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Southwest Airlines Co. (the "Company" or "Southwest") operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near-international markets. The unaudited Condensed Consolidated Financial Statements include accounts of the Company and its wholly owned subsidiaries.

As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization (“WHO”) classified the virus as a pandemic. The speed with which the effects of the COVID-19 pandemic have changed the U.S. economic landscape, outlook, and in particular the travel industry, has been swift and unexpected. The Company began to see a negative impact on bookings for future travel in late February 2020, which quickly accelerated into and throughout March. January and February operating revenues were generally in line with the Company’s expectations, but March results were significantly below expectations due to the sharp decline in Passenger demand and bookings, combined with an unprecedented level of close-in trip cancellations (Customers canceling close to scheduled flight times). On March 22, the Company began proactively canceling a significant portion of its scheduled flights, and increased those cancellations further beginning on March 27, 2020. In addition, the cancellation of flights, both in March 2020 and for future periods, has resulted in a significant amount of cash refunds and issuance of travel credits to Customers. Further, due to the fears and restrictions involved with travel in the near term, sales of tickets for future travel have been well below the Company’s expectations. These events have created a liquidity risk, and the Company reacted quickly by taking the following steps to better enable it to meet all financial obligations as they become due.

In mid-March, the Company closed a transaction to obtain $1.0 billion under the 364-Day Credit Agreement (defined below) from the syndicate of lenders named therein, and also drew down an available $1.0 billion under the Revolving Credit Agreement (defined below). Subsequently, on March 30, 2020, the Company executed an agreement to increase the commitments under the 364-Day Credit Agreement to $3.3 billion, add an uncommitted accordion provision to permit additional term loans in an aggregate amount not to exceed $417 million, and secured the 364-Day Credit

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Agreement with aircraft. This transaction was funded on April 1, 2020. On March 30, 2020, the Company also executed an agreement to secure the Revolving Credit Agreement with aircraft. See Note 8 for further information on these transactions as well as Note 13 for actions taken subsequent to March 31, 2020.

Given the current capital market environment, the Company has been pursuing opportunities for additional financing transactions. The Company has also taken swift actions to preserve cash, including reducing named executive officer salaries and Board of Director cash retainer fees by 20 percent; suspending all hiring and non-contract salary increases; implementing voluntary time-off programs; canceling or deferring hundreds of capital spending projects; modifying vendor and supplier payment terms; and cutting all non-essential spending. The Company has also significantly reduced its published flight schedule through June 2020, and will continue evaluating the need for further flight schedule adjustments.

In response to flight schedule adjustments due to the effects of the COVID-19 pandemic, a number of aircraft were taken out of the Company’s schedule beginning in late March. As of March 31, a portion of the Company's fleet had been placed in temporary storage and the Company was actively canceling a significant portion of its previously scheduled flying. Given the current expectation that these aircraft have been grounded temporarily, the Company has continued to record depreciation expense associated with them.

As a result of the events and impacts surrounding the COVID-19 pandemic, including the Company's net loss incurred in first quarter 2020, and the significant number of aircraft that have been placed in temporary storage, the Company considered whether these conditions indicated that it was more likely than not that the Company’s $970 million in Goodwill and its $295 million in indefinite-lived intangible assets were impaired. However, upon review, the Company determined that, based on the facts and circumstances in existence as of March 31, 2020, the fair values more likely than not exceeded book values of both its reporting unit and its indefinite-lived intangible assets and therefore, no quantitative test was required.

In addition, the Company has assessed whether any impairment of its amortizable assets existed, and has determined that no charges were deemed necessary under applicable accounting standards as of March 31, 2020.

The Company’s assumptions about future conditions important to its assessment of potential impairment of its amortizable assets, indefinite-lived intangible assets, and goodwill, including the impacts of the COVID–19 pandemic and other ongoing impacts to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.

The Company's income tax benefit recorded for first quarter 2020 was at a rate of 34.3 percent, which is higher than its first quarter 2019 rate of 23.1 percent. The higher effective tax rate in 2020 reflects the anticipated benefit of carrying back full year 2020 projected net losses to claim tax refunds against previous cash taxes paid relating to tax years 2015 through 2019, some of which were at higher rates than the current year.

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On December 18, 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new standard eliminates certain exceptions in Accounting Standards Codification ("ASC") 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted in any interim period within that year. The Company elected to early adopt this standard as of January 1, 2020. The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods. However, the early adoption as of January 1, 2020, did not have an impact on the Company's financial statements or disclosures for first quarter 2020.

On August 29, 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software. This standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, Accounting for Internal-Use Software, to determine which implementation costs to (i) capitalize as assets and amortize over the term of the hosting arrangement or (ii) expense as incurred. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and the standard was adopted and applied prospectively by the Company as of January 1, 2020, but it did not have a significant impact on the Company's financial statements and disclosures.

On August 28, 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. This standard requires changes to the disclosure requirements for fair value measurements for certain Level 3 items, and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively. The Company adopted the standard as of January 1, 2020, but it did not have a significant impact on the Company's financial statements or disclosures. See Note 9 for further information on the Company's fair value measurements.

On January 26, 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The new standard eliminates Step 2 from the goodwill impairment test. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and the standard was adopted and applied prospectively by the Company as of January 1, 2020, but it did not have a significant impact on the Company's financial statements and disclosures.

Fuel Contracts

Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Furthermore, jet fuel and oil typically represents one of the largest operating expenses for airlines. The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program. Although the Company may periodically enter into jet fuel derivatives for short-term timeframes, because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately 24 months into the future. However, the Company has found

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that financial derivative instruments in other commodities, such as West Texas Intermediate ("WTI") crude oil, Brent crude oil, and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility. The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.

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

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

For the three months ended March 31, 2020, the Company had fuel derivative instruments in place for up to 70 percent of its fuel consumption. As of March 31, 2020, the Company also had fuel derivative instruments in place to provide coverage at varying price levels. The following table provides information about the Company’s volume of fuel hedging on an economic basis:

		Maximum fuel hedged as of
		March 31, 2020			Derivative underlying commodity type as of
Period (by year)		(gallons in millions) (a)			March 31, 2020
Remainder of 2020		976			WTI crude oil, Brent crude oil, and Heating oil
2021		1,283			WTI crude oil and Brent crude oil
2022		930			WTI crude oil and Brent crude oil
Beyond 2022		529			WTI crude oil and Brent crude oil

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

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. All periodic changes in fair value of the derivatives designated as hedges are recorded in Accumulated other comprehensive income (loss) ("AOCI") until the underlying jet fuel is consumed. See Note 5.

The Company's results are subject to the possibility that the derivatives will no longer qualify for hedge accounting, in which case any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as

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the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through earnings. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. During first quarter 2020, as a result of the drastic drop in demand for air travel, the Company's forecast for second quarter fuel purchases and consumption was significantly reduced, causing the Company to be in an estimated "over– hedged" position for second quarter 2020. Therefore, the Company de–designated a portion of its fuel hedges related to second quarter 2020 and has reclassified approximately $2 million in losses from AOCI into Other (gains) losses, net, in first quarter 2020. The Company did not have any such situations occur during 2019.

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

				Asset derivatives								Liability derivatives
		Balance Sheet		Fair value at				Fair value at				Fair value at				Fair value at
(in millions)		location		3/31/2020				12/31/2019				3/31/2020				12/31/2019
Derivatives designated as hedges (a)
Fuel derivative contracts (gross)		Prepaid expenses and other current assets		$	5			$	48			$	—			$	—
Fuel derivative contracts (gross)		Other assets		79				62				—				—
Interest rate derivative contracts		Prepaid expenses and other current assets		4				—				—				—
Interest rate derivative contracts		Other assets		—				2				—				—
Interest rate derivative contracts		Accrued liabilities		—				—				14				5
Interest rate derivative contracts		Other noncurrent liabilities		—				—				16				1
Total derivatives designated as hedges				$	88			$	112			$	30			$	6
Derivatives not designated as hedges (a)
Fuel derivative contracts (gross)		Prepaid expenses and other current assets		$	1			$	—			$	—			$	—
Interest rate derivative contracts		Accrued liabilities		—				—				41				—
Interest rate derivative contracts		Other noncurrent liabilities		—				—				—				—
Total derivatives not designated as hedges				$	1			$	—			$	41			$	—
Total derivatives				$	89			$	112			$	71			$	6

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

The following table presents the amounts recorded on the unaudited Condensed Consolidated Balance Sheet related to fair value hedges:

Balance Sheet location of hedged item		Carrying amount of the hedged liabilities								Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)
		March 31,								March 31,
(in millions)		2020				2019				2020				2019
Current maturities of long-term debt		$	504			$	300			$	4			$	2
Long-term debt less current maturities		—				495				18				13
		$	504			$	795			$	22			$	15

(a) At March 31, 2020 and 2019, these amounts include the cumulative amount of fair value hedging adjustments remaining for which hedge accounting has been discontinued of $18 million and $20 million, respectively.

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

		Balance Sheet		March 31,				December 31,
(in millions)		location		2020				2019
Cash collateral deposits held from counterparties for fuel contracts - current		Offset against Prepaid expenses and other current assets		$	1			$	10
Cash collateral deposits held from counterparties for fuel contracts - noncurrent		Offset against Other assets		19				15

 

All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty. The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current outstanding derivative asset amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments. As of March 31, 2020, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

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

Offsetting of derivative assets
(in millions)
				(i)				(ii)				(iii) = (i) + (ii)				(i)				(ii)				(iii) = (i) + (ii)
				March 31, 2020												December 31, 2019
Description		Balance Sheet location		Gross amounts of recognized assets				Gross amounts offset in the Balance Sheet				Net amounts of assets presented in the Balance Sheet				Gross amounts of recognized assets				Gross amounts offset in the Balance Sheet				Net amounts of assets presented in the Balance Sheet
Fuel derivative contracts		Prepaid expenses and other current assets		$	6			$	(1	)		$	5			$	48			$	(10	)		$	38
Fuel derivative contracts		Other assets		$	79			$	(19	)		$	60		(a)	$	62			$	(15	)		$	47		(a)
Interest rate derivative contracts		Prepaid expenses and other current assets		$	4			$	—			$	4			$	—			$	—			$	—
Interest rate derivative contracts		Other assets		$	—			$	—			$	—		(a)	$	2			$	—			$	2		(a)

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 10.

Offsetting of derivative liabilities
(in millions)
				(i)				(ii)				(iii) = (i) + (ii)				(i)				(ii)				(iii) = (i) + (ii)
				March 31, 2020												December 31, 2019
Description		Balance Sheet location		Gross amounts of recognized liabilities				Gross amounts offset in the Balance Sheet				Net amounts of liabilities presented in the Balance Sheet				Gross amounts of recognized liabilities				Gross amounts offset in the Balance Sheet				Net amounts of liabilities presented in the Balance Sheet
Fuel derivative contracts		Prepaid expenses and other current assets		$	1			$	(1	)		$	—			$	10			$	(10	)		$	—
Fuel derivative contracts		Other assets		$	19			$	(19	)		$	—		(a)	$	15			$	(15	)		$	—		(a)
Interest rate derivative contracts		Accrued liabilities		$	55			$	—			$	55		(a)	$	5			$	—			$	5		(a)
Interest rate derivative contracts		Other noncurrent liabilities		$	16			$	—			$	16			$	1			$	—			$	1

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 10.

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The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019:

Location and amount recognized in income on cash flow and fair value hedging relationships
		Three months ended March 31, 2020												Three months ended March 31, 2019
(in millions)		Fuel and oil				Other (gains)/losses, net				Interest expense				Fuel and oil				Interest expense
Total		$	22			$	2			$	2			$	11			$	8
Loss on cash flow hedging relationships:
Commodity contracts:
Amount of loss reclassified from AOCI into income		22				2				—				11				—
Interest contracts:
Amount of loss reclassified from AOCI into income		—				—				—				—				1
Impact of fair value hedging relationships:
Interest contracts:
Hedged items		—				—				4				—				6
Derivatives designated as hedging instruments		—				—				(2		)		—				1

Derivatives designated and qualified in cash flow hedging relationships
	(Gain) loss recognized in AOCI on derivatives, net of tax
	Three months ended
	March 31,
(in millions)	2020				2019
Fuel derivative contracts	$	84			$	(68	)
Interest rate derivatives	32				12
Total	$	116			$	(56	)

Derivatives not designated as hedges
	Loss recognized in income on derivatives
	Three months ended								Location of loss  recognized in income on derivatives
	March 31,
(in millions)	2020				2019
Interest rate derivatives	$	24			$	—			Other (gains) losses, net

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31, 2020 and 2019 of $24 million and $28 million, respectively. These amounts are recognized through changes in fair value within AOCI for designated hedges, and are ultimately recorded as a component of Fuel and oil in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) during the period the contracts settle.

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in

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underlying markets or provided by third parties. Included in the Company’s cumulative net unrealized losses from fuel hedges as of March 31, 2020, recorded in AOCI, were approximately $67 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to March 31, 2020.

Interest Rate Swaps

The Company is party to certain interest rate swap agreements that are accounted for as either fair value hedges or cash flow hedges, as defined in the applicable accounting guidance for derivative instruments and hedging. Several of the Company's interest rate swap agreements qualify for the "shortcut" method of accounting for hedges, which dictates that the hedges are assumed to be perfectly effective, and thus there is no ineffectiveness to be recorded in earnings.

During first quarter 2019, the Company entered into 12 separate forward-starting interest rate swap agreements related to a series of 12 737 MAX 8 aircraft leases with deliveries originally scheduled between July 2019 and February 2020. These lease contracts expose the Company to interest rate risk as the rental payments are adjusted and become fixed based on the 9-year swap rate at the time of delivery. The primary objective for these interest rate derivatives, which qualified as cash flow hedges, was to hedge the forecasted monthly rental payments. These swap agreements provide for a single payment at maturity based upon the change in the 9-year swap rate between the execution date and the termination date. All 12 swap agreements were terminated during third quarter 2019, resulting in $32 million being "frozen" in AOCI. As a result of the extenuating circumstances involving the MAX aircraft, which are outside the control of the Company, these amounts will be recognized in earnings when the original forecasted transaction occurs, which remains probable.

During third quarter 2019, the Company entered into 12 separate forward-starting interest rate swap agreements, with similar terms as the third quarter 2019 terminated swaps, except for the range of 737 MAX 8 deliveries scheduled were between June 2020 and September 2020. During first quarter 2020, nine of the aircraft leases became no longer probable to be received within the scheduled delivery range. Therefore, the nine associated swap agreements were de-designated and $17 million was "frozen" in AOCI. These amounts will be recognized in earnings when the original forecasted transaction occurs, which continues to be probable. The mark-to-market changes for these swap agreements are now being recorded in earnings, resulting in a $24 million unrealized loss to Other (gains) and losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2020. The Company will continue to assess the likelihood of the forecasted transactions related to the hedges for the remaining 737 MAX 8 deliveries in future periods.

For the Company’s interest rate swap agreements that do not qualify for the "shortcut" or "critical terms match" methods of accounting, ineffectiveness is assessed at each reporting period. If hedge accounting is achieved, all periodic changes in fair value of the interest rate swaps are recorded in AOCI.

Credit Risk and Collateral

Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At March 31, 2020, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty credit rating. The Company also had agreements with counterparties in which cash deposits and letters of credit are required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.

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The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of March 31, 2020, at which such postings are triggered:

Counterparty (CP)

(in millions)

A

B

C

D

E

F

Other (a)

Total

Fair value of fuel derivatives

$

23

$

10

$

20

$

8

$

9

$

8

$

7

$

85

Cash collateral held from CP

20

—

—

—

—

—

—

20

Letters of credit (LC)

—

—

—

—

—

—

—

—

Option to substitute LC for cash

N/A

N/A

(75) to (150) or >(550)(b)

(125) to (150) or >(550)(c)

(c)

N/A

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

Cash is provided to CP

>(100)

>(50)

(75) to (150) or >(550)(d)

(125) to (150) or >(550)(d)

>(40)

>(65)(d)

Cash is received from CP

>0(d)

>150(d)

>250(d)

>125(d)

>100(d)

>70(d)

Cash can be pledged to   CP as collateral

(200) to (600)(e)

N/A

(150) to (550)(b)

(150) to (550)(b)

N/A

N/A

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

Cash is provided to CP

(0) to (200) or >(600)

(f)

(0) to (150) or >(550)

(0) to (150) or >(550)

(f)

(f)

Cash is received from CP

(f)

(f)

(f)

(f)

(f)

(f)

Cash can be pledged to   CP as collateral

(200) to (600)

N/A

(150) to (550)

(150) to (550)

N/A

N/A

(a) Individual counterparties with fair value of fuel derivatives < $8 million.

(b) The Company has the option of providing cash or letters of credit as collateral.

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

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

(e) The Company has the option of providing cash as collateral.

(f) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

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Comprehensive income (loss) includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting, unrealized gains and losses on certain investments, and actuarial gains/losses arising from the Company’s postretirement benefit obligation. The differences between Net income (loss) and Comprehensive income (loss) for the three months ended March 31, 2020 and 2019 were as follows:

	Three months ended March 31,
(in millions)	2020				2019
NET INCOME (LOSS)	$	(94	)		$	387
Unrealized gain (loss) on fuel derivative instruments, net of   deferred taxes of ($19) and $22	(65		)		76
Unrealized loss on interest rate derivative instruments, net of   deferred taxes of ($10) and ($3)	(32		)		(11		)
Other, net of deferred taxes of ($9) and $3	(28		)		11
Total other comprehensive income (loss)	$	(125	)		$	76
COMPREHENSIVE INCOME (LOSS)	$	(219	)		$	463

A rollforward of the amounts included in AOCI is shown below for the three months ended March 31, 2020:

(in millions)	Fuel derivatives				Interest rate derivatives				Defined benefit plan items				Other				Deferred tax				Accumulated other comprehensive income (loss)
Balance at December 31, 2019	$	(125	)		$	(33	)		$	20			$	59			$	18			$	(61	)
Changes in fair value	(108		)		(42		)		—				(37		)		43				(144		)
Reclassification to earnings	24				—				—				—				(5		)		19
Balance at March 31, 2020	$	(209	)		$	(75	)		$	20			$	22			$	56			$	(186	)

The following table illustrates the significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2020:

Three months ended March 31, 2020
(in millions)		Amounts reclassified from AOCI				Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)
AOCI components
Unrealized loss on fuel derivative instruments		$	22			Fuel and oil expense
		2				Other (gains) losses, net
		5				Less: Tax expense
		$	19			Net of tax

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Passenger Revenues

Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow. The following table provides the components of Passenger revenue recognized for the three months ended March 31, 2020 and 2019:

	Three months ended March 31,
(in millions)	2020				2019
Passenger non-loyalty	$	3,220			$	4,043
Passenger loyalty - air transportation	461				535
Passenger ancillary sold separately	164				167
Total passenger revenues	$	3,845			$	4,745

As of March 31, 2020, and December 31, 2019, the components of Air traffic liability and Air traffic liability - noncurrent, including contract liabilities based on tickets sold, unused funds available to the Customer, and loyalty points available for redemption, net of expected spoilage, within the unaudited Condensed Consolidated Balance Sheet were as follows:

	Balance as of
(in millions)	March 31, 2020				December 31, 2019
Air traffic liability - passenger travel and ancillary passenger services	$	2,650			$	2,125
Air traffic liability - loyalty program	3,561				3,385
Total Air traffic liability	$	6,211			$	5,510

Rollforwards of the Company's Air traffic liability - loyalty program for the three months ended March 31, 2020 and 2019 were as follows (in millions):

	Three months ended March 31,
	2020				2019
Air traffic liability - loyalty program - beginning balance	$	3,385			$	3,011
Amounts deferred associated with points awarded	656				711
Revenue recognized from points redeemed - Passenger	(461		)		(535		)
Revenue recognized from points redeemed - Other	(19		)		(16		)
Air traffic liability - loyalty program - ending balance	$	3,561			$	3,171

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Air traffic liability includes consideration received for ticket and loyalty related performance obligations which have not been satisfied as of a given date. Rollforwards of the amounts included in Air traffic liability as of March 31, 2020 and 2019 were as follows (in millions):

	Air traffic liability
Balance at December 31, 2019	$	5,510
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	4,565
Revenue from amounts included in contract liability opening balances	(1,949		)
Revenue from current period sales	(1,915		)
Balance at March 31, 2020	$	6,211

	Air traffic liability
Balance at December 31, 2018	$	5,070
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	5,704
Revenue from amounts included in contract liability opening balances	(2,008		)
Revenue from current period sales	(2,752		)
Balance at March 31, 2019	$	6,014

In first quarter 2020, the Company experienced a significantly higher number of Customer driven flight cancellations as a result of the COVID-19 pandemic. See Note 2 for further information. As a result, the amount of Customer travel funds held by the Company that can be redeemed for future travel as of March 31, 2020, far exceeds previous periods and represents approximately one third of the total Air traffic liability balance at March 31, 2020, as compared to approximately 13 percent of the total Air traffic liability balance at December 31, 2019. In order to provide additional flexibility to Customers who own these funds, the Company has significantly relaxed its previous policies with regards to the time period within which these funds can be redeemed, which is typically twelve months from the original date of purchase. For all Customer travel funds created or expired between March 1 and September 7, 2020 associated with flight cancellations, the Company has extended the expiration date to September 7, 2022. The more significant of these ticket policy changes occurred in April 2020, which may result in a portion of these funds shifting to non-current, based on changes in expectations of when they will be redeemed for travel.

Spoilage estimates are based on the Company's Customers' historical travel behavior as well as assumptions about the Customers' future travel behavior. Assumptions used to generate spoilage estimates can be impacted by several factors including, but not limited to: fare increases, fare sales, changes to the Company's ticketing policies, changes to the Company’s refund, exchange, and unused funds policies, seat availability, and economic factors. Given the unprecedented amount of first quarter 2020 Customer flight cancellations and the amount of travel funds provided, the Company expects additional variability in the amount of spoilage revenue recorded in future periods, as the estimates of the portion of those funds that will expire unused may differ from historical experience.

The Company has a co-branded credit card agreement (the “Agreement”) with Chase Bank USA, N.A. (“Chase”), through which the Company sells loyalty points and certain marketing components, which consist of the use of Southwest Airlines’ brand and access to Rapid Rewards Member lists, licensing and advertising elements, and the use of the Company’s resource team. The Company recognized revenue related to the marketing, advertising, and other travel-related benefits of the revenue associated with various loyalty partner agreements including, but not limited to, the Agreement with Chase, within Other operating revenues. For the three months ended March 31, 2020 and 2019, the Company recognized $321 million and $319 million, respectively.

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The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share amounts). Antidilutive common stock equivalents, excluded from the diluted net income (loss) per share calculation, consisting primarily of restricted stock units, are not material.

	Three months ended March 31,
	2020				2019
NUMERATOR:
Net income (loss)	$	(94	)		$	387
DENOMINATOR:
Weighted-average shares outstanding, basic	515				551
Dilutive effect of restricted stock units	—				1
Adjusted weighted-average shares outstanding, diluted	515				552
NET INCOME (LOSS) PER SHARE:
Basic	$	(0.18	)		$	0.70
Diluted	$	(0.18	)		$	0.70

On March 12, 2020, the Company entered into a new $1.0 billion 364-day term loan credit facility agreement (the “364-Day Credit Agreement”) with a syndicate of lenders identified in the 364-Day Credit Agreement that was drawn in full on the closing date. On March 30, 2020, the Company amended and restated the 364-Day Credit Agreement (the “Amended and Restated 364-Day Credit Agreement”) with a syndicate of lenders identified in the Amended and Restated 364-Day Credit Agreement to add additional term loan commitments of approximately $2.3 billion, add an uncommitted accordion increase provision to permit additional term loans in an aggregate amount not to exceed approximately $417 million, amend the pricing, amend certain covenants, add certain covenants, and provide for the grant of a security interest in certain aircraft and related assets. The Amended and Restated 364-Day Credit Agreement matures in full on March 29, 2021.

On March 16, 2020, the Company drew down the full $1.0 billion on its existing $1.0 billion revolving credit facility expiring in August 2022 (the "Revolving Credit Agreement"). The Revolving Credit Agreement is a series of short-term borrowings; at the end of each borrowing the Company must elect to roll the facility over into the next borrowing or pay down the facility, therefore the Company has classified the obligation under Current maturities of long-term debt within the unaudited Condensed Consolidated Balance Sheet as of March 31, 2020. The Revolving Credit Agreement also has an accordion feature that would allow the Company, subject to, among other things, the procurement of incremental commitments, to increase the size of the facility to $1.5 billion.

Concurrently with entering into the Amended and Restated 364-Day Credit Agreement on March 30, 2020, the Company also amended the Revolving Credit Agreement (the “Amended and Restated Revolving Credit Agreement”; together with the Amended and Restated 364-Day Credit Agreement, the “Amended and Restated Credit Agreements”) to (i) amend the pricing and fees, (ii) amend certain covenants and provisions, (iii) add certain covenants, and (iv) provide for the grant of a security interest in certain aircraft and related assets.

Generally, amounts outstanding under the Amended and Restated Credit Agreements bear interest at interest rates based on either the LIBOR rate (selected by the Company for designated interest periods) or the “alternate base rate” (being the highest of (1) the Wall Street Journal prime rate, (2) one-month adjusted LIBOR (one-month LIBOR plus a statutory

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reserve rate) plus 1%, and (3) the New York Fed Bank Rate, plus 0.5%). The underlying LIBOR rate is subject to a floor of 1% per annum and the “alternate base rate” is subject to a floor of 1% per annum.

The Amended and Restated Credit Agreements contain customary representations and warranties, covenants, and events of default. The Amended and Restated Credit Agreements are secured by certain separate pools of aircraft and related assets, each with a minimum appraised value ratio requirement. Under the Amended and Restated Credit Agreements, the Company is required to maintain, at all times after March 31, 2021, a specified ratio of (x) adjusted net income (before interest, taxes, depreciation, amortization, and aircraft rental expense) less cash dividends to (y) interest and aircraft rental expense; and to maintain a minimum level of liquidity of $2.5 billion (defined as the aggregate amount available to be borrowed under the Amended and Restated Revolving Credit Agreement plus the aggregate amount of unrestricted cash and cash equivalents of the Company).

During February 2020, the Company issued $500 million senior unsecured notes due 2030. The notes bear interest at 2.625 percent. Interest is payable semi-annually in arrears on February 10 and August 10, beginning in 2020.

As of March 31, 2020, aggregate principal maturities of debt and finance leases (not including amounts associated with interest rate swap agreements, interest on finance leases, and amortization of purchase accounting adjustments) were $741 million for the remainder of 2020, $2.2 billion in 2021, $475 million in 2022, $103 million in 2023, $103 million in 2024, $90 million in 2025, and $1.4 billion thereafter.

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

As of March 31, 2020, the Company held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, short-term investments (primarily treasury bills and certificates of deposit), interest rate derivative contracts, fuel derivative contracts, and available-for-sale securities. The majority of the Company’s short-term investments consist of instruments classified as Level 1. However, the Company has certificates of deposit, commercial paper, and time deposits that are classified as Level 2, due to the fact that the fair value for these instruments is determined utilizing observable inputs in non-active markets. Other available-for-sale securities primarily consist of investments associated with the Company’s excess benefit plan.

The Company’s fuel and interest rate derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. Fuel derivative instruments currently consist solely of option contracts, whereas interest rate derivatives consist solely of swap agreements. See Note 4 for further information on the Company’s derivative instruments and hedging activities. The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2. The Company’s Treasury Department, which reports to the Chief Financial Officer, determines the value of option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts. The option pricing model used by the Company is an industry standard model for valuing options and is the same model used by the broker/dealer community (i.e., the Company’s counterparties). The inputs to this option pricing model are the option strike price, underlying price, risk free rate of interest, time to expiration, and volatility. Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as

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Level 3. Volatility information is obtained from external sources, but is analyzed by the Company for reasonableness and compared to similar information received from other external sources. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. To validate the reasonableness of the Company’s option pricing model, on a monthly basis, the Company compares its option valuations to third party valuations. If any significant differences were to be noted, they would be researched in order to determine the reason. However, historically, no significant differences have been noted. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.

Included in Other available-for-sale securities are the Company’s investments associated with its deferred compensation plans, which consist of mutual funds that are publicly traded and for which market prices are readily available. These plans are non-qualified deferred compensation plans designed to hold contributions in excess of limits established by the Internal Revenue Code of 1986, as amended. The distribution timing and payment amounts under these plans are made based on the participant’s distribution election and plan balance. Assets related to the funded portions of the deferred compensation plans are held in a rabbi trust, and the Company remains liable to these participants for the unfunded portion of the plans. The Company records changes in the fair value of the assets in the Company’s earnings.

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2020, and December 31, 2019:

						Fair value measurements at reporting date using:
						Quoted prices in active markets for identical assets				Significant other observable inputs				Significant unobservable inputs
Description		March 31, 2020				(Level 1)				(Level 2)				(Level 3)
Assets		(in millions)
Cash equivalents
Cash equivalents (a)		$	3,495			$	3,495			$	—			$	—
Commercial paper		360				—				360				—
Certificates of deposit		19				—				19				—
Time deposits		66				—				66				—
Short-term investments:
Treasury bills		1,396				1,396				—				—
Certificates of deposit		184				—				184				—
Time deposits		25				—				25				—
Interest rate derivatives (see Note 4)		4								4
Fuel derivatives:
Option contracts (b)		85				—				—				85
Other available-for-sale securities		182				182				—				—
Total assets		$	5,816			$	5,073			$	658			$	85
Liabilities
Interest rate derivatives (see Note 4)		$	(71	)		$	—			$	(71	)		$	—

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

(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as an asset. See Note 4.

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						Fair value measurements at reporting date using:
						Quoted prices in active markets for identical assets				Significant other observable inputs				Significant unobservable inputs
Description		December 31, 2019				(Level 1)				(Level 2)				(Level 3)
Assets		(in millions)
Cash equivalents
Cash equivalents (a)		$	1,999			$	1,999			$	—			$	—
Commercial paper		535				—				535				—
Certificates of deposit		14				—				14				—
Short-term investments:
Treasury bills		1,196				1,196				—				—
Certificates of deposit		268				—				268				—
Time deposits		60				—				60				—
Interest rate derivatives (see Note 4)		2				—				2				—
Fuel derivatives:
Option contracts (b)		110				—				—				110
Other available-for-sale securities		197				197				—				—
Total assets		$	4,381			$	3,392			$	879			$	110
Liabilities
Interest rate derivatives (see Note 4)		$	(6	)		$	—			$	(6	)		$	—

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

(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net asset. See Note 4.

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The Company did not have any assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2020, or the year ended December 31, 2019. The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 and the year ended December 31, 2019:

Fair value measurements using significant unobservable inputs (Level 3)
(in millions)	Fuel derivatives
Balance at December 31, 2019	$	110
Total losses for the period
Included in earnings	(2		)	(a)
Included in other comprehensive income	(106		)
Purchases	83			(b)
Balance at March 31, 2020	$	85
The amount of total losses for the period   included in earnings attributable to the   change in unrealized gains or losses relating   to assets still held at March 31, 2020	$	(2	)	(a)
The amount of total losses for the period   included in other comprehensive loss attributable to the   change in unrealized gains or losses relating   to assets still held at March 31, 2020	$	(100	)

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

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

Fair value measurements using significant unobservable inputs (Level 3)
(in millions)	Fuel derivatives
Balance at December 31, 2018	$	138
Losses included in other comprehensive loss	(112		)
Purchases	133			(a)
Sales	(2		)	(a)
Settlements	(47		)
Balance at December 31, 2019	$	110

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

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

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The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at March 31, 2020:

Quantitative information about Level 3 fair value measurements
		Valuation technique		Unobservable input		Period (by year)		Range		Weighted Average (a)
Fuel derivatives		Option model		Implied volatility		Second quarter 2020		49-121%		93	%
						Third quarter 2020		50-73%		59	%
						Fourth quarter 2020		41-56%		47	%
						2021		28-47%		36	%
						2022		27-30%		28	%
						Beyond 2022		25-27%		26	%

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

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at March 31, 2020, are presented in the table below. The fair values of the Company’s publicly held long-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these agreements as Level 2. Debt under five of the Company’s debt agreements is not publicly held. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.

(in millions)	Carrying value				Estimated fair value				Fair value level hierarchy
2.65% Notes due 2020	$	504			$	495			Level 2
Term Loan Agreement payable through 2020 - 5.223%	120				120				Level 3
737 Aircraft Note payable through 2020	7				7				Level 3
Revolving Credit Facility	1,000				978				Level 3
Term Loan Agreement due 2021 - 3.000%	1,000				990				Level 3
2.75% Notes due 2022	300				283				Level 2
Pass Through Certificates due 2022 - 6.24%	168				167				Level 2
Term Loan Agreement payable through 2026 - 3.03%	178				164				Level 3
3.00% Notes due 2026	300				284				Level 2
3.45% Notes due 2027	300				264				Level 2
7.375% Debentures due 2027	121				139				Level 2
2.625% Notes due 2030	500				420				Level 2

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(in millions)	March 31, 2020				December 31, 2019
Trade receivables	$	44			$	53
Credit card receivables	4				112
Business partners and other suppliers	535				779
Income tax receivable	88				87
Other	38				55
Accounts and other receivables	$	709			$	1,086

(in millions)	March 31, 2020				December 31, 2019
Derivative contracts	$	60			$	49
Intangible assets, net	296				296
Other	264				232
Other assets	$	620			$	577

(in millions)	March 31, 2020				December 31, 2019
Accounts payable trade	$	218			$	304
Salaries payable	226				231
Taxes payable excluding income taxes	66				227
Aircraft maintenance payable	156				162
Fuel payable	57				129
Dividends payable	—				93
Other payable	320				428
Accounts payable	$	1,043			$	1,574

(in millions)	March 31, 2020				December 31, 2019
Profitsharing and savings plans	$	25			$	695
Vacation pay	443				434
Health	99				120
Workers compensation	168				166
Property and income taxes	67				79
Derivative contracts	55				5
Other	180				250
Accrued liabilities	$	1,037			$	1,749

(in millions)	March 31, 2020				December 31, 2019
Postretirement obligation	$	294			$	288
Other deferred compensation	286				313
Other	114				105
Other noncurrent liabilities	$	694			$	706

For further information on supplier receivables, see Note 12. For further information on fuel derivative and interest rate derivative contracts, see Note 4.

Other Operating Expenses

Other operating expenses consist of aircraft rentals, distribution costs, advertising expenses, personnel expenses, professional fees, and other operating costs, none of which individually exceeded 10 percent of Operating expenses.

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Los Angeles International Airport

In October 2017, the Company executed a lease agreement with Los Angeles World Airports ("LAWA") (the "T1.5 Lease"). Under the T1.5 Lease, the Company is overseeing and managing the design, development, financing, construction, and commissioning of a passenger processing facility between Terminal 1 and 2 (the "Terminal 1.5 Project"). The Terminal 1.5 Project is expected to include ticketing, baggage claim, passenger screening, and a bus gate at a cost not to exceed $479 million for site improvements and non-proprietary improvements. Construction on the Terminal 1.5 Project began during third quarter 2017 and is estimated to be substantially completed during fourth quarter 2020. The costs incurred to fund the Terminal 1.5 Project are included within Assets Constructed for Others ("ACFO") and all amounts that have been or will be reimbursed will be included within Construction obligation on the accompanying unaudited Condensed Consolidated Balance Sheet.

Funding for this project is primarily through the Regional Airports Improvement Corporation (the "RAIC"), which is a quasi-governmental special purpose entity that is acting as a conduit borrower under a syndicated credit facility provided by a group of lenders. A loan made under the credit facility for the Terminal 1.5 Project is being used to reimburse the Company for the site improvements and non-proprietary improvements of the Terminal 1.5 Project, and the outstanding loan will be repaid with the proceeds of LAWA’s payments to purchase completed construction phases. The Company guaranteed the obligation of the RAIC under the credit facility associated with the Terminal 1.5 Project. As of March 31, 2020, the Company's outstanding remaining guaranteed obligation under the credit facility for the Terminal 1.5 Project was $212 million.

Construction costs recorded in ACFO for the Terminal 1.5 Project were $198 million and $164 million, as of March 31, 2020, and December 31, 2019, respectively.

Dallas Love Field

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

Although the City of Dallas received commitments from various sources that helped to fund portions of the LFMP project, including the Federal Aviation Administration ("FAA"), the Transportation Security Administration, and the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds. The Company guaranteed principal and interest payments on bonds issued by the LFAMC. As of March 31, 2020, $407 million of principal remained outstanding. The net present value of the future principal and interest payments associated with the bonds was $449 million as of March 31, 2020, and was reflected as part of the Company's operating lease right–of–use assets and lease obligations in the unaudited Condensed Consolidated Balance Sheet.

Contingencies

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service (the "IRS"). The Company's management does not expect that the outcome of any of its currently ongoing legal proceedings or the outcome of any adjustments presented by the IRS, individually or collectively, will have a material adverse effect on the Company's financial condition, results of operations, or cash flow.

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On March 13, 2019, the FAA issued an emergency order for all U.S. airlines to ground all Boeing MAX aircraft. The Company immediately complied with the order and grounded all 34 MAX aircraft in its fleet. The Company will continue to monitor the situation and any potential future accounting implications that arise. The most significant financial impacts of this grounding to the Company thus far have been lost revenues, operating income, and operating cash flows, and delayed capital expenditures, directly associated with its grounded MAX fleet and other new aircraft that have not been able to be delivered. In July 2019, the Boeing Company announced a $4.9 billion after-tax charge for "potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding." In January 2020, the Boeing Company announced an additional pre-tax charge of $2.6 billion related to "estimated potential concessions and other considerations to customers related to the 737 MAX grounding."

During fourth quarter 2019, the Company entered into a Memorandum of Understanding with Boeing to compensate Southwest for estimated financial damages incurred during 2019 related to the grounding of the MAX. The terms of the agreement are confidential, but are intended to provide for a substantial portion of the Company’s estimated financial damages associated with both the 34 MAX aircraft that were grounded as of March 13, 2019, as well as the 41 additional MAX aircraft the Company was scheduled to receive (28 owned MAX from Boeing and 13 leased MAX from third parties) from March 13, 2019 through December 31, 2019. In accordance with applicable accounting principles, the Company will account for substantially all of the proceeds received from Boeing as a reduction in cost basis spread across both the existing 31 owned MAX in the Company’s fleet, plus the Company’s future firm aircraft deliveries as of the date of the agreement. No material financial impacts of the agreement were realized in the Company’s earnings during year ended December 31, 2019. A total of $300 million in proceeds received in cash from Boeing are reflected within Investing Activities in the Consolidated Statement of Cash Flows for the three months ended March 31, 2020. Amounts agreed to but not yet received are recorded within Accounts and Other Receivables.

In April 2020, the Company reached an agreement in principle with the Treasury with respect to funding support pursuant to the Payroll Support Program under the CARES Act. See Note 2 for further information on the CARES Act. Funds received under the Payroll Support Program are expected to be used to pay Employee wages and benefits through September 30, 2020. The Company's expected aggregate receipts under the Payroll Support Program total approximately $3.3 billion (the "Payroll Support"), for which the Company expects to provide the Treasury consideration in the form of a promissory note representing a $948 million unsecured term loan to the Company and of warrants to purchase up to an aggregate of 2.6 million shares of the Company’s common stock, subject to adjustment by the Treasury in each case.

On April 21, 2020, the Company received the first installment of approximately $1.6 billion of expected proceeds, or 50 percent, for which the Company provided consideration in the form of a promissory note representing a $459 million unsecured term loan and of warrants to purchase up to an aggregate of 1.3 million shares of the Company’s common stock. The remainder of the funds are expected to be disbursed to the Company, and the additional warrants are expected to be issued, in three installments from May to July 2020.

As consideration for Payroll Support, on April 20, 2020, the Company issued a promissory note (the “Note”) in favor of the Treasury and entered into a warrant agreement with the Treasury (the “Warrant Agreement”), pursuant to which the Company agreed to issue warrants (each, a “Warrant”) to purchase common stock of the Company to the Treasury. In connection with the initial disbursement on April 21, 2020, the Note was issued at an initial amount of $459 million. Upon each subsequent disbursement of Payroll Support to the Company after April 21, 2020, (i) the principal amount of the Note will be increased in an amount equal to 30 percent of any such disbursement and (ii) the Company will issue a Warrant to the Treasury in an amount equal to 10 percent of the principal amount of the increase to the Note in connection with such disbursement of Payroll Support, divided by the strike price of $36.47 (which was the closing price of the Company’s common stock on April 9, 2020).

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The Note matures in full on April 19, 2030, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. The Company has an option to prepay the Note at any time without premium or penalty. Amounts outstanding under the Note bear interest at a rate of 1.00 percent before April 20, 2025 and, afterwards, at a rate equal to Secured Overnight Financing Rate or other benchmark replacement rate consistent with customary market conventions plus margin of 2.00 percent. The Note contains customary representations and warranties and events of default.

The Warrant Agreement sets out the Company’s obligations to issue Warrants in connection with disbursements of Payroll Support and to file a resale shelf registration statement for the Warrants and the underlying shares of common stock. The Company has also granted the Treasury certain demand underwritten offering and piggyback registration rights with respect to the Warrants and the underlying common stock. Each Warrant is exercisable at a strike price of $36.47 per share of common stock and will expire on the fifth anniversary of the issue date of such Warrant. The Warrants will be settled through net share settlement or net cash settlement, at the Company’s option. The Warrants include adjustments for below market issuances, payment of dividends and other customary anti-dilution provisions. The Warrants do not have voting rights.

By accepting financing under the CARES Act, the Company has agreed to certain restrictions on its business, including:

•	The Company is prohibited from repurchasing its common stock and from paying dividends or making capital contributions with respect to its common stock until September 30, 2021.

•	The Company must place certain restrictions on certain higher-paid employee and executive pay, including limiting pay increases and severance pay or other benefits upon terminations, until March 24, 2022.

•	The Company is prohibited from involuntary terminations or furloughs of its Employees (except for death, disability, cause, or certain disciplinary reasons) until September 30, 2020.

•	The Company may not reduce the salary, wages, or benefits of its Employees (other than its Executive Officers or independent contractors, or as otherwise permitted under the terms of the Payroll Support Program) until September 30, 2020.

•	Until March 1, 2022, the Company must comply with any requirement issued by the Department of Transportation (“DOT”) that the Company maintain certain scheduled air transportation service as DOT deems necessary to ensure services to any point served by the Company before March 1, 2020.

•	The Company must maintain certain internal controls and records relating to the CARES Act funds, and is subject to additional reporting requirements.

The Payroll Support will be recorded upon initial receipt of the cash as a deferred expense in the unaudited Condensed Consolidated Balance Sheet, and subsequently reclassified as a contra-expense in the unaudited Condensed Consolidated Statement of Income in second and third quarters 2020-relative to the salaries and wages expected to be incurred by the Company in those periods. At the Company’s election, approximately 90 percent of the total $3.3 billion in assistance is expected to be received in second quarter 2020, with the remainder to be received in third quarter 2020. The Company will allocate the proceeds received from the Treasury in accordance with applicable accounting guidance, and based on the consideration provided in the transaction.

The Company has also been notified of general terms associated with the Loan program available to U.S. carriers through the Treasury under the CARES Act. The Company has the opportunity to apply for a 5-year senior secured term loan (the “secured term loan”) up to $2.8 billion as of April 20, 2020, that would be collateralized by certain assets of the Company. Interest on the secured term loan would be at LIBOR plus 250 basis points, would be prepayable at any time, and would contain restrictions similar to those noted above associated with the Payroll Support Program. If it agrees to take the secured term loan, the Company would have to provide approximately 7.6 million warrants to the Treasury. The Company plans to apply for the secured term loan by the April 30, 2020 deadline, but is currently undecided as to whether it would agree to draw down on the loan. The deadline for the Company to decide whether to take the loan is currently September 30, 2020. In connection with the secured term loan, should the Company accept the loan, the Company will be required to comply with the relevant provisions of the CARES Act, including those prohibiting the repurchase of common stock and the payment of common stock dividends, as well as those restricting

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the payment of certain executive compensation. Under the CARES Act, these restrictions will apply until one year after the secured term loan is repaid in full.

The terms of the CARES Act represent just one component of the Company’s actions to address the liquidity risks presented by the impacts of the COVID-19 pandemic to its business. Commercial air travel in the U.S. and Company Passenger revenues for most of April 2020 have been at levels of less than five percent of comparable amounts experienced in April of 2019. However, much of the Company’s operating expenses have not declined at a commensurate amount, leading to significant operating cash outflows. Although the Company has canceled a significant portion of its originally scheduled flights for April, May, June, and July 2020, only a portion of the Company’s operating cost structure is variable, and the savings from less fuel consumption, landing fees, and certain other expenses will likely only cover a portion of the lost revenue during this period of time.

The Company believes it has taken appropriate measures to address the significant cash outflows experienced thus far, and continues to evaluate options, should the lack of demand for air travel continue beyond the near term. In addition to the significant reductions in the Company’s flight schedule, various voluntary leave options have been offered to the Company’s 60,000 plus Employees (including time off without pay and extended time off with partial pay), hundreds of capital spending projects have been canceled or deferred, all non-essential spending has been cut, and existing contracts and payment terms with the majority of its vendors have been evaluated for further savings opportunities.

The Company believes its financial position and preparation prior to the impact of the COVID-19 pandemic have allowed it to react quickly and sensibly in the steps it has taken so far to raise cash and increase its liquidity. Given the Company’s continued current access to capital markets, investment grade credit rating, and unencumbered assets (including a significant number of aircraft), it believes it has opportunities and options to raise additional liquidity at reasonable terms. Thus, the Company believes it is probable that the plans it has in place, or that it has the ability to execute as of the date of this filing, when fully implemented, will sufficiently mitigate the present conditions and allow the Company to reasonably handle the liquidity risks presented by the current climate.

The Company drew approximately $2.3 billion under the Amended and Restated 364-Day Credit Agreement on April 1, 2020. On April 24, 2020, the Company also drew an additional $350 million under the $417 million accordion feature that allows the total borrowing capacity under the Amended and Restated 364-Day Credit Agreement to increase to $3.75 billion. As of the date hereof, there is approximately $3.68 billion outstanding under the Amended and Restated 364–Day Credit Agreement.

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•	Travel funds created because of a flight cancellation between March 1, 2020 and September 7, 2020, will be available for use through September 7, 2022.

•	Travel funds that expired or will expire between March 1, 2020 and September 7, 2020, will be available for use through September 7, 2022.

•	While the Company has never charged a change fee (though the customer would be required to pay any fare difference), it is now also allowing any Customer to change their travel plans for flights through April 30, 2020, for another date 60 days from the original date of travel, without any fare difference, when booked in the same fare class and between the same origin and destination.

•	Rapid Rewards loyalty program members who have travel funds that are set to expire, or funds that are created between March 1, 2020 and September 7, 2020, now have the option to convert those travel funds into Rapid Rewards points at the same rate as they are able to purchase a ticket with points.

•	All Rapid Rewards loyalty program members qualifying progress received a "boost" of 15,000 tier qualifying points and 10 flight credits toward A-List and A-List Preferred status, and 25,000 Companion Pass qualifying points and 25 flight credits toward Companion Pass status.

•	All current A-List and A-List Preferred tier status members earned status has been extended through December 31, 2021.

•	Companion pass Members earned status has been extended through June 30, 2021.

•	Snack and beverage service has been suspended on all flights to minimize contact in the cabin until further notice.

•	Enhanced aircraft cleaning procedures have been applied since March 4, 2020.

•	Procedures and protocol have been implemented with the intent of enabling Employees to wear personal protective equipment and adhere to health officials' recommendations.

•	The Company has offered the ability to work remotely to most of the Company’s office and clerical Employees, including the vast majority of its more than 6,000 Employees at the Company’s headquarters campus in Dallas, Texas.

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•	the Company’s financial outlook, goals, expectations, and projected results of operations, including factors and assumptions underlying the Company’s projections, in particular assumptions regarding the impact of the COVID-19 pandemic, and the MAX groundings and the timing of the MAX return to service;

•	the Company’s expectations about future receipts pursuant to the Payroll Support Program under the CARES Act;

•	the Company’s plans and expectations regarding its fleet, its fleet order book, and its fleet delivery schedule, including factors and assumptions underlying the Company’s plans and expectations, in particular the impacts of the COVID-19 pandemic and the MAX groundings;

•	the Company's plans and expectations related to the return of the MAX to service;

•	the Company’s capacity plans and expectations, including factors and assumptions underlying the Company's plans and expectations, in particular the impacts of the COVID-19 pandemic;

•	the Company’s network plans;

•	the Company’s plans, expectations, and estimates related to fuel costs and the Company’s related management of risk associated with changing jet fuel prices, including the assumptions underlying the estimates;

•	the Company's expectations with respect to capital expenditures and liquidity, including its ability to meet its ongoing capital, operating, and other obligations, and the Company’s anticipated needs for, and sources of, funds;

•	the Company's assessment of market risks; and

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

•	the extent of the impact of the COVID-19 pandemic, including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, and the extent of the impact of the COVID-19 pandemic on overall demand for air travel and the Company’s access to capital;

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the impact of fears or actual outbreaks of infectious disease, economic conditions, governmental actions, extreme or severe weather and natural disasters, fears of terrorism or war, actions of competitors, fuel prices, consumer perception, 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 U.S. Treasury’s right pursuant to the Payroll Support Program to amend the documents or require new or additional conditions of the payroll support in ways that may be materially adverse to the Company;

•	the enactment or adoption of future laws, statutes, and regulations and interpretation or enforcement of current and future laws, statutes, and regulations that affect the terms or application of the Payroll Support Program documents and that may have a material adverse effect on the Company;

•	the Company's dependence on Boeing and the Federal Aviation Administration with respect to the timing of the return of the 737 MAX to service and any related changes to the Company's operational and financial assumptions and decisions;

•	the Company's dependence on Boeing with respect to the Company's fleet order book and delivery schedule;

•	the Company’s dependence on other third parties, and the impact on the Company’s operations and results of operations of any third party delays or non-performance;

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

•	other factors as set forth in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, and in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

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•	The Company is prohibited from repurchasing its common stock and from paying dividends or making capital contributions with respect to its common stock until September 30, 2021;

•	The Company must place certain restrictions on certain higher-paid employee and executive pay, including limiting pay increases and severance pay or other benefits upon terminations, until March 24, 2022;

•	The Company is prohibited from involuntary terminations or furloughs of its Employees (except for death, disability, cause, or certain disciplinary reasons) until September 30, 2020;

•	The Company may not reduce the salary, wages, or benefits of its Employees (other than its Executive Officers or independent contractors, or as otherwise permitted under the terms of the Payroll Support Program) until September 30, 2020;

•	Until March 1, 2022, the Company must comply with any requirement issued by the Department of Transportation (“DOT”) that the Company maintain certain scheduled air transportation service as DOT deems necessary to ensure services to any point served by the Company before March 1, 2020; and

•	The Company must maintain certain internal controls and records relating to the CARES Act funds, and is subject to additional reporting requirements.

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(1)

On May 15, 2019, the Company’s Board of Directors authorized the repurchase of up to $2.0 billion of the Company’s common stock. Repurchases are made in accordance with applicable securities laws in open market or private, including accelerated, repurchase transactions from time to time, depending on market conditions, and may be discontinued at any time. On March 16, 2020, the Company announced it was suspending further share repurchase activity following completion of the First Quarter 2020 ASR Program until further notice.

(2)

Under an accelerated share repurchase program entered into by the Company with a third party financial institution in fourth quarter 2019 (the “Fourth Quarter 2019 ASR Program”), the Company paid $550 million and received an initial delivery of 7,276,275 shares during December 2019, representing an estimated 75 percent of the shares to be purchased by the Company under the Fourth Quarter 2019 ASR Program based on a volume-weighted average price of $56.6911 per share of the Company’s common stock on the New York Stock Exchange during a calculation period between November 13, 2019 and December 11, 2019. The third party financial institution delivered an additional 1,835,017 shares to the Company in further partial settlements of the Fourth Quarter 2019 ASR Program in January 2020, which was determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during calculation periods completed in January 2020. Final settlement of the Fourth Quarter 2019 ASR Program occurred in February 2020 and was determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during a calculation period completed in February 2020. Upon settlement, the third party financial institution delivered 900,018 additional shares of the Company’s common stock to the Company. In total, the average purchase price per share for the 10,011,310 shares repurchased under the Fourth Quarter 2019 ASR Program, upon completion of the Fourth Quarter 2019 ASR Program in February 2020, was $54.9379.

(3)

Under the First Quarter 2020 ASR Program launched in February 2020, the Company paid $500 million and received delivery of 6,405,876 shares during March 2020, representing 75 percent of the shares originally expected to be repurchased under the First Quarter 2020 ASR Program. The third party financial institution exercised its early termination option in March 2020, and sent cash proceeds totaling $134.2 million to the Company in March 2020 to settle the transaction. In total, the average purchase price per share for the 6,405,876 shares repurchased under the First Quarter 2020 ASR Program, upon completion of the First Quarter 2020 ASR Program in March 2020, was $57.1030.

(4)	During the period from February 27, 2020 through February 28, 2020, the Company repurchased 400,000 shares of its common stock on the open market at an average price of $47.1229.

(5)	During March 2020, the Company repurchased 1,474,000 shares of its common stock on the open market under an additional share repurchase plan at an average price of $45.1799 per share.

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