization expense for the first six months of 2023 increased by $82 million, or 12.6 percent, compared with the first six months of 2022. On a per ASM basis, Depreciation and amortization expense increased 1.1 percent, compared with the first six months of 2022. On a dollar basis, approximately 70 percent of the increase was due to the acquisition of 107 -8 aircraft since second quarter 2022, and approximately 20 percent of the increase was due to decreasing the airframe salvage value for the entire -700 fleet, which was a change in estimate made in third quarter 2022. This change in estimate was not material to first six months of 2023, nor is it expected to be material to future periods.

Other operating expenses for the first six months of 2023 increased by $386 million, or 25.3 percent, compared with the first six months of 2022. Included within this line item was aircraft rentals expense in the amount of $99 million and $98 million for the six months ended June 30, 2023 and 2022, respectively. On a per ASM basis, Other operating expenses increased 10.8 percent, compared with the first six months of 2022. On a dollar and per ASM basis, approximately 25 percent of the increase was due to higher interrupted trip expense driven by costs associated with the Company's December 2022 operational disruption, approximately 15 percent of the increase was due to higher personnel expenses, and approximately 15 percent of the increase was due to higher professional fees driven by an increase in technology projects. The majority of the remaining increase was due to various flight-driven expenses.

Other expenses (income)

Interest expense for the first six months of 2023 decreased by $56 million, or 30.1 percent, compared with the first six months of 2022, primarily due to various debt repurchases since second quarter 2022.

Capitalized interest for the first six months of 2023 decreased by $9 million, or 45.0 percent, compared with the first six months of 2022, primarily due to a significant amount of assets being placed into service, most notably 107 MAX aircraft being delivered since the first six months of 2022.

Interest income for the first six months of 2023 increased by $238 million, compared with the first six months of 2022, primarily due to higher interest rates earned on the Company's cash and short-term investments.

Loss on extinguishment of debt for the first six months of 2023 decreased by $116 million, compared with the first six months of 2022, primarily due to the partial extinguishment of the Company's Convertible Notes in the first six months of 2022, compared with none in the first six months of 2023.

The following table displays the components of Other (gains) losses, net, for the six months ended June 30, 2023 and 2022:

			Six months ended June 30,
(in millions)			2023						2022
Mark-to-market impact from fuel contracts settling in current and future periods			$	6					$	15
Unrealized mark-to-market adjustment on available for sale securities			(4)						7
Mark-to-market impact on deferred compensation plan investment			(26)						72
Other			3						2
			$	(21)					$	96

Income Taxes

The Company's effective tax rate was approximately 23.2 percent for the first six months of 2023, compared with 26.9 percent for the first six months of 2022. The year-over-year decline in the tax rate was primarily due to the absence of losses on convertible debt repurchases, which were largely disallowed as a tax deduction in 2022.

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,												Percent						Six months ended June 30,												Percent
			2023						2022						Change						2023						2022						Change
Fuel and oil expense, unhedged			$	1,418					$	1,942											$	2,992					$	3,148
Add: Premium cost of fuel contracts designated as hedges			30						26												61						53
Deduct: Fuel hedge gains included in Fuel and oil expense, net			(45)						(332)												(103)						(561)
Fuel and oil expense, as reported (economic)			$	1,403					$	1,636					(14.2)						$	2,950					$	2,640
Total operating expenses, net, as reported			$	6,242					$	5,570											$	12,232					$	10,415
Deduct: Impairment of long-lived assets			—						(15)												—						(31)
Deduct: Litigation settlement			(12)						—												(12)						—
Total operating expenses, excluding special items			$	6,230					$	5,555					12.2						$	12,220					$	10,384					17.7
Deduct: Fuel and oil expense, as reported (economic)			(1,403)						(1,636)												(2,950)						(2,640)
Operating expenses, excluding Fuel and oil expense and special items			$	4,827					$	3,919					23.2						$	9,270					$	7,744					19.7
Deduct: Profitsharing expense			(121)						(81)												(121)						(118)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing			$	4,706					$	3,838					22.6						$	9,149					$	7,626					20.0
Operating income, as reported			$	795					$	1,158											$	511					$	1,007
Add: Impairment of long-lived assets			—						15												—						31
Add: Litigation settlement			12						—												12						—
Operating income, excluding special items			$	807					$	1,173					(31.2)						$	523					$	1,038					(49.6)
Other (gains) losses, net, as reported			$	(7)					$	25											$	(21)					$	96
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a)			(6)						20												(6)						(15)
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities			—						(4)												4						(7)
Other (gains) losses, net, excluding special items			$	(13)					$	41					n.m.						$	(23)					$	74					n.m.
Income before income taxes, as reported			$	886					$	1,036											$	682					$	660
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a)			6						(20)												6						15
Add: Impairment of long-lived assets			—						15												—						31
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities			—						4												(4)						7
Add: Loss on extinguishment of debt			—						43												—						116
Add: Litigation settlement			$	12					—												$	12					—
Income before income taxes, excluding special items			$	904					$	1,078					(16.1)						$	696					$	829					(16.0)
Provision for income taxes, as reported			$	203					$	276											$	158					$	178
Add (Deduct): Net income tax impact of fuel and special items (b)			8						(23)												8						18
Provision for income taxes, net, excluding special items			$	211					$	253					(16.6)						$	166					$	196					(15.3)

			Three months ended June 30,												Percent						Six months ended June 30,												Percent
			2023						2022						Change						2023						2022						Change
Net income, as reported			$	683					$	760											$	524					$	482
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a)			6						(20)												6						15
Add: Loss on extinguishment of debt			—						43												—						116
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities			—						4												(4)						7
Add (Deduct): Net income tax impact of special items (b)			(8)						23												(8)						(18)
Add: Impairment of long-lived assets			—						15												—						31
Add: Litigation settlement			12						—												12						—
Net income, excluding special items			$	693					$	825					(16.0)						$	530					$	633					(16.3)
Net income per share, diluted, as reported			$	1.08					$	1.20											$	0.84					$	0.77
Add: Impact of special items			0.01						0.08												0.01						0.24
Add (Deduct): Net impact of net income above from fuel contracts divided by dilutive shares			0.01						(0.03)												0.01						0.02
Add (Deduct): Net income tax impact of special items (b)			(0.01)						0.05												(0.01)						(0.03)
Net income per share, diluted, excluding special items			$	1.09					$	1.30					(16.2)						$	0.85					$	1.00					(15.0)
Operating expenses per ASM (cents)			14.66		¢				14.92		¢										15.17		¢				14.52		¢
Deduct: Impact of special items			(0.03)						(0.04)												(0.02)						(0.05)
Deduct: Fuel and oil expense divided by ASMs			(3.29)						(4.38)												(3.65)						(3.68)
Deduct: Profitsharing expense divided by ASMs			(0.29)						(0.22)												(0.15)						(0.16)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)			11.05		¢				10.28		¢				7.5						11.35		¢				10.63		¢				6.8

(a) See Note 3 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.

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, non-GAAP; Other (gains) losses, net, non-GAAP; Income before income taxes, non-GAAP; Provision for income taxes, net, non-GAAP; Net income, non-GAAP; Net income 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 the 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, 2022 and Note 3 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.Noncash impairment charges, primarily associated with adjustments to the salvage values for previously retired airframes;

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

3.Losses associated with the partial extinguishment of the Company's Convertible Notes and early prepayment of debt. These losses are also now presented as a separate line item in the unaudited Condensed

Consolidated Statement of Comprehensive Income, rather than its prior presentation where it was included as a component of Other (gains) losses, net. Such losses are incurred as a result of opportunistic decisions made by the Company to prepay portions of its debt, most of which was incurred during the pandemic in order to provide liquidity during the prolonged downturn in air travel; and

4.A charge associated with a tentative litigation settlement regarding certain California state meal-and-rest-break regulations for flight attendants.

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, non-GAAP; Other (gains) losses, net, non-GAAP; Income before income taxes, non-GAAP; Provision for income taxes, net, non-GAAP; Net income, non-GAAP; Net income per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

Liquidity and Capital Resources

Net cash provided by operating activities was $1.4 billion for the three months ended June 30, 2023, compared with $1.9 billion provided by operating activities in the same prior year period. Net cash provided by operating activities was $2.1 billion for the six months ended June 30, 2023, compared with $3.0 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, 2023, were largely impacted by the Company's net income (as adjusted for noncash items), an $809 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, an increase of $140 million in excise tax liabilities due to an increase in sales related to an increase in travel demand, partially offset by a $243 million decrease related to the purchase of fuel derivative instruments, which is included within Other, net operating cash flows in the accompanying unaudited Condensed Consolidated Statement of Cash Flows, and a $215 million decrease due to the payment of Customer reimbursement expenses in first quarter 2023 related to the December 2022 operational disruption. 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. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, pay dividends, and provide working capital.

Net cash used in investing activities totaled $627 million during the three months ended June 30, 2023, compared with $1.6 billion used in investing activities in the same prior year period. Net cash used in investing activities for the six months ended June 30, 2023 was $2.2 billion, compared with $1.7 billion 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, 2023, Capital expenditures were $2.0 billion, compared with $1.5 billion 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, 2023, compared to the same prior year period.

Based on anticipated aircraft delivery delays from Boeing, the Company continues to plan for approximately 70 -8 aircraft deliveries and 26 -700 aircraft retirements in 2023. The Company continues to estimate its 2023 capital spending to be approximately $3.5 billion. This continues to assume approximately $2.3 billion in aircraft capital spending and $1.2 billion in non-aircraft capital spending, which includes tens of millions in operational disruption-related investments. The Company also estimates its total annual capital spending to be approximately $4 billion, on average, for the five years 2023 through 2027.

Net cash provided by financing activities was $10 million during the three months ended June 30, 2023, compared with $215 million used in financing activities for the same prior year period. Net cash used in financing activities was $253 million during the six months ended June 30, 2023, compared with $530 million used in financing activities for the same prior year period. The Company paid $214 million in cash dividends to Shareholders and repaid $67 million in finance lease obligations during the six months ended June 30, 2023. The Company may engage in early debt repurchases from time to time and some of these early repurchases are not included in the Company's current maturities of long-term debt. The Company's 2023 total scheduled debt repayments are expected to be $83 million. During the six months ended June 30, 2022, the Company repaid $555 million in debt and finance lease obligations, including the early extinguishment of $302 million in principal of its Convertible Notes for a cash payment of $409 million.

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"). There were no amounts outstanding under the Amended A&R Credit Agreement as of June 30, 2023. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

Although not the case at June 30, 2023, 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 flight credits 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 5 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 $12.2 billion as of June 30, 2023, and anticipated future internally generated funds from operations. The Company continues to have a large base of unencumbered assets with a net book value of more than $14.0 billion, including aircraft valued in excess of $11.5 billion and more than $2.5 billion in non-aircraft assets such as spare engines, ground equipment, and real estate. In addition, the Company continues to maintain investment-grade credit ratings by all three major credit agencies (Moody's, S&P Global, and Fitch).

As of June 30, 2023, the Company's total firm and option order book with Boeing was 564 aircraft. See Note 9 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, 2023:

												Average Age (Yrs)						Number of Aircraft						Number Owned						Number Leased
Type						Seats
737-700						143						18						408			(a)			370						38
737-800						175						8						207						190						17
737 -8						175						2						188						159						29
Totals												12						803						719						84

(a) Included three Boeing 737 Next Generation aircraft in storage as of June 30, 2023.

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, 2022.

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 ("Exchange Act"). 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 expectations with respect to steps taken to boost operational resiliency and to mitigate the risk of an operational disruption recurrence, including with respect to expected benefits;

• the Company’s financial guidance for third quarter and full year 2023 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 and expectations for the repayment of debt, its effective tax rate, and its capital spending;

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

• the Company’s expectations regarding passenger demand, revenue trends, and bookings, including with respect to managed business revenues;

• the Company’s labor plans and expectations;

• the Company’s fleet and network-related goals, including without limitation with respect to better optimizing its network, growth opportunities and frequencies, alignment of fleet and staffing with the business environment, reduction of operating costs, further modernizing its fleet with less carbon-intensive aircraft, restoration of the Company’s network and core markets, and maturation of newer markets;

• 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 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 impact of fears or actual outbreaks of 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, banking 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 Company's dependence on Boeing, Boeing’s suppliers, and the FAA with respect to the Company's fleet plans and deliveries, and other operational strategies and goals;

• the Company's dependence on its workforce, including its ability to employ sufficient numbers of qualified Employees to effectively and efficiently maintain its operations;

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

• 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;

• 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 other third parties, in particular with respect to its technology plans, its tactical action plans and expectations related to operational resiliency, its fuel supply, Global Distribution Systems, and the impact on the Company's operations and results of operations of any third party delays or non-performance;

• the Company's ability to obtain and maintain adequate infrastructure and equipment to support its operations and initiatives;

• the emergence of additional costs or effects associated with the December 2022 operational disruption, including litigation, government investigation and actions, and internal actions;

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

• 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; and

• other factors as set forth in the Company's filings with the Securities and Exchange Commission (the "SEC"), 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, 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.