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

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

Relevant comparative operating statistics for the three and six months ended June 30, 2024 and 2023 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,
20242023Change
Revenue passengers carried (000s)37,50935,7155.0%
Enplaned passengers (000s)47,26744,7875.5%
Revenue passenger miles (RPMs) (in millions)(a)38,22135,5057.6%
Available seat miles (ASMs) (in millions)(b)46,25042,5798.6%
Load factor(c)82.6%83.4%(0.8)pts.
Average length of passenger haul (miles)1,0199942.5%
Average aircraft stage length (miles)7667285.2%
Trips flown375,749365,0892.9%
Seats flown (000s)(d)59,77557,9043.2%
Seats per trip(e)159.1158.60.3%
Average passenger fare$178.94$179.44(0.3)%
Passenger revenue yield per RPM (cents)(f)17.5618.05(2.7)%
Operating revenues per ASM (cents)(g)15.9016.53(3.8)%
Passenger revenue per ASM (cents)(h)14.5115.05(3.6)%
Operating expenses per ASM (cents)(i)15.0414.662.6%
Operating expenses per ASM, excluding fuel (cents)11.5811.371.8%
Operating expenses per ASM, excluding fuel and profitsharing (cents)11.5211.084.0%
Fuel costs per gallon, including fuel tax$2.76$2.606.2%
Fuel costs per gallon, including fuel tax (economic)$2.76$2.606.2%
Fuel consumed, in gallons (millions)5775387.2%
Active fulltime equivalent Employees74,08171,2993.9%
Aircraft at end of period(j)8178031.7%
Six months ended June 30,
20242023Change
Revenue passengers carried (000s)70,38165,9476.7%
Enplaned passengers (000s)88,16482,4526.9%
Revenue passenger miles (RPMs) (in millions)(a)71,30865,0529.6%
Available seat miles (ASMs) (in millions)(b)88,49780,6419.7%
Load factor(c)80.6%80.7%(0.1)pts.
Average length of passenger haul (miles)1,0139862.7%
Average aircraft stage length (miles)7607225.3%
Trips flown725,728699,2103.8%
Seats flown (000s)(d)115,469110,6224.4%
Seats per trip(e)159.1158.20.6%
Average passenger fare$176.52$174.601.1%
Passenger revenue yield per RPM (cents)(f)17.4217.70(1.6)%
Operating revenues per ASM (cents)(g)15.4615.80(2.2)%
Passenger revenue per ASM (cents)(h)14.0414.28(1.7)%
Operating expenses per ASM (cents)(i)15.4615.171.9%
Operating expenses per ASM, excluding fuel (cents)11.9211.513.6%
Operating expenses per ASM, excluding fuel and profitsharing (cents)11.8811.364.6%
Fuel costs per gallon, including fuel tax$2.84$2.88(1.4)%
Fuel costs per gallon, including fuel tax (economic)$2.84$2.88(1.4)%
Fuel consumed, in gallons (millions)1,1011,0217.8%
Active fulltime equivalent Employees74,08171,2993.9%
Aircraft at end of period(j)8178031.7%

(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" or "PRASM," 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" or "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 June 30, 2023.

Financial Overview

The Company recorded second quarter 2024 operating revenues of $7.4 billion, an all-time quarterly record, driven by all-time quarterly record passengers carried, passenger revenue, and ancillary revenue as well as a second quarter record number of Rapid Rewards member acquisitions.

The Company reports its results in accordance with accounting principles generally accepted in the United States ("GAAP"). The Company also provides certain non-GAAP financial measures 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, 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)
GAAP20242023Change
Operating income$398$795(49.9)%
Net income$367$683(46.3)%
Net income per share, diluted$0.58$1.08(46.3)%
Non-GAAP
Operating income$405$891(54.5)%
Net income$370$758(51.2)%
Net income per share, diluted$0.58$1.19(51.3)%

The Company's operating income and net income for the three months ended June 30, 2024, on a GAAP and non-GAAP basis, decreased compared to the same prior year period primarily due to higher salaries, wages, and benefits and fuel prices. On a GAAP basis, the Company's Operating expenses increased 11.4 percent year-over-year, while Operating revenues increased 4.5 percent.

Six months ended June 30,
(in millions, except per share amounts)
GAAP20242023Change
Operating income$6$511(98.8)%
Net income$137$524(73.9)%
Net income per share, diluted$0.23$0.84(72.6)%
Non-GAAP
Operating income$28$607(95.4)%
Net income$152$595(74.5)%
Net income per share, diluted$0.25$1.33(81.2)%

The Company's operating income and net income for the six months ended June 30, 2024, 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 Operating expenses increased 11.8 percent year-over-year, while Operating revenues increased 7.4 percent.

2024 Outlook

The following tables present current selected financial guidance for third quarter and full year 2024:

3Q 2024 Estimation
RASM (a), year-over-yearFlat to down 2%
ASMs (b), year-over-yearUp ~2%
Economic fuel costs per gallon (c)(d)$2.60 to $2.70
Fuel hedging premium expense per gallon$0.07
Fuel hedging cash settlement gains per gallon$0.04
ASMs per gallon (fuel efficiency)~81
CASM-X (e), year-over-year (c)(f)Up 11% to 13%
Scheduled debt repayments (millions)~$7
Interest expense (millions)~$62
2024 Estimation
ASMs (b), year-over-yearUp ~4%
Economic fuel costs per gallon (c)(d)$2.70 to $2.80
Fuel hedging premium expense per gallon$0.07
Fuel hedging cash settlement gains per gallon$0.03
CASM-X (e), year-over-year (c)(f)Up 7% to 8%
Scheduled debt repayments (millions)~$29
Interest expense (millions)~$252
Aircraft (g)802
Effective tax rate~24%
Capital spending (billions)~$2.5

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

(b) Available seat miles ("ASMs" or "capacity"). The Company's flight schedule is published for sale through March 5, 2025. The Company expects fourth quarter 2024 capacity to decrease approximately 4 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 July 17, 2024 third quarter, fourth quarter, and full year 2024 economic fuel costs per gallon are estimated to be in the range of $2.60 to $2.70, $2.60 to $2.70, 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 20 Boeing 737-8 ("-8") aircraft deliveries and 35 aircraft retirements in 2024, comprised of 31 Boeing 737-700s ("-700") and four Boeing 737-800s ("-800"). 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 manufacturing challenges, so the Company offers no assurances that current estimations and timelines will be met.

The Company expects third quarter 2024 unit revenue to be in the range of flat to down two percent on a year-over-year basis with capacity up roughly two percent, also on a year-over-year basis. This guidance range contemplates a revenue management headwind similar to second quarter of two points from bookings already in place. In 2023, the Company transitioned to a modernized Origin and Destination ("O&D") revenue management system that consistently produced superior results to its prior leg-based revenue management system during an eighteen-month long parallel test prior to launch. The Company continues to gain experience with the system, particularly in periods with changing capacity and close-in changes to published schedules driven by Boeing's aircraft delivery challenges. The Company recently conducted an evaluation of its revenue management performance, including a third-party review, to identify opportunities to improve the revenue management of future bookings. Those opportunities are currently being actioned. The Company continues to believe that the new revenue management system will deliver better long-term performance compared with its prior system. In addition to revenue management actions, network optimization and capacity moderation in the second half of the year are expected to support sequential year-over-year unit revenue improvement. Summer, fall, and recently published winter base schedules all include changes to better match supply to demand with capacity expected to decline four percent year-over-year in fourth quarter, and seats and trips to decline roughly eight percent year-over-year in fourth quarter. As such, the Company expects unit revenue to inflect positively by fourth quarter 2024, on a year-over-year basis.

The Company continues to expect cost increases, most notably market-driven rate inflation in salaries, wages, and benefits, and higher maintenance expenses, for the remainder of the year, driving third quarter 2024 CASM-X to an expected increase in the range of 11 percent to 13 percent, year-over-year. The sequential year-over-year increase from second quarter 2024 is primarily due to lower year-over-year capacity growth in third quarter 2024. The Company continues to expect full year 2024 CASM-X to increase in the range of seven percent to eight percent, year-over-year.

Company Overview

On July 25, 2024, the Company announced several new initiatives designed to elevate the Customer experience on its flights, improve financial performance, and drive Shareholder value. As part of its ongoing focus on product evolution, the Company is moving forward with plans to assign seats, offer premium seating options, redesign the boarding model, and introduce redeye (i.e., overnight) flying. The Company has been known for its open seating model for more than 50 years, which was unique in the airline industry and has been popular with Southwest Customers for decades. Open seating served the Company well as a primarily short-haul carrier. The open seating design, combined with historically lower load factors, contributed to the efficiency of turning aircraft quickly. The Company’s low-cost model enabled low fares and, combined with great Customer Service, allowed the Company to grow across the country and eventually become the nation’s largest domestic carrier.

However, as the domestic travel market has matured and structural changes have reduced the demand for short-haul travel—first after 9/11 and more recently post-pandemic—the Company began flying longer distances. The importance of having an assigned seat grows among Customers as the length of flight gets longer. In addition, Customer travel frequency and preferences have evolved—for both frequent flyers, as well as those of more infrequent travelers who are not accustomed to the open seating policy utilized by the Company—especially as it has opened several new markets and expanded its route network during the past few years. The Company has continually monitored Customer feedback regarding seating preferences for decades, and it is now overwhelmingly clear Customer travel patterns and preferences have evolved and a seat assignment is preferred. Recent research conducted by the Company indicates that a vast majority of both existing Southwest Customers and potential Customers prefer an assigned seat, which supports the Company’s decision to now evolve its boarding and seating processes. In addition to assigning seats, the Company plans to offer a premium, extended legroom portion of the cabin that research shows many Customers also prefer. While specific cabin layout details are still in design, the Company expects roughly one-third of seats across the fleet to offer extended legroom, in-line with that offered by industry peers on narrowbody aircraft.

The decision to update the seating and boarding model is part of the Company's continued modernization and Customer experience efforts. Following a Customer study regarding the inflight experience, the Company has enhanced its onboard offerings during the past two years with improvements such as faster WiFi, in-seat power, and larger overhead bins. Work is well underway on a refreshed cabin design, including new, more comfortable

RECARO seats. Following a Customer study regarding open versus assigned seating launched last fall, the addition of assigned and premium seating is designed to address the overwhelming Customer preference and give Customers more choice, which is expected to further enhance the all-in value for which Southwest Airlines is known.

The move to assigned and premium seating will be a significant undertaking by the Company. In addition to incorporating new technologies and procedures for a seamless transition, the new cabin layout will require approvals from the FAA. The Company expects to make bookings available in 2025. The Company also announced it is adding 24-hour operation capabilities with the introduction of overnight, redeye flights. Booking of redeye flying on initial routes became available starting July 25, 2024 through Southwest.com, with the first overnight flights landing on February 14, 2025 (Valentine’s Day) in five initial nonstop markets: Las Vegas to Baltimore and Orlando; Los Angeles to Baltimore and Nashville; and Phoenix to Baltimore.

The Company's Board of Directors (“the Board”) received a letter dated June 10, 2024, from Elliott Investment Management L.P. (“Elliott”), stating that Elliott had made an investment of approximately $1.9 billion in the Company, representing an approximately 11 percent economic interest in the Company, and advocating for changes to management, the Board, and corporate strategy. Given continued activist activity, the Company expects an increase in professional advisory fees and other costs related to shareholder activism matters in future periods. See Part II Item 1A Risk Factors – “The Company’s business has been and could be negatively affected as a result of actions of activist shareholders, and such activism could adversely affect the strategic direction and business results of the Company."

Additionally, in order to provide the Board with time to make informed decisions that are in the best interests of the Company and its Shareholders, on July 2, 2024, the Board adopted a shareholder rights plan (the “Rights Plan”) and declared a dividend of one right in respect of each of the Company’s issued and outstanding shares of common stock, which will cause substantial dilution to any person or group acquiring 12.5 percent or more of the Company’s outstanding common stock without the prior approval of the Board. The Rights Plan is designed to deter the acquisition of actual, de facto, or negative control of the Company by any person or group without appropriately compensating its Shareholders for that control. See Note 11 to the unaudited Condensed Consolidated Financial Statements for additional detail regarding the Rights Plan.

The Company continues to receive updates from Boeing regarding further aircraft delivery delays, which presents significant planning challenges for both 2024 and 2025. While the Company has not further adjusted capacity expectations this quarter, it will continue to closely monitor the ongoing aircraft delivery delays with Boeing and adjust expectations, conservatively, as needed.

On April 24, 2024, the Company's nearly 20,000 Flight Attendants, represented by the Transport Workers of America Union Local 556 ("TWU 556"), voted to ratify a four-year contract extension with the Company. The newly ratified agreement becomes amendable in May 2028.

The Company ended second quarter 2024 with 817 Boeing 737 aircraft, including 233 -8 aircraft. During second quarter 2024, the Company retired six -700 aircraft and one -800 aircraft and took delivery of five -8 aircraft. During April 2024, the Company shifted one 2025 -8 option into 2026. In July 2024, the Company exercised two -7 options for delivery in 2025 and converted two 2025 -7 firm orders into 2025 -8 firm orders. The Company continues to plan for approximately 20 -8 aircraft deliveries in 2024, which differs from its contractual order book due to Boeing's continued manufacturing challenges and the current status of the -7 certification. The Company plans to retire approximately 35 aircraft, comprised of 31 -700s and four -800s in 2024, ending the year with roughly 802 aircraft in its fleet. The Company's aircraft delivery and retirement expectations for 2024 and beyond are fluid and subject to Boeing's production capability.

The Company has published its flight schedule through March 5, 2025. The Company continues to focus on its goals of operational excellence and reliability, regaining efficiencies, increasing productivity, and returning margins back to historical levels.

As part of its commitment to corporate sustainability, the Company published its 2023 One Report and Diversity, Equity, and Inclusion ("DEI") Report on May 8, 2024. These reports describe the Company's sustainability strategies, which include the Company’s fuel conservation and emissions mitigation initiatives and other efforts to minimize greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling, and dive deeper into the Company's DEI goals and initiatives and highlight 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 address matters that are currently not 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, 2024 and June 30, 2023

Operating Revenues

Total operating revenues for second quarter 2024 increased by $317 million, or 4.5 percent, year-over-year, to achieve an all-time quarterly Company record of $7.4 billion. Passenger revenues for second quarter 2024 increased by $303 million, or 4.7 percent, year-over-year. Other revenues for second quarter 2024 increased by $16 million, or 2.8 percent, year-over-year. These revenue increases were primarily due to an 8.6 percent increase in capacity and aided by all-time quarterly Company records for ancillary revenue and passengers carried. The Company's Rapid Rewards® loyalty program had record second quarter new Member additions and an all-time quarterly record level of Member engagement, as measured by an all-time quarterly record spend on the Company's co-branded Chase® Visa credit card. Second quarter 2024 managed business revenues (defined as travel booked through the Company's managed business tools) continued to improve on a year-over-year basis. Despite the record revenue performance, second quarter 2024 RASM was 15.90 cents, finishing 3.8 percent lower than second quarter 2023, primarily driven by industry-wide domestic capacity growth outpacing demand.

Operating Expenses

Operating expenses for second quarter 2024 increased by $714 million, or 11.4 percent, compared with second quarter 2023, and capacity increased 8.6 percent over the same prior year period. Approximately 30 percent of the increase in expense was due to higher Salaries, wages, and benefits expense, approximately 30 percent was due to higher Fuel and oil expense, 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 second quarter of 2024 and 2023, 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 June 30,Per ASM changePercent change
(in cents, except for percentages)20242023
Salaries, wages, and benefits6.47¢6.55¢(0.08)¢(1.2)%
Fuel and oil3.463.290.175.2
Maintenance materials and repairs0.760.640.1218.8
Landing fees and airport rentals1.121.080.043.7
Depreciation and amortization0.870.860.011.2
Other operating expenses2.362.240.125.4
Total15.04¢14.66¢0.38¢2.6%

Operating expenses per ASM for second quarter 2024 increased by 2.6 percent, compared with second quarter 2023, primarily due to increases in Fuel and oil expense and Maintenance materials and repairs expense. Operating expenses per ASM for second quarter 2024, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 6.0 percent, compared with second quarter 2023, primarily due to market-driven rate inflation in salaries, wages, and benefits expense and higher maintenance expenses in 2024. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for second quarter 2024 increased by $213 million, or 7.6 percent, compared with second quarter 2023. On a per ASM basis, second quarter 2024 Salaries, wages, and benefits expense decreased 1.2 percent, compared with second quarter 2023. On a dollar basis, 40 percent of the increase was primarily due to step/pay rate increases and related benefits for certain workgroups (including the recently ratified labor contracts with the Company's Pilots, Flight Attendants, and Ramp, Operations, Provisioning, and Cargo Agents), approximately 40 percent of the increase was driven by an increase in capacity and/or number of trips flown, and the remainder was due to various benefits associated with the higher contractual wages. On a per ASM basis, the majority of the change was due to a decrease in Profitsharing expense as a result of lower year-to-date pre-tax profit eligible for profitsharing.

Fuel and oil expense for second quarter 2024 increased by $196 million, or 14.0 percent, compared with second quarter 2023. On a per ASM basis, second quarter 2024 Fuel and oil expense increased 5.2 percent. On a dollar basis, 50 percent of the increase was primarily attributable to an increase in fuel gallons consumed, and the remainder of the increase was due to an increase in fuel prices. The Company's second quarter 2024 average economic jet fuel price of $2.76 per gallon is net of approximately $21 million in cash settlements from hedging activities. On a per ASM basis, the majority of the change was due to higher 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,
20242023
Economic fuel costs per gallon$2.76$2.60
Fuel hedging premium expense (in millions)$39$30
Fuel hedging cash settlement gain (in millions)$21$45
Fuel hedging premium expense per gallon$0.07$0.06
Fuel hedging cash settlement gain per gallon$0.04$0.09

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 2024 available seat miles per gallon ("fuel efficiency") increased 1.1 percent, year-over-year, due to operating more -8 aircraft, the Company's most fuel-efficient aircraft, as a percentage of 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 on 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 17, 2024.

Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (b)
Average Brent Crude Oil price per barrel3Q 20244Q 2024
$70$2.35 - $2.45$2.25 - $2.35
$80$2.55 - $2.65$2.55 - $2.65
Current Market (a)$2.60 - $2.70$2.60 - $2.70
$90$2.75 - $2.85$2.80 - $2.90
$100$2.90 - $3.00$3.05 - $3.15
$110$3.00 - $3.10$3.25 - $3.35
Fair market value of fuel derivative contracts settling in period$22 million$23 million
Estimated premium costs$39 million$39 million

(a) Brent crude oil average market prices as of July 17, 2024, were $84 and $82 per barrel for third quarter and fourth quarter 2024, respectively.

(b) Based on the Company's existing fuel derivative contracts and market prices as of July 17, 2024, third quarter, fourth quarter, and full year 2024 economic fuel costs per gallon are estimated to be in the range of $2.60 to $2.70, $2.60 to $2.70, 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:

PeriodMaximum fuel hedged percentage (a)(b)
202458%
202547%
202630%

(a) Based on the Company's current available seat mile plans. The Company is currently 57 percent hedged in third quarter 2024 and 59 percent hedged for fourth quarter 2024.

(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 are ultimately 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 the unaudited Condensed Consolidated Statement of Comprehensive Income 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, 2024, and the expected future periods in which these items are expected to settle and/or be recognized in the unaudited Condensed Consolidated Statement of Comprehensive Income (in millions):

YearFair value of fuel derivative contracts at June 30, 2024Amount of gains (losses) deferred in AOCI at June 30, 2024 (net of tax)
Remainder of 2024$50$(20)
202569(60)
2026101(14)
Total$220$(94)

Maintenance materials and repairs expense for second quarter 2024 increased by $79 million, or 29.2 percent, compared with second quarter 2023. On a per ASM basis, Maintenance materials and repairs expense increased 18.8 percent, compared with second quarter 2023. On a dollar and per ASM basis, approximately 40 percent of the increase was due to an increase in engine shop visits and other engine expenses for the Company's -700 and -800 fleet, approximately 15 percent of the increase was driven by airframe repairs due to a higher average cost per event and the timing of maintenance events, and approximately 15 percent was due to increased bulk purchases of materials for the Company's seat refurbishment efforts on its entire fleet.

Landing fees and airport rentals expense for second quarter 2024 increased by $52 million, or 11.3 percent, compared with second quarter 2023. On a per ASM basis, Landing fees and airport rentals expense increased 3.7 percent, compared with second quarter 2023. On a dollar and per ASM basis, approximately 75 percent of the increase was due to an increase in airport rental expense throughout the network driven by higher rates charged by airports. The remainder of the dollar increase was due to higher landing fees, driven both by the increase in trips flown and higher rates charged by airports.

Depreciation and amortization expense for second quarter 2024 increased by $37 million, or 10.1 percent, compared with second quarter 2023. On a per ASM basis, Depreciation and amortization expense increased 1.2 percent, compared with second quarter 2023. On a dollar basis, approximately 50 percent of the increase was due to accelerating the depreciation for certain -700 aircraft planned for early retirement in 2024 and 2025, and approximately 25 percent of the increase was due to the acquisition of 45 -8 aircraft since second quarter 2023, as partially offset by 30 -700 owned and finance leased aircraft retirements.

Other operating expenses for second quarter 2024 increased by $137 million, or 14.3 percent, compared with second quarter 2023. 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, 2024 and 2023. On a per ASM basis, Other operating expenses increased 5.4 percent, compared with second quarter 2023. On a dollar and per ASM basis, (i) approximately 40 percent of the year-over-year increase was due to higher advertising expense, (ii) approximately 20 percent was due to higher revenue related expenses (including credit card processing charges), and (iii) approximately ten percent was due to higher per diem rates paid to Flight crews, primarily driven by the new Pilot and Flight Attendant ratified agreements.

Other expenses (income)

Interest income for second quarter 2024 decreased by $14 million, or 9.7 percent, compared with second quarter 2023, primarily due to lower cash and investment balances in the total investment portfolio.

The following table displays the components of Other (gains) losses, net, for the three months ended June 30, 2024 and 2023:

Three months ended June 30,
(in millions)20242023
Mark-to-market impact from fuel contracts settling in current and future periods$2$6
Premium benefit of fuel contracts not designated as hedges(1)—
Mark-to-market impact on deferred compensation plan investments(8)(16)
Other23
$(5)$(7)

Income Taxes

The Company's effective tax rate was 23.2 percent in second quarter 2024, compared with 22.9 percent in second quarter 2023. The year-over-year increase in the tax rate was primarily due to the impact of projected pre-tax book income on the annual effective tax rate. The Company currently estimates its annual 2024 effective tax rate to be approximately 24 percent.

Comparison of six months ended June 30, 2024 and June 30, 2023

In late December 2022, the Company experienced a wide-scale operational disruption as 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, largely isolated to January and February 2023, as well as additional 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 first quarter 2023 results was approximately $380 million on a pre-tax basis. Other than a fourth quarter 2023 charge associated with a Department of Transportation settlement of $107 million, there were no material impacts to operating revenues or expenses as a result of this disruption beyond first quarter 2023. See Note 1 to the unaudited Condensed Consolidated Financial Statements for further information.

Operating Revenues

Passenger revenues for the six months ended June 30, 2024, increased by $910 million, or 7.9 percent, compared with the first six months of 2023. On a unit basis, Passenger revenues decreased 1.7 percent, year-over-year. The dollar increase was primarily due to a 9.7 percent increase in capacity due to increased flight activity and strong operational performance and completion factor for the six months ended June 30, 2024 versus 2023. For the six months ended June 30, 2024, the year-over-year Passenger revenue yield per ASM decrease was primarily driven by industry-wide domestic capacity growth outpacing demand, including the Company’s own capacity increase of 9.7 percent year-over-year. In addition, the Company has continued to gain experience with a new revenue management system that was implemented in 2023, which it believes will deliver better long-term performance compared with its prior system. However, during the first half of 2024, the Company believes it sold an excess number of seats for the peak summer travel period too early in the booking curve, leading to a further dilution in unit revenues.

Other revenues for the six months ended June 30, 2024, increased by $30 million, or 2.6 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 six months ended June 30, 2024, increased by $1.4 billion, or 11.8 percent, compared with the first six months of 2023, and capacity increased 9.7 percent over the same prior year period. Approximately 45 percent of the increase in expense was due to higher Salaries, wages, and benefits expense, approximately 15 percent was due to higher Maintenance materials and repairs expense, and approximately 10 percent 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 2024 and 2023, 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.

Six months ended June 30,Per ASMPercent
(in cents, except for percentages)20242023changechange
Salaries, wages, and benefits6.72¢6.53¢0.19¢2.9%
Fuel and oil3.543.66(0.12)(3.3)
Maintenance materials and repairs0.800.630.1727.0
Landing fees and airport rentals1.101.080.021.9
Depreciation and amortization0.920.910.011.1
Other operating expenses2.382.360.020.8
Total15.46¢15.17¢0.29¢1.9%

Operating expenses per ASM for the first six months of 2024 increased by 1.9 percent, compared with the first six months of 2023. The majority of the year-over-year unit cost increase was primarily due to increases in Salaries, wages, and benefits expense and Maintenance materials and repairs expense, partially offset by a decrease in the Company's fuel cost per gallon. Operating expenses per ASM for the first six months of 2024, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 5.5 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 2024 increased by $675 million, or 12.8 percent, compared with the first six months of 2023. On a per ASM basis, Salaries, wages, and benefits expense for the first six months of 2024 increased 2.9 percent, compared with the first six months of 2023. On a dollar basis, approximately 45 percent of the increase was due to step/pay rate increases for certain workgroups (including the recently ratified labor contracts with the Company's Pilots, Flight Attendants, and Ramp, Operations, Provisioning, and Cargo Agents), and approximately 25 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 six months of 2024 increased by $180 million, or 6.1 percent, compared with the first six months of 2023. On a per ASM basis, Fuel and oil expense for the first six months of 2024 decreased 3.3 percent. On a dollar basis, the increase was primarily attributable to an increase in fuel gallons consumed, partially offset by a decrease in the Company's fuel cost per gallon. On a per ASM basis, the decrease was primarily attributable to a decrease in the Company's fuel cost per gallon. 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,
20242023
Economic fuel costs per gallon$2.84$2.88
Fuel hedging premium expense (in millions)$78$61
Fuel hedging cash settlement gain (in millions)$38$103
Fuel hedging premium expense per gallon$0.07$0.06
Fuel hedging cash settlement gains per gallon$0.03$0.11

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 2024 increased by $200 million, or 39.1 percent, compared with the first six months of 2023. On a per ASM basis, Maintenance materials and repairs expense increased 27.0 percent, compared with the first six months of 2023. On a dollar and per ASM basis, approximately 65 percent of the increase was primarily due to an increase in engine shop visits and various other engine expenses for the Company's -700 and -800 fleet, approximately 15 percent of the increase was driven by airframe repairs due to a higher average cost per event and the timing of regular maintenance events, and approximately 10 percent was due to increased bulk purchases of materials for the Company's seat refurbishment efforts on its entire fleet.

Landing fees and airport rentals expense for the first six months of 2024 increased by $108 million, or 12.5 percent, compared with the first six months of 2023. On a per ASM basis, Landing fees and airport rentals expense increased 1.9 percent, compared with the first six months of 2023. On a dollar basis, approximately 80 percent of the increase was largely due to an increase in airport rental expense throughout the network driven by higher rates charged by airports, and the majority of the remainder of the increase was attributable to higher landing fees, primarily driven by both the increase in trips flown and higher rates charged by airports.

Depreciation and amortization expense for the first six months of 2024 increased by $81 million, or 11.1 percent, compared with the first six months of 2023. On a per ASM basis, Depreciation and amortization expense increased 1.1 percent, compared with the first six months of 2023. On a dollar basis, approximately 45 percent of the increase was due to accelerating the depreciation for certain -700 aircraft planned for early retirement in 2024 and 2025, and approximately 30 percent of the increase was due to the acquisition of 45 -8 aircraft since second quarter 2023, as partially offset by 30 -700 owned and finance leased aircraft retirements.

Other operating expenses for the first six months of 2024 increased by $201 million, or 10.5 percent, compared with the first six months of 2023. Included within this line item was aircraft rentals expense in the amount of $101 million and $99 million for the six months ended June 30, 2024 and 2023, respectively. On a per ASM basis, Other operating expenses increased 0.8 percent, compared with the first six months of 2023. On a dollar basis, (i) approximately 50 percent of the year-over-year increase was due to higher advertising expense, (ii) approximately 25 percent of the increase was due to higher revenue related expenses (including credit card processing charges), (iii) approximately 15 percent of the increase was due to higher per diem rates paid to Flight crews, primarily driven by the new Pilot and Flight Attendant ratified agreements, and (iv) approximately 10 percent of the increase was due to higher professional fees driven by an increase in spend on technology enhancements and replacement projects.

Other expenses (income)

The following table displays the components of Other (gains) losses, net, for the six months ended June 30, 2024 and 2023:

Six months ended June 30,
(in millions)20242023
Mark-to-market impact from fuel contracts settling in current and future periods$3$6
Premium benefit of fuel contracts not designated as hedges(1)—
Unrealized mark-to-market adjustment on available for sale securities—(4)
Mark-to-market impact on deferred compensation plan investment(23)(26)
Other43
$(17)$(21)

Income Taxes

The Company's effective tax rate was approximately 24.4 percent for the first six months of 2024, compared with 23.2 percent for the first six months of 2023. The year-over-year increase in the tax rate was primarily due to the impact of projected pre-tax book income on the annual effective tax rate.

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

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

Three months ended June 30,PercentSix months ended June 30,Percent
20242023Change20242023Change
Fuel and oil expense, unhedged$1,581$1,418$3,091$2,992
Add: Premium cost of fuel contracts designated as hedges40307961
Deduct: Fuel hedge gains included in Fuel and oil expense, net(22)(45)(40)(103)
Fuel and oil expense, as reported$1,599$1,40314.0$3,130$2,950
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)1—2—
Deduct: Premium benefit of fuel contracts not designated as hedges(1)—(1)—
Fuel and oil expense, excluding special items (economic)$1,599$1,40314.0$3,131$2,9506.1
Total operating expenses, net, as reported$6,956$6,242$13,677$12,232
Deduct: Labor contract adjustment (b) (c)—(84)(9)(84)
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)1—2—
Deduct: Premium benefit of fuel contracts not designated as hedges(1)—(1)—
Deduct: Litigation settlements—(12)(7)(12)
Deduct: Professional advisory fees$(7)—$(7)—
Total operating expenses, excluding special items$6,949$6,14613.1$13,655$12,13612.5
Deduct: Fuel and oil expense, excluding special items (economic)(1,599)(1,403)(3,131)(2,950)
Operating expenses, excluding Fuel and oil expense and special items$5,350$4,74312.8$10,524$9,18614.6
Deduct: Profitsharing expense(31)(121)(31)(121)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing$5,319$4,62215.1$10,493$9,06515.8
Operating income, as reported$398$795$6$511
Add: Labor contract adjustment (b) (c)—84984
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)(1)—(2)—
Add: Premium benefit of fuel contracts not designated as hedges1—1—
Add: Litigation settlements—12712
Add: Professional advisory fees$7$—$7$—
Operating income, excluding special items$405$891(54.5)$28$607(95.4)
Other gains, net, as reported$(5)$(7)$(17)$(21)
Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (a)(2)(6)(3)(6)
Add: Premium benefit of fuel contracts not designated as hedges1—1—
Add: Unrealized mark-to-market adjustment on available for sale securities———4
Other gains, net, excluding special items$(6)$(13)(53.8)%$(19)$(23)(17.4)%
Three months ended June 30,PercentSix months ended June 30,Percent
20242023Change20242023Change
Income before income taxes, as reported$478$886$181$682
Add: Labor contract adjustment (b) (c)—84984
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)(1)—(2)—
Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)2636
Add: Litigation settlements—12712
Add: Professional advisory fees7—7—
Deduct: Unrealized mark-to-market adjustment on available for sale securities———(4)
Income before income taxes, excluding special items$486$988(50.8)$205$780(73.7)
Provision for income taxes, as reported$111$203$44$158
Add: Net income tax impact of fuel and special items (c)527927
Provision for income taxes, net, excluding special items$116$230(49.6)$53$185(71.4)
$0.002024$0.002023ChangeChange
Net income, as reported$367$683$137$524
Add: Labor contract adjustment (b) (c)—84984
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)(1)—(2)—
Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)2636
Add: Litigation settlements—12712
Add: Professional advisory fees7—7—
Deduct: Unrealized mark-to-market adjustment on available for sale securities———(4)
Deduct: Net income tax impact of special items (d)(5)(27)(9)(27)
Net income, excluding special items$370$758(51.2)$152$595(74.5)
Net income per share, diluted, as reported$0.58$1.08$0.23$0.84
Add: Impact of special items0.010.140.030.01
Add: Net impact of net income above from fuel contracts divided by dilutive shares—0.01—0.01
Deduct: Net income tax impact of special items (d)(0.01)(0.04)(0.01)(0.01)
Net income per share, diluted, excluding special items$0.58$1.19(51.3)$0.25$0.85(70.6)
Operating expenses per ASM (cents)15.04¢14.66¢15.46¢15.17¢
Deduct: Impact of special items(0.02)(0.23)(0.02)(0.12)
Deduct: Fuel and oil expense divided by ASMs(3.46)(3.29)(3.54)(3.66)
Deduct: Profitsharing expense divided by ASMs(0.06)(0.29)(0.04)(0.15)
Three months ended June 30,PercentSix months ended June 30,Percent
20242023Change20242023Change
Operating expenses per ASM, excluding Fuel and oil expense, special items, and profitsharing (cents)11.50¢10.85¢6.011.86¢11.24¢5.5

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

(b) Represents changes in estimate related to the contract ratification bonus for the Company’s Ramp, Operations, Provisioning, and Cargo Agents as part of the tentative agreement ratified in March 2024 with TWU 555. The Company began accruing for all of its open labor contracts on April 1, 2022.

(c) The Company had not previously included an approximate $84 million adjustment associated with on-going labor contract negotiations during second quarter 2023 as a special item, and provided revised second quarter 2023 results in the Company's third quarter 2023 Form 10-Q. The Company has included the adjustment amount in its calculation of Non-GAAP financial measures for both the second quarter and year-to-date periods ending June 30, 2023. See the Note Regarding Use of Non-GAAP Financial Measures for further information.

(d) 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.

Non-GAAP Return on Invested Capital (ROIC) (in millions) (unaudited)

Twelve months ended
June 30, 2024
Operating loss, as reported$(281)
Professional advisory fees7
TWU 555 contract adjustment9
TWU 556 contract adjustment95
SWAPA contract adjustment354
Net impact from fuel contracts16
DOT settlement107
Litigation settlements7
Operating income, non-GAAP$314
Net adjustment for aircraft leases (a)127
Adjusted operating income, non-GAAP (A)$441
Non-GAAP tax rate (B)23.8%(d)
Net operating profit after-tax, NOPAT (A (1-B) = C)*$336
Debt, including finance leases (b)$8,008
Equity (b)10,604
Net present value of aircraft operating leases (b)949
Average invested capital$19,561
Equity adjustment for hedge accounting (c)(61)
Adjusted average invested capital (D)$19,500
Non-GAAP ROIC, pre-tax (A/D)2.3%
Non-GAAP ROIC, after-tax (C/D)1.7%

(a) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft). The Company makes this adjustment to enhance comparability to other entities that have different capital structures by utilizing alternative financing decisions.

(b) Calculated as an average of the five most recent quarter end balances or remaining obligations. The Net present value of aircraft operating leases represents the assumption that all aircraft in the Company’s fleet are owned, as it reflects the remaining contractual commitments discounted at the Company's estimated incremental borrowing rate as of the time each individual lease was signed.

(c) The Equity adjustment in the denominator adjusts for the cumulative impacts, in Accumulated other comprehensive income and Retained earnings, of gains and/or losses that will settle in future periods, including those associated with the Company's fuel hedges. The current period impact of these gains and/or losses is reflected in the Net impact from fuel contracts in the numerator.

(d) The GAAP twelve month rolling tax rate as of June 30, 2024, was 41.0 percent, and the Non-GAAP twelve month rolling tax rate was 23.8 percent. See Note Regarding Use of Non-GAAP Financial Measures for additional information.

Note Regarding Use of Non-GAAP Financial Measures

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

As a result, the Company also provides financial information in this filing that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company’s performance on an economic fuel cost basis include 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, 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, 2023 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.Accruals associated with the recently ratified Ramp, Operations, Provisioning, and Cargo Agents contract. These amounts accrued in 2024 relate to additional compensation for services performed by Employees outside of this fiscal year;

2.Charges associated with tentative litigation settlements regarding certain California state meal-and-rest-break regulations for flight attendants and an arbitration award in favor of the Company's Pilots relating to a collective-bargaining matter;

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

4.Incremental expense associated with the recently ratified Pilot and Flight Attendant contracts. The change in estimate recognized in 2023 relates to additional compensation for services performed by Employees outside of the applicable fiscal period;

5.A charge associated with a settlement reached with the Department of Transportation as a result of the Company's December 2022 operational disruption; and

6.Expenses associated with incremental professional advisory fees related to activist investor activities, which were not budgeted by the Company, are not associated with the ongoing operation of the airline, and are difficult to predict in future 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: 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, 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 has also provided its calculation of return on invested capital, which is a measure of financial performance used by management to evaluate its investment returns on capital. Return on invested capital is not a substitute for financial results as reported in accordance with GAAP and should not be utilized in place of such GAAP results. Although return on invested capital is not a measure defined by GAAP, it is calculated by the Company, in part, using non-GAAP financial measures. Those non-GAAP financial measures are utilized for the same reasons as those noted above for Net income, non-GAAP and Operating income, non-GAAP. The comparable GAAP measures include charges or benefits that are deemed "special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends, and the Company’s profitability targets and estimates, both internally and externally, are based on non-GAAP results since "special items" cannot be reliably predicted or estimated. The Company believes non-GAAP return on invested capital is a meaningful measure because it quantifies the Company's effectiveness in generating returns relative to the capital it has invested in its business. Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital differ; therefore, the Company is providing an explanation of its calculation for non-GAAP return on invested capital in the accompanying reconciliation in order to allow investors to compare and contrast its calculation to the calculations provided by other companies.

Liquidity and Capital Resources

Net cash used in operating activities was $23 million for the three months ended June 30, 2024, compared with $1.4 billion provided by operating activities in the same prior year period. Net cash used in operating activities was $128 million for the six months ended June 30, 2024, compared with $2.1 billion provided by operating activities in the same prior year period. Historically, operating cash inflows are primarily derived from selling tickets for future flights and 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, 2024, were largely impacted by the Company's net income (as adjusted for noncash items); the approximately $1.9 billion paid to Pilots, Flight Attendants, and Ramp, Operations, Provisioning, and Cargo Agents as bonuses upon the ratification of the labor contract agreements with the Southwest Airlines Pilots Association ("SWAPA"), Transport Workers of America Union Local 556 ("TWU 556"), and the Transport Workers Union Local 555 ("TWU 555"), respectively; and the $105 million payout of the Company's Profitsharing Plan contribution for the 2023 Plan year. These decreases were partially offset by a $798 million increase in Air traffic liability driven by higher ticket sales related to an increase in capacity. 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, and an increase of $140 million in excise tax liabilities due to an increase in sales related to an increase in travel demand. These increases were 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. 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 $206 million during the three months ended June 30, 2024, compared with $627 million used in investing activities in the same prior year period. Net cash used in investing activities for the six months ended June 30, 2024 was $791 million, compared with $2.2 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, 2024, Capital expenditures were $1.1 billion, compared with $2.0 billion in the same prior year period. Capital expenditures decreased, year-over-year, largely due to fewer aircraft deliveries during the six months ended June 30, 2024, compared to the same prior year period.

The Company continues to estimate its 2024 capital spending to be roughly $2.5 billion, which includes approximately $1.0 billion in aircraft capital spending, assuming approximately 20 -8 aircraft deliveries in 2024 and continued progress delivery payments for the Company's contractual 2025 firm orders. The Company and Boeing are in ongoing discussions regarding the negative financial impacts to the Company as a result of aircraft delivery delays. In accordance with applicable accounting guidance, any compensation negotiated and received from Boeing for financial damages associated with such delays would be expected to be realized as a reduction in the cost basis of certain aircraft either in the Company's fleet or associated with future deliveries from Boeing.

Net cash provided by financing activities was $4 million during the three months ended June 30, 2024, compared with $10 million provided by financing activities for the same prior year period. Net cash used in financing activities was $227 million during the six months ended June 30, 2024, compared with $253 million used in financing activities for the same prior year period. The Company paid $215 million in cash dividends to Shareholders and repaid $16 million in finance lease obligations during the six months ended June 30, 2024. The Company may engage in early debt repurchases from time to time at its discretion; however, any early future repurchases are not included in the Company's current maturities of long-term debt. The Company's 2024 total scheduled debt repayments are expected to be $29 million. As the Company's $1.6 billion in Convertible Senior Notes and its $1.3 billion in Senior Unsecured Notes mature in second quarter 2025, they are now reflected in Current maturities of long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet as of June 30, 2024. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information on future debt maturities. During the six months ended June 30, 2023, the Company paid $214 million in cash dividends to Shareholders and repaid $67 million in finance lease obligations.

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 Credit Agreement"), which expires in August 2028. For the six months ended June 30, 2024 and 2023 there were no amounts outstanding under the Amended Credit Agreement. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

As of June 30, 2024, the Company carried a working capital deficit of approximately $1.4 billion, 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 $10.0 billion as of June 30, 2024, 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 approximately $17.1 billion, including $14.3 billion in aircraft value and $2.8 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 July 25, 2024, for the years 2024 through 2031, the Company has firm orders with Boeing for 497 aircraft, and options for an additional 197 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, 2024:

Average Age (Yrs)Number of AircraftNumber OwnedNumber Leased
TypeSeats
737-7001431937834632
737-800175920619016
737 -8175223320429
Totals1281774077

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, 2023.

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 financial guidance for third quarter and full year 2024 and factors that could impact the Company’s financial results;

  • the Company’s capacity guidance and expectations;

  • 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 interest expense, its effective tax rate, and its capital spending;

  • the Company’s fleet plans, including with respect to fleet modernization, seats and trips, fleet utilization, flexibility, and expected fleet deliveries and retirements, and underlying expectations and dependencies;

  • the Company’s expectations regarding its revenue management system, passenger demand, revenue trends, and bookings;

  • the Company’s fleet and network-related plans and goals including, without limitation, with respect to better optimizing its network, operational goals, improving reliability, assigned and premium seating, cabin design and seating, and the introduction of redeye (i.e., overnight) flying;

  • the Company’s focus areas, goals, opportunities, and initiatives including, without limitation, with respect to elevating the Customer experience and enhancing all-in value, redesigning the boarding model,

improving financial performance, driving Shareholder value, operational excellence and reliability, regaining efficiencies, increasing productivity, and returning margins to historical levels;

  • the Company’s expectations with respect to the Rights Plan;

  • the Company’s labor plans and expectations;

  • the Company’s short-term and long-term financial and operational goals;

  • 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, 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, assigned and premium seating plans, and other operational plans, strategies, and goals;

  • the cost and effects of the actions of activist shareholders;

  • 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 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 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, 2023, as well as those under the heading “Risk Factors” in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024.

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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