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 nine months ended September 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 September 30,
	2023			2022			Change
Revenue passengers carried (000s)	35,349			34,434			2.7	%
Enplaned passengers (000s)	44,598			43,157			3.3	%
Revenue passenger miles (RPMs) (in millions)(a)	35,624			33,534			6.2	%
Available seat miles (ASMs) (in millions)(b)	44,169			39,272			12.5	%
Load factor(c)	80.7		%	85.4		%	(4.7)		pts.
Average length of passenger haul (miles)	1,008			974			3.5	%
Average aircraft stage length (miles)	735			711			3.4	%
Trips flown	374,926			351,218			6.8	%
Seats flown (000s)(d)	59,494			54,609			8.9	%
Seats per trip(e)	158.7			155.5			2.1	%
Average passenger fare	$	167.24		$	163.01		2.6	%
Passenger revenue yield per RPM (cents)(f)	16.60			16.74			(0.8)	%
Operating revenues per ASM (cents)(g)	14.77			15.84			(6.8)	%
Passenger revenue per ASM (cents)(h)	13.38			14.29			(6.4)	%
Operating expenses per ASM (cents)(i)	14.51			14.83			(2.2)	%
Operating expenses per ASM, excluding fuel (cents)	10.97			10.38			5.7	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	10.88			10.23			6.4	%
Fuel costs per gallon, including fuel tax	$	2.80		$	3.39		(17.4)	%
Fuel costs per gallon, including fuel tax, economic	$	2.78		$	3.34		(16.8)	%
Fuel consumed, in gallons (millions)	557			515			8.2	%
Active fulltime equivalent Employees	74,181			64,123			15.7	%
Aircraft at end of period(j)	817			742			10.1	%


	Nine months ended September 30,
	2023			2022			Change
Revenue passengers carried (000s)	101,296			93,688			8.1	%
Enplaned passengers (000s)	127,050			116,446			9.1	%
Revenue passenger miles (RPMs) (in millions)(a)	100,676			92,540			8.8	%
Available seat miles (ASMs) (in millions)(b)	124,810			110,978			12.5	%
Load factor(c)	80.7		%	83.4		%	(2.7)		pts.
Average length of passenger haul (miles)	994			988			0.6	%
Average aircraft stage length (miles)	726			733			(1.0)	%
Trips flown	1,074,136			965,817			11.2	%
Seats flown (000s)(d)	170,116			149,913			13.5	%
Seats per trip(e)	158.4			155.2			2.1	%
Average passenger fare	$	172.03		$	169.37		1.6	%
Passenger revenue yield per RPM (cents)(f)	17.31			17.15			0.9	%
Operating revenues per ASM (cents)(g)	15.44			15.90			(2.9)	%
Passenger revenue per ASM (cents)(h)	13.96			14.30			(2.4)	%
Operating expenses per ASM (cents)(i)	14.93			14.63			2.1	%
Operating expenses per ASM, excluding fuel (cents)	11.32			10.68			6.0	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	11.19			10.52			6.4	%
Fuel costs per gallon, including fuel tax	$	2.85		$	3.05		(6.6)	%
Fuel costs per gallon, including fuel tax, economic	$	2.85		$	3.03		(5.9)	%
Fuel consumed, in gallons (millions)	1,578			1,438			9.7	%
Active fulltime equivalent Employees	74,181			64,123			15.7	%
Aircraft at end of period(j)	817			742			10.1	%

(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.

(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 Boeing 737 Next Generation aircraft in storage as of September 30, 2023.

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 in 2023 following first quarter 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 and key winter operations steps were completed as of October 2023, as planned.

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 third 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 September 30,
(in millions, except per share amounts)
GAAP	2023		2022		Change
Operating income	$	117	$	395	(70.4)	%
Net income	$	193	$	277	(30.3)	%
Net income per share, diluted	$	0.31	$	0.44	(29.5)	%

Non-GAAP
Operating income	$	224	$	425	(47.3)
Net income	$	240	$	316	(24.1)
Net income per share, diluted	$	0.38	$	0.50	(24.0)

The Company's financial results for the three months ended September 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 and maintenance materials and repairs expense. On a GAAP basis, the Company's results for the three months ended September 30, 2023 also included incremental expense of $96 million related to the contract ratification bonus for the Company’s Flight Attendants as part of the tentative agreement reached in October 2023, and for the three months ended September 30, 2022, also included a $76 million loss on extinguishment of debt due to the repurchase of the Company's Convertible Senior Notes (the "Convertible Notes").


	Nine months ended September 30,
(in millions, except per share amounts)
GAAP	2023		2022		Change
Operating income	$	628	$	1,402	(55.2)	%
Net income	$	717	$	759	(5.5)	%
Net income (loss) per share, diluted	$	1.15	$	1.21	(5.0)	%

Non-GAAP
Operating income	$	832	$	1,463	(43.1)	%
Net income	$	836	$	950	(12.0)	%
Net income per share, diluted	$	1.33	$	1.51	(11.9)	%

The Company's financial results for the nine months ended September 30, 2023, on a GAAP and non-GAAP basis, included a negative financial impact of approximately $380 million on a pre-tax basis related to the December 2022 operational disruption. Additionally, Operating income decreased compared to the same prior year period primarily due to higher salaries, wages, and benefits expense and maintenance materials and repairs expense. On a GAAP basis, the Company's results for the nine months ended September 30, 2023 also included incremental expense of $180 million related to the contract ratification bonus for the Company’s Flight Attendants as part of the tentative agreement reached in October 2023, and for the nine months ended September 30, 2022 also included a $192 million loss on extinguishment of debt due to the repurchase of a portion of the Company's Convertible Notes.

2023 Outlook

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


									4Q 2023 Estimation
RASM (a), year-over-year									Down 9% to 11%
ASMs (b), year-over-year									Up ~21%
Economic fuel costs per gallon (c)(d)									$2.90 to $3.00
Fuel hedging premium expense per gallon									$0.05
Fuel hedging cash settlement gains per gallon									$0.19
ASMs per gallon (fuel efficiency)									78 to 80
CASM-X (e), year-over-year (c)(f)									Down 16% to 19%
Scheduled debt repayments (millions)									~$7
Interest expense (millions)									~$63


									2023 Estimation
ASMs (b), year-over-year									Up 14% to 15%
Economic fuel costs per gallon (c)(d)									$2.85 to $2.95
Fuel hedging premium expense per gallon									$0.06
Fuel hedging cash settlement gains per gallon									$0.14
CASM-X (e), year-over-year (c)(f)(g)									Down 1% to 2%
Scheduled debt repayments (millions)									~$85
Interest expense (millions)									~$256
Aircraft (h)									814
Effective tax rate									~23%
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 August 4, 2024. Adjusting for the December 2022 operational disruption, which lowered capacity in fourth quarter 2022, the Company's fourth quarter 2023 capacity would have been up roughly 15 percent, year-over-year. The Company now expects first quarter 2024 capacity to increase in the range of approximately 10 percent to 12 percent, year-over-year, of which all is from the carryover effect of capacity growth in 2023, compared with its previous guidance to increase in the range of 14 percent to 16 percent, year-over-year. The Company also expects full year 2024 capacity to increase in the range of 6 percent to 8 percent, year-over-year.

(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 October 18, 2023, fourth quarter and full year 2023 economic fuel costs per gallon are estimated to be in the range of $2.90 to $3.00 and $2.85 to $2.95, 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) 2023 CASM-X guidance excludes the impact of approximately $84 million related to labor accrual adjustments in second quarter 2023 that related primarily to prior periods. The Company has treated this amount, and the approximately $96 million labor accrual adjustment in third quarter 2023, as special items in its year-to-date 2023 Non-GAAP financial results. See the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for further information.

(h) Aircraft on property, end of period. The Company now plans for approximately 85 Boeing 737-8 ("-8") aircraft deliveries and 41 Boeing 737-700 ("-700") aircraft retirements in 2023, and still plans to end the year with 814 aircraft. This is compared with its previous plan for approximately 70 -8 deliveries and 26 -700 retirements. 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 in fourth quarter 2023, overall demand for travel remains stable, including strong bookings to-date for the holiday travel periods. While leisure demand remains healthy, leisure trends appear to be returning to historically seasonal norms, and business travel trends continue to be stable. Based on current trends, the Company anticipates record fourth quarter operating revenue driven by record fourth quarter passengers.

The Company expects fourth quarter 2023 RASM to decline in the range of 9 percent to 11 percent, year-over-year. This decline includes an approximate one and one-half point offset from the December 2022 operational disruption. The expected RASM decline is driven by higher-than-seasonally-normal ASM growth in fourth quarter 2023 as the

Company closes out the restoration of the network and normalizes the utilization of the fleet. Further, unit revenue pressure is also driven by higher-than-normal investment in development markets and schedules that are not ideally matched to current business travel trends. The Company is addressing these challenges in its 2024 network plan by adjusting capacity and further optimizing the network.

The Company expects fourth quarter 2023 CASM-X to decrease in the range of 16 percent to 19 percent, year-over-year, 15-points of which relates to elevated operating expenses and lower capacity levels in fourth quarter 2022 as a result of the December 2022 operational disruption. The guidance range is inclusive of higher labor rates and market wage rate accruals for all Employee workgroups, including wage rate increases associated with the recently announced tentative agreement with the Transport Workers of America Union Local 556 ("TWU 556").

Company Overview

For the nine months ended September 30, 2023, the Company hired approximately 7,300 Employees, net of attrition. The Company's number of active full-time equivalent Employees increased by 15.7 percent from September 30, 2022 to September 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 its fleet. 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 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.

On August 15, 2023, the Company reached a tentative collective-bargaining agreement with the Transport Workers Union Local 555 ("TWU 555"), which represents the Company's more than 17,000 Ramp, Operations, Provisioning, and Cargo Agents. However, during September 2023, TWU 555 membership voted not to ratify the agreement. The Company will continue to engage in discussions on a new agreement with TWU 555.

On October 6, 2023, the Company's more than 480 Material Specialists, represented by the International Brotherhood of Teamsters ("IBT"), voted to ratify a three-year contract extension with the Company. The newly ratified agreement becomes amendable in October 2026.

On October 25, 2023, the Company reached a tentative collective-bargaining agreement with TWU 556, which represents the Company's nearly 19,000 Flight Attendants. The ratification vote is scheduled to conclude in fourth quarter 2023. If the tentative agreement is ratified, it will become amendable in December 2028.

The Company remains in negotiations for a new collective-bargaining agreement with the Southwest Airlines Pilots Association, which represents the Company’s almost 10,000 Pilots. The Company’s consolidated financial statements include market wage rate accruals for the Pilots for all periods after the current collective-bargaining agreement’s September 2020 amendable date.

During third quarter 2023, the Company announced two new benefits as part of an ongoing commitment to provide Customers with more choices, more flexibility, and more value when they fly Southwest. Customers traveling on Wanna Get Away® fares now are able to make same-day standby changes and add standby listings online or on the Southwest app. Previously, Rapid Rewards Tier Members and Customers traveling on Business Select®, Anytime, and Wanna Get Away Plus™ fares had flexibility to list on a different flight free of charge on their day of scheduled travel. This new offering expands the same-day standby benefit to all Southwest Customers. The Company also began offering free inflight Internet for Customers who purchase a Business Select fare.

During October 2023, the Company announced enhancements to its Rapid Rewards loyalty program to reward loyal Members by making it easier for Customers to earn tier status and making credit card spend count double toward

tier requirements, awarding A-List Preferred Members with up to two complimentary premium drinks, and, starting in spring of 2024, allowing Customers to pay for flights by using a combination of cash and Rapid Rewards points, starting with as few as 1,000 points.

The Company ended third quarter 2023 with 817 Boeing 737 aircraft, including 206 -8 aircraft. During third quarter 2023, the Company retired four -700 aircraft and took delivery of 18 -8 aircraft. On October 25, 2023, the Company secured an order book with Boeing that is expected to help modernize the Company's fleet with less carbon-intensive aircraft and enable the Company's long-term plan for orderly and measured growth. In light of the new order book, the Company now plans for approximately 85 -8 deliveries from Boeing in 2023, and plans to accelerate additional -700 aircraft retirements into 2023, retiring a total of approximately 41 -700 aircraft in 2023. As a result, the Company continues to expect to end 2023 with 814 aircraft. The revised order book with Boeing will continue 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 October 26, 2023, consists of a total of 573 MAX firm orders (302 -7 aircraft and 271 -8 aircraft) for the years 2023 through 2031 and 207 MAX options (-7s or -8s) for the years 2025 through 2031.

The Company has published its flight schedule for sale through August 4, 2024. The Company is in the midst of planning for 2024 and is focused on operational excellence and driving out inefficiencies, increasing productivity, improving reliability, and returning margins back to historical levels.

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 September 30, 2023 and September 30, 2022

Operating Revenues

Total operating revenues for third quarter 2023 increased by $305 million, or 4.9 percent, year-over-year, to achieve a third quarter Company record of $6.5 billion. Passenger revenues for third quarter 2023 increased by $299 million, or 5.3 percent, year-over-year. Other revenues for third quarter 2023 increased by $6 million, or 1.1 percent, year-over-year. These revenue increases were primarily due to a 12.5 percent increase in capacity and a 2.6 percent higher average fare, aided by increases in loyalty revenue and ancillary passenger revenues. The Company's Rapid Rewards® loyalty program continues to be a point of strength, with record third quarter new Member additions, a third quarter record level of Member engagement, and record third quarter spend on the Company's co-branded Chase® Visa credit card. Third quarter 2023 RASM was 14.77 cents, a decrease of 6.8 percent, compared with third quarter 2022. Also on a unit basis, third quarter Passenger revenues decreased 6.4 percent, year-over-year. These year-over-year per unit decreases were largely driven by a 4.7 point decrease in Load factor as capacity growth outpaced demand in third quarter 2023.

Operating Expenses

Operating expenses for third quarter 2023 increased by $583 million, or 10.0 percent, compared with third quarter 2022, while capacity increased 12.5 percent over the same prior year period. The vast majority of the dollar increase was due to higher Salaries, wages, and benefits expense, 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 third 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 and caused the Company's fixed costs to be spread over significantly more ASMs.


	Three months ended September 30,				Per ASM change		Percent change
(in cents, except for percentages)	2023		2022
Salaries, wages, and benefits	6.17	¢	5.92	¢	0.25	¢	4.2	%

Fuel and oil	3.54		4.45		(0.91)		(20.4)
Maintenance materials and repairs	0.74		0.52		0.22		42.3
Landing fees and airport rentals	1.04		1.01		0.03		3.0
Depreciation and amortization	0.85		0.85		—		—
Other operating expenses	2.17		2.08		0.09		4.3
Total	14.51	¢	14.83	¢	(0.32)	¢	(2.2)	%

Operating expenses per ASM for third quarter 2023 decreased by 2.2 percent, compared with third quarter 2022, primarily due to a significant decrease in the Company's fuel cost per gallon. Operating expenses per ASM for third quarter 2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 4.4 percent, compared with third quarter 2022, primarily due to general inflationary cost pressures, in particular higher labor rates for all Employee workgroups, including market wage rate accruals associated with open contract labor agreements, as well as the timing of planned maintenance expenses. 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 third quarter 2023 increased by $406 million, or 17.5 percent, compared with third quarter 2022. On a per ASM basis, third quarter 2023 Salaries, wages, and benefits expense increased 4.2 percent, compared with third quarter 2022. On a dollar basis, approximately 60 percent of the increase was due to step/pay rate increases for certain workgroups, including market wage rate accruals for open collective bargaining agreements (inclusive of $96 million on a GAAP basis in additional compensation in third quarter 2023 for past services, as part of the contract ratification bonus negotiated as part of the tentative agreement reached with TWU 556), and approximately 20 percent of the increase was driven by an increase in capacity and/or number of trips flown. 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 measures.

Fuel and oil expense for third quarter 2023 decreased by $186 million, or 10.6 percent, compared with third quarter 2022. On a per ASM basis, third quarter 2023 Fuel and oil expense decreased 20.4 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 third quarter 2023 average economic jet fuel price of $2.78 per gallon is net of approximately $94 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 September 30,
	2023		2022
Economic fuel costs per gallon	$	2.78	$	3.34
Fuel hedging premium expense (in millions)	$	30	$	12
Fuel hedging premium expense per gallon	$	0.05	$	0.02
Fuel hedging cash settlement gain per gallon	$	0.16	$	0.43

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 third quarter 2023 available seat miles per gallon ("fuel efficiency") increased 3.9 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 October 18, 2023.


	Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (b)
Average Brent Crude Oil price per barrel	4Q 2023	2023

$70	$2.45 - $2.55	$2.75 - $2.85
$80	$2.70 - $2.80	$2.80 - $2.90
Current Market (a)	$2.90 - $3.00	$2.85 - $2.95
$90	$2.95 - $3.05	$2.85 - $2.95
$100	$3.15 - $3.25	$2.90 - $3.00
$110	$3.40 - $3.50	$2.95 - $3.05

Fair market value	$110 million	$306 million
Estimated premium costs	$30 million	$121 million

(a) Brent crude oil average market prices as of October 18, 2023, were $89 and $84 per barrel for fourth quarter and full year 2023, respectively.

(b) Based on the Company's existing fuel derivative contracts and market prices as of October 18, 2023, fourth quarter and full year 2023 economic fuel costs per gallon are estimated to be in the range of $2.90 to $3.00 and $2.85 to $2.95, 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			50%
2024			55%
2025			43%
2026			Less than 10%

(a) Based on the Company's current available seat mile plans. The Company is currently 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 September 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 September 30, 2023		Amount of gains (losses) deferred in AOCI at September 30, 2023 (net of tax)
Remainder of 2023	$	122	$	59
2024	191		26
2025	144		(3)
2026	$	30	$	4
Total	$	487	$	86

Maintenance materials and repairs expense for third quarter 2023 increased by $122 million, or 59.8 percent, compared with third quarter 2022. On a per ASM basis, Maintenance materials and repairs expense increased 42.3 percent, compared with third 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. These engine expenses are associated with both the Company’s -700 fleet, due to an increase in the number of engines inducted for planned performance shop restoration visits as a result of their utilization, and planned shop visits for the Company's Boeing 737-800 ("-800") fleet, as -800 aircraft emerge from their maintenance “honeymoon” period, during which the engines have required significantly lower levels of maintenance while in the early phases of their useful lives.

Landing fees and airport rentals expense for third quarter 2023 increased by $62 million, or 15.7 percent, compared with third quarter 2022. On a per ASM basis, Landing fees and airport rentals expense increased 3.0 percent, compared with third quarter 2022. On a dollar basis, approximately 50 percent of the increase was attributable to an increase in airport rental expense throughout the network driven by higher rates and approximately 40 percent of the increase was attributable to higher landing fees, primarily driven both by the increase in trips flown and higher rates charged by airports.

Depreciation and amortization expense for third quarter 2023 increased by $40 million, or 11.9 percent, compared with third quarter 2022. On a per ASM basis, Depreciation and amortization expense remained flat, compared with third quarter 2022. On a dollar basis, the increase was primarily due to the acquisition of 102 -8 aircraft since third quarter 2022.

Other operating expenses for third quarter 2023 increased by $139 million, or 17.0 percent, compared with third 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 September 30, 2023 and 2022. On a per ASM basis, Other operating expenses increased 4.3 percent, compared with third quarter 2022. On a dollar basis, approximately 20 percent of the increase was due to higher advertising expenses, approximately 20 percent of the increase was due to higher personnel expenses driven by an increase in Crew lodging expense associated with the increase in trips and inflationary pressure, and approximately 20 percent of the increase was due to higher professional fees, driven by an increase in technology spending. The remainder of the year-over-year increase was primarily due to various flight-driven expenses.

Other expenses (income)

Interest expense for third quarter 2023 decreased by $23 million, or 26.7 percent, compared with third quarter 2022, primarily due to various debt repurchases since third quarter 2022. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

Capitalized interest for third quarter 2023 decreased by $7 million, or 63.6 percent, compared with third quarter 2022, primarily due to a significant amount of assets being placed into service since third quarter 2022, most notably the delivery of 18 -8 aircraft in third quarter 2023.

Interest income for third quarter 2023 increased by $86 million, compared with third quarter 2022, primarily due to higher interest rates earned on the Company's cash and short-term investments.

Loss on extinguishment of debt for third quarter 2023 decreased by $76 million compared with third quarter 2022, primarily due to the partial extinguishment of the Company's Convertible Notes in third quarter 2022, compared to none in third quarter 2023.

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


	Three months ended September 30,
(in millions)	2023		2022
Mark-to-market impact from fuel contracts settling in current and future periods	$	(33)	$	(38)
Premium cost of fuel contracts not designated as hedges	—		(14)


Mark-to-market impact on deferred compensation plan investments	9		13
Other	1		—


	$	(23)	$	(39)

Income Taxes

The Company's effective tax rate was 18.5 percent in third quarter 2023, compared with 21.6 percent in third 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 approximately 23 percent.

Comparison of nine months ended September 30, 2023 and September 30, 2022

Operating Revenues

Passenger revenues for the nine months ended September 30, 2023, increased by $1.6 billion, or 9.8 percent, compared with the first nine months of 2022. On a unit basis, Passenger revenues decreased 2.4 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 nine months ended September 30, 2023 versus 2022. For the nine months ended September 30, 2023, the year-over-year Passenger revenue yield per ASM decrease was primarily driven by a 2.7 percent decrease in Load factor as the capacity growth of 12.5 percent outpaced the growth in demand of 8.8 percent for the nine months ended September 30, 2023.

Other revenues for the nine months ended September 30, 2023, increased by $69 million, or 4.2 percent, year-over-year. On a dollar basis, the increase was primarily due to additional marketing revenue from Chase Bank USA, N.A., driven by improved retail spend on the Company's co-brand credit card.

Operating Expenses

Operating expenses for the nine months ended September 30, 2023, increased by $2.4 billion, or 14.8 percent, compared with the first nine months of 2022, while capacity increased 12.5 percent over the same prior year period. Approximately 50 percent of the increase was due to higher Salaries, wages, and benefits expense, approximately 20 percent was due to higher Other operating expenses, and approximately 10 percent was due to higher Maintenance, materials, and repairs 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 nine 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 and caused the Company's fixed costs to be spread over significantly more ASMs.


	Nine months ended September 30,				Per ASM		Percent
(in cents, except for percentages)	2023		2022		change		change
Salaries, wages, and benefits	6.40	¢	6.11	¢	0.29	¢	4.7	%

Fuel and oil	3.61		3.95		(0.34)		(8.6)
Maintenance materials and repairs	0.67		0.56		0.11		19.6
Landing fees and airport rentals	1.06		1.02		0.04		3.9
Depreciation and amortization	0.89		0.89		—		—

Other operating expenses	2.30		2.10		0.20		9.5
Total	14.93	¢	14.63	¢	0.30	¢	2.1	%

Operating expenses per ASM for the first nine months of 2023 increased by 2.1 percent, compared with the first nine months of 2022. The majority of the year-over-year unit cost increase was driven by higher salaries, wages, and benefits expense, partially offset by a decrease in the Company's fuel cost per gallon. Operating expenses per ASM for the first nine months of 2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 5.2 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 nine months of 2023 increased by $1.2 billion, or 18.0 percent, compared with the first nine months of 2022. On a per ASM basis, Salaries, wages, and benefits expense for the first nine months of 2023 increased 4.7 percent, compared with the first nine 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 (inclusive of $180 million on a GAAP basis in additional compensation related to past services negotiated as part of the tentative agreement reached with TWU 556) and approximately 30 percent of the increase was driven by an increase in capacity and/or number of trips flown. 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 measures.

Fuel and oil expense for the first nine months of 2023 increased by $124 million, or 2.8 percent, compared with the first nine months of 2022. On a per ASM basis, Fuel and oil expense for the first nine months of 2023 decreased 8.6

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:


	Nine months ended September 30,
	2023		2022
Economic fuel costs per gallon	$	2.85	$	3.03
Fuel hedging premium expense (in millions)	$	91	$	65
Fuel hedging premium expense per gallon	$	0.06	$	0.05
Fuel hedging cash settlement gains per gallon	$	0.12	$	0.54

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 nine months of 2023 increased by $212 million, or 34.0 percent, compared with the first nine months of 2022. On a per ASM basis, Maintenance materials and repairs expense increased 19.6 percent, compared with the first nine 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.

Landing fees and airport rentals expense for the first nine months of 2023 increased by $196 million, or 17.4 percent, compared with the first nine months of 2022. On a per ASM basis, Landing fees and airport rentals expense increased 3.9 percent, compared with the first nine months of 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 and approximately 45 percent of the increase was largely due to higher airport rental expense throughout the network, associated with both higher rates and additional space leased at airports.

Depreciation and amortization expense for the first nine months of 2023 increased by $123 million, or 12.5 percent, compared with the first nine months of 2022. On a per ASM basis, Depreciation and amortization expense remained flat, compared with the first nine months of 2022. On a dollar basis, the increase was primarily due to the acquisition of 102 -8 aircraft since third quarter 2022.

Other operating expenses for the first nine months of 2023 increased by $525 million, or 22.4 percent, compared with the first nine months of 2022. Included within this line item was aircraft rentals expense in the amount of $149 million and $146 million for the nine months ended September 30, 2023 and 2022, respectively. On a per ASM basis, Other operating expenses increased 9.5 percent, compared with the first nine months of 2022. On a dollar and per ASM basis, approximately 15 percent of the increase was due to higher interrupted trip expense, primarily in first quarter 2023 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 nine months of 2023 decreased by $79 million, or 29.0 percent, compared with the first nine months of 2022, primarily due to various debt repurchases since third quarter 2022.

Capitalized interest for the first nine months of 2023 decreased by $16 million, or 51.6 percent, compared with the first nine months of 2022, primarily due to a significant amount of assets being placed into service, most notably 102 MAX aircraft being delivered since third quarter 2022.

Interest income for the first nine months of 2023 increased by $324 million, compared with the first nine 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 nine months of 2023 decreased by $192 million, compared with the first nine months of 2022, primarily due to the partial extinguishment of the Company's Convertible Notes in the first nine months of 2022, compared with none in the first nine months of 2023.

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


	Nine months ended September 30,
(in millions)	2023		2022
Mark-to-market impact from fuel contracts settling in current and future periods	$	(26)	$	(23)
Premium cost of fuel contracts not designated as hedges	—		(14)

Unrealized mark-to-market adjustment on available for sale securities	(4)		7
Mark-to-market impact on deferred compensation plan investment	(17)		84


Other	3		3
	$	(44)	$	57

Income Taxes

The Company's effective tax rate was approximately 22.0 percent for the first nine months of 2023, compared with 25.1 percent for the first nine 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 September 30,				Percent	Nine months ended September 30,				Percent
	2023		2022		Change	2023		2022		Change




Fuel and oil expense, unhedged	$	1,616	$	1,931		$	4,608	$	5,079
Add: Premium cost of fuel contracts designated as hedges	30		26			91		79
Deduct: Fuel hedge gains included in Fuel and oil expense, net	(82)		(207)			(185)		(768)
Fuel and oil expense, as reported	$	1,564	$	1,750	(10.6)	$	4,514	$	4,390
Deduct: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	(11)		(12)			(12)		(12)
Deduct: Premium benefit of fuel contracts not designated as hedges	—		(14)			—		(14)
Fuel and oil expense, excluding special items (economic)	$	1,553	$	1,724	(9.9)	$	4,502	$	4,364	3.2

Total operating expenses, as reported	$	6,408	$	5,825		$	18,640	$	16,240

Deduct: Labor contract adjustment (a)	(96)		—			(180)		—
Deduct: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	(11)		(12)			(12)		(12)

Deduct: Premium benefit of fuel contracts not designated as hedges	—		(14)			—		(14)

Deduct: Impairment of long-lived assets	—		(4)			—		(35)
Deduct: Litigation settlement	—		—			(12)		—
Total operating expenses, excluding special items	$	6,301	$	5,795	8.7	$	18,436	$	16,179	14.0
Deduct: Fuel and oil expense, excluding special items (economic)	(1,553)		(1,724)			(4,502)		(4,364)
Operating expenses, excluding Fuel and oil expense and special items	$	4,748	$	4,071	16.6	$	13,934	$	11,815	17.9
Deduct: Profitsharing expense	(38)		(57)			(158)		(175)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing	$	4,710	$	4,014	17.3	$	13,776	$	11,640	18.4

Operating income, as reported	$	117	$	395		$	628	$	1,402

Add: Labor contract adjustment (a)	96		—			180		—
Add: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	11		12			12		12

Add: Premium benefit of fuel contracts not designated as hedges	—		14			—		14

Add: Impairment of long-lived assets	—		4			—		35
Add: Litigation settlement	—		—			12		—
Operating income, excluding special items	$	224	$	425	(47.3)	$	832	$	1,463	(43.1)


	Three months ended September 30,				Percent	Nine months ended September 30,				Percent
	2023		2022		Change	2023		2022		Change
Other (gains) losses, net, as reported	$	(23)	$	(39)		$	(44)	$	57
Add: Mark-to-market impact from fuel contracts settling in current and future periods (b)	33		38			26		23
Add: Premium benefit of fuel contracts not designated as hedges	—		14			—		14
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities	—		—			4		(7)

Other (gains) losses, net, excluding special items	$	10	$	13	(23.1)%	$	(14)	$	87	n.m.

Income before income taxes, as reported	$	237	$	353		$	919	$	1,013

Add: Labor contract adjustment (a)	96		—			180		—
Add: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	11		12			12		12


Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (b)	(33)		(38)			(26)		(23)

Add: Impairment of long-lived assets	—		4			—		35
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities	—		—			(4)		7
Add: Loss on extinguishment of debt	—		76			—		192
Add: Litigation settlement	—		—			12		—
Income before income taxes, excluding special items	$	311	$	407	(23.6)	$	1,093	$	1,236	(11.6)

Provision for income taxes, as reported	$	44	$	76		$	202	$	254
Add: Net income tax impact of fuel and special items (c)	27		15			55		32

Provision for income taxes, net, excluding special items	$	71	$	91	(22.0)	$	257	$	286	(10.1)



Net income, as reported	$	193	$	277		$	717	$	759

Add: Labor contract adjustment (a)	96		—			180		—
Add: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	11		12			12		12


Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (b)	(33)		(38)			(26)		(23)
Add: Loss on extinguishment of debt	—		76			—		192
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities	—		—			(4)		7
Deduct: Net income tax impact of special items (c)	(27)		(15)			(55)		(32)
Add: Impairment of long-lived assets	—		4			—		35
Add: Litigation settlement	—		—			12		—

Net income, excluding special items	$	240	$	316	(24.1)	$	836	$	950	(12.0)


	Three months ended September 30,						Percent	Nine months ended September 30,						Percent
	2023			2022			Change	2023			2022			Change

Net income per share, diluted, as reported	$	0.31		$	0.44			$	1.15		$	1.21
Add (Deduct): Impact of special items	0.14			0.12				0.29			0.38
Deduct: Net impact of net income above from fuel contracts divided by dilutive shares	(0.03)			(0.04)				(0.02)			(0.02)
Deduct: Net income tax impact of special items (c)	(0.04)			(0.02)				(0.09)			(0.06)


Net income per share, diluted, excluding special items	$	0.38		$	0.50		(24.0)	$	1.33		$	1.51		(11.9)

Operating expenses per ASM (cents)	14.51		¢	14.83		¢		14.93		¢	14.63		¢
Deduct: Impact of special items	(0.24)			(0.01)				(0.16)			(0.03)
Deduct: Fuel and oil expense divided by ASMs	(3.52)			(4.45)				(3.61)			(3.95)
Deduct: Profitsharing expense divided by ASMs	(0.08)			(0.15)				(0.12)			(0.16)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	10.67		¢	10.22		¢	4.4	11.04		¢	10.49		¢	5.2

(a) Represents changes in estimate related to the contract ratification bonus for the Company’s Flight Attendants as part of the tentative agreement reached in October 2023 with TWU 556. The Company began accruing for all of its open labor contracts on April 1, 2022, and this incremental $180 million expense extends the timeframe covered by the ratification bonus to the date the Flight Attendant contract became amendable on November 1, 2018, to compensate for missed wage increases over that time period. The Company’s consolidated financial statements for the three and nine months ended September 30, 2023 include market rate wage accrual for all workgroups with open collective bargaining agreements. The Company had not previously included an approximate $84 million adjustment associated with ongoing labor contract negotiations during second quarter 2023 as a special item, but has now included such amount in its calculation of Non-GAAP financial measures for the year-to-date period ended September 30, 2023. The Company is therefore providing adjusted reconciliation schedules for second quarter 2023 as supplemental information below. See the Note Regarding Use of Non-GAAP Financial Measures for further information.

(b) See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information.

(c) 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.

Revised Three Months Ended June 30, 2023 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
	2023		2022		Change




Fuel and oil expense, unhedged	$	1,418	$	1,942
Add: Premium cost of fuel contracts designated as hedges	30		26
Deduct: Fuel hedge gains included in Fuel and oil expense, net	(45)		(332)
Fuel and oil expense, as reported (economic)	$	1,403	$	1,636	(14.2)




Total operating expenses, as reported	$	6,242	$	5,570

Deduct: Labor contract adjustment	(84)		—




Deduct: Impairment of long-lived assets	—		(15)
Deduct: Litigation settlement	(12)		—
Total operating expenses, excluding special items	$	6,146	$	(5,555)	n.m.
Deduct: Fuel and oil expense, as reported (economic)	(1,403)		(1,636)
Operating expenses, excluding Fuel and oil expense and special items	$	4,743	$	3,919	16.6
Deduct: Profitsharing expense	(121)		(81)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing	$	4,622	$	3,838	17.3


	Three months ended June 30,						Percent
	2023			2022			Change
Operating income, as reported	$	795		$	1,158

Add: Labor contract adjustment	84			—




Add: Impairment of long-lived assets	—			15
Add: Litigation settlement	12			—
Operating income, excluding special items	$	891		$	1,173		(24.0)

Other (gains) losses, net, as reported	$	(7)		$	25
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods	(6)			20

Deduct: Unrealized mark-to-market adjustment on available for sale securities	—			(4)

Other (gains) losses, net, excluding special items	$	(13)		$	41		n.m.

Income before income taxes, as reported	$	886		$	1,036

Add: Labor contract adjustment	84			—



Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods	6			(20)

Add: Impairment of long-lived assets	—			15
Add: Unrealized mark-to-market adjustment on available for sale securities	—			4
Add: Loss on extinguishment of debt	—			43
Add: Litigation settlement	12			—
Income before income taxes, excluding special items	$	988		$	1,078		(8.3)

Provision for income taxes, as reported	$	203		$	276
Add (Deduct): Net income tax impact of fuel and special items (a)	27			(23)

Provision for income taxes, net, excluding special items	$	230		$	253		(9.1)



Net income, as reported	$	683		$	760

Add: Labor contract adjustment	84			—



Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods	6			(20)
Add: Loss on extinguishment of debt	—			43
Add: Unrealized mark-to-market adjustment on available for sale securities	—			4
Add (Deduct): Net income tax impact of fuel and special items (a)	(27)			23
Add: Impairment of long-lived assets	—			15
Add: Litigation settlement	12			—

Net income, excluding special items	$	758		$	825		(8.1)

Net income per share, diluted, as reported	$	1.08		$	1.20
Add: Impact of special items	0.14			0.08
Add (Deduct): Net impact of net income above from fuel contracts divided by dilutive shares	0.01			(0.03)
Add (Deduct): Net income tax impact of special items (a)	(0.04)			0.05


Net income per share, diluted, excluding special items	$	1.19		$	1.30		(8.5)

Operating expenses per ASM (cents)	14.66		¢	14.92		¢
Deduct: Impact of special items	(0.23)			(0.04)
Deduct: Fuel and oil expense divided by ASMs	(3.29)			(4.38)
Deduct: Profitsharing expense divided by ASMs	(0.29)			(0.22)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	10.85		¢	10.28		¢	5.5

(a) 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. 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;

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

5.Incremental expense associated with ongoing labor contract negotiations with TWU 556 which represents the Company’s Flight Attendants. The change in estimate recognized in the second and third quarters of 2023 relates to additional compensation for services performed by Employees outside of those applicable fiscal periods.

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 $616 million for the three months ended September 30, 2023, compared with $234 million provided by operating activities in the same prior year period. Net cash provided by operating activities was $2.7 billion for the nine months ended September 30, 2023, compared with $3.2 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 nine months ended September 30, 2023, were largely impacted by the Company's net income (as adjusted for noncash items), a $750 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, partially offset by a $245 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 nine months ended September 30, 2022, were largely impacted by the Company's net income (as adjusted for noncash items), a $700 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, 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 $64 million during the three months ended September 30, 2023, compared with $1.1 billion used in investing activities in the same prior year period. Net cash used in investing activities for the nine months ended September 30, 2023, was $2.3 billion, compared with $2.8 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 nine months ended September 30, 2023, Capital expenditures were $2.8 billion, compared with $2.6 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 nine months ended September 30, 2023, compared to the same prior year period.

The Company continues to estimate its 2023 capital spending to be roughly $3.5 billion, which includes approximately $2.3 billion in aircraft capital spending, assuming approximately 85 -8 deliveries in 2023 and $1.2 billion in non-aircraft capital spending, including tens of millions in operational investments related to the Company's winter operations plan. The Company continues to estimate its total annual capital spending to be approximately $4 billion, on average, for the five years 2023 through 2027.

Net cash used in financing activities was $213 million during the three months ended September 30, 2023, compared with $1.9 billion used in financing activities for the same prior year period. Net cash used in financing activities was $466 million during the nine months ended September 30, 2023, compared with $2.4 billion used in financing activities for the same prior year period. The Company paid $428 million in cash dividends to Shareholders and repaid $78 million in finance lease obligations during the nine months ended September 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 $85 million. During the nine months ended September 30, 2022, the Company repaid $2.5 billion in debt and finance lease obligations, including a $1.3 billion prepayment for all of its outstanding 4.75% Notes due 2023 and the early extinguishment of $486 million in principal of its Convertible Notes for cash payments totaling $648 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"). In August 2023, this facility was amended to, among other things, (i) extend the expiration date to August 2028, (ii) release all aircraft and other assets constituting collateral securing loans under the facility, (iii) eliminate the minimum liquidity covenant, (iv) add a Coverage Ratio financial covenant, and (v) amend the covenant requiring that a pool of lien-free specified aircraft and related assets have a minimum aggregate appraised value. There were no amounts outstanding under the Amended A&R Credit Agreement as of September 30, 2023. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

Although not the case at September 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 $11.7 billion as of September 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 $14.5 billion, including aircraft valued in excess of $12.0 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).

Contractual Obligations

On October 25, 2023, the Company entered into a supplemental agreement with Boeing relating to its contractual order book for -7 and -8 aircraft. This agreement, which extends the order book to 2031, provides flexibility in support of the Company's growth plans and fleet modernization.

The Company now plans for approximately 85 -8 aircraft deliveries from Boeing and 41 -700 retirements in 2023. The delivery schedule below reflects contractual commitments, although the timing of future deliveries could be affected by any potential or prolonged delays in the manufacturing process or with the -7 certification. The Company retains significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize.

As of October 26, 2023, the Company had firm deliveries and options for -7 and -8 aircraft as follows:


	The Boeing Company
	-7 Firm Orders		-8 Firm Orders		-7 or -8 Options	Total
2023	—		85		—	85	(c)
2024	27		53		—	80
2025	54		3		23	80
2026	59		—		26	85
2027	19		46		25	90
2028	15		50		25	90
2029	38		34		18	90
2030	45		—		45	90
2031	45		—		45	90
	302	(a)	271	(b)	207	780

(a) The delivery timing for the -7 is dependent on the 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.

(b) The Company has flexibility to designate firm orders or options as -7s or -8s, upon written advance notification as stated in the contract.

(c) Includes 69 -8 deliveries received year-to-date through September 30, 2023. The Company now plans for approximately 85 -8 aircraft deliveries in 2023.

Based on the Company's revised agreement with Boeing, capital commitments associated with its firm orders as of October 26, 2023, were: $133 million remaining in 2023, $2.1 billion in 2024, $1.7 billion in 2025, $1.8 billion in 2026, $2.6 billion in 2027, $2.9 billion in 2028, and $5.3 billion thereafter.

The following table details information on the aircraft in the Company's fleet as of September 30, 2023:


		Average Age (Yrs)	Number of Aircraft		Number Owned	Number Leased
Type	Seats
737-700	143	18	404	(a)	369	35
737-800	175	8	207		190	17
737 -8	175	2	206		177	29
Totals		12	817		736	81

(a) Included three Boeing 737 Next Generation aircraft in storage as of September 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 fourth 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 with respect to fleet modernization, fleet utilization, flexibility benefits, and expected fleet deliveries and retirements, and underlying expectations and dependencies;
the Company’s expectations regarding passenger demand, revenue trends, and bookings;
the Company’s labor plans and expectations;
the Company’s fleet and network-related goals, including without limitation with respect to restoring and better optimizing its network, normalizing the utilization of its fleet, operational excellence, driving out inefficiencies, increasing productivity, and improving reliability;
the Company’s goals with respect to returning margins back to historical levels;
the Company’s plans and expectations with respect to the Customer experience and the Rapid Rewards loyalty program;
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 or actual acts 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, capacity and operational plans, and other operational plans, strategies, and goals;
the Company's dependence on its workforce, including its ability to employ and retain 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 plans and expectations related to operational excellence and reliability, fuel supply, maintenance, environmental sustainability, 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.

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