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MarketScreener Homepage  >  Equities  >  Nyse  >  Southwest Airlines    LUV

SOUTHWEST AIRLINES

(LUV)
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SOUTHWEST AIRLINES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

02/08/2021 | 01:40pm EST

YEAR IN REVIEW


In late February 2020, the Company began to see a negative impact from the
COVID-19 pandemic, which quickly accelerated during the first quarter and
continued throughout the remainder of the year. As a consequence, the Company
experienced its first annual net loss in 48 years. The Company's prior trend of
47 consecutive years of profitability was a feat unmatched in the U.S. airline
industry.

Both GAAP and non-GAAP results, shown in the following tables, were impacted by
the pandemic. See Note Regarding Use of Non-GAAP Financial Measures and the
Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional
detail regarding non-GAAP financial measures.
                                                   Year ended
(in millions, except per share amounts)           December 31,
GAAP                                            2020         2019        Percent Change
Operating income (loss)                      $ (3,816)$ 2,957            n.m.
Net income (loss)                            $ (3,074)$ 2,300            n.m.

Net income (loss) per share, diluted $ (5.44)$ 4.27

  n.m.

Non-GAAP
Operating income (loss)                      $ (5,032)$ 2,957            n.m.
Net income (loss)                            $ (3,512)$ 2,300            n.m.

Net income (loss) per share, diluted $ (6.22)$ 4.27

n.m.




The COVID-19 pandemic depressed the demand for air travel and negatively
impacted both GAAP and non-GAAP results year-over-year. Operating revenues for
the year ended December 31, 2020 decreased 59.7 percent as the Company
experienced load factors and yields that were considerably lower than historical
levels. The Company took action to reduce capacity and swiftly cut costs, which
generated a reduction in operating expenses of 33.9 percent. However, due to the
fixed nature of a large portion of the Company's cost structure, especially in
the short-term, the reduction in operating expenses was not enough to overcome
the dramatic decline in revenues.

For periods prior to second quarter 2020, the Company provided its calculation
of non-GAAP return on invested capital ("ROIC") as a measure of financial
performance used by management to quantify the Company's effectiveness in
generating returns relative to the capital invested in the business. By second
quarter 2020, the precipitous drop in passenger demand and bookings caused by
COVID-19 resulted in a material and adverse effect on the Company's operating
income and cash flows from operations. As a result, management ceased focus on
ROIC and instead has since focused on bolstering the Company's liquidity through
cost reductions, financings, sale-leaseback transactions, and securities
offerings. Accordingly, the Company has chosen not to present ROIC in this Form
10-K and does not expect to present it again until and if the operating
environment normalizes sufficiently to return the Company to operating income
instead of operating loss.

See Notes 2 and 7 to the Consolidated Financial Statements for further information on the significant impacts to the Company's operations, financial performance, and liquidity from the COVID-19 pandemic.

2021 Outlook


Thus far in 2021, the Company experienced stalled demand in January and bookings
for February 2021, primarily driven by the high level of COVID-19 cases and
hospitalizations, as well as a seasonally weaker time period for leisure travel
demand following the holidays. However, trip cancellations have stabilized and
January 2021 operating revenues are expected to improve slightly compared with
the Company's previous estimations for January
                                       53
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2021 operating revenues provided mid-December 2020, primarily due to stronger leisure passenger demand in the January holiday return travel period and a slight improvement in load factor. The following table presents selected preliminary estimates of operating revenue, load factor, and capacity for January and February 2021:


                                           Estimated               Estimated
                                         January 2021            February 

2021

Operating revenues year-over-year       Down 65% to 70%         Down 65% to 75%
Previous estimation                     Down 65% to 75%               (a)
As compared with 2019                   Down 65% to 70%         Down 65% to 75%
Load factor                               50% to 55%              50% to 55%
Previous estimation                       45% to 55%                  (a)
ASMs year-over-year                        Down ~41%               Down ~46%
Previous estimation                     Down 40% to 45%         Down 40% to 45%
As compared with 2019                      Down ~43%               Down ~45%

(a) No previous estimation provided.


The Company estimates its March 2021 capacity to decrease approximately 16
percent, year-over-year, or 31 percent, compared with March 2019. The Company
estimates its first quarter 2021 capacity to decrease approximately 35 percent
year-over-year, primarily driven by the continued negative effects of the
pandemic.

Excluding Fuel and oil expense and special items, first quarter 2021 operating
expenses are expected to decrease in the range of 15 to 20 percent,
year-over-year, primarily due to lower capacity, year-over-year, as well as an
estimated $400 million of cost savings from voluntary separation and extended
leave programs. See Note 2 to the Consolidated Financial Statements for further
description of these programs. The year-over-year projections do not reflect the
potential impact of Fuel and oil expense, special items, and profitsharing
expense in both years because the Company cannot reliably predict or estimate
these 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
projected results is not meaningful or available without unreasonable effort.

COVID-19 Pandemic


In response to the far-reaching impacts of the COVID-19 pandemic, the Company
has taken significant measures to enhance and expand upon its already generous
and flexible ticketing policies, and to support the well-being of both its
Employees and passengers on a daily basis. These have included, but are not
limited to the following:

•Travel funds created because of a flight cancellation between March 1, 2020 and
September 7, 2020, will now expire September 7, 2022.
•Travel funds that would otherwise have expired between March 1, 2020 and
September 7, 2020, will now expire September 7, 2022.
•Rapid Rewards® loyalty program members who have travel funds that were set to
expire, or funds that were created between March 1, 2020 and September 7, 2020,
had the option to convert those travel funds into Rapid Rewards points at the
same rate as they were able to purchase a ticket with points, through December
15, 2020.
•All Rapid Rewards loyalty program members with an account opened by December
31, 2020 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 on April 1, 2020
earned status has been extended through December 31, 2021.
•Companion pass members earned status on April 1, 2020 has been extended through
December 31, 2021.
•Enhanced aircraft cleaning procedures have been applied since March 4, 2020.
                                       54
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•Procedures and protocol have been implemented with the requirement that
Employees and Customers (age two or over) must wear masks or face coverings.
•Measures to support physical distancing, including messaging to Customers and
Employees, and modified boarding procedures, have been implemented.
•A Customer health declaration, which must be acknowledged prior to travel, has
been implemented.
•An Employee health declaration, which all Employees are expected to
acknowledge, has been implemented.
•The Company continues to offer 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.

The Company continues to communicate with its entire workforce on the employment
of best practices and Centers for Disease Control and Prevention guidelines in
the current environment while at work, especially considering that a large
portion of its Employees come into direct contact with Customers on a daily
basis.

As detailed in Note 2 to the Consolidated Financial Statements, in connection
with the major negative impact of COVID-19 on air carriers, the Company has
received significant financial assistance from the U.S. Department of Treasury
(the "Treasury") pursuant to the Payroll Support Program established pursuant to
the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").
Amounts received under the Payroll Support Program were approximately
$3.4 billion and were utilized to directly offset payroll expenses incurred by
the Company, including specified benefits, between April 2020 and September
2020. During 2020, the Company issued a promissory note in favor of the Treasury
in the aggregate amount of $976 million and issued warrants valued at a total of
$40 million to purchase up to an aggregate of 2.7 million shares of the
Company's common stock, subject to adjustment pursuant to the terms of the
warrants. Of the approximate $3.4 billion, $2.4 billion consists of a grant that
does not require repayment. Approximately $2.3 billion of the direct payroll
support of $2.4 billion was allocated on a pro-rata basis as a contra-expense
line item in the Consolidated Statement of Comprehensive Income (Loss) between
second and third quarters of 2020, with the remaining $40 million allocated to
the value of warrants issued from the Company to the Treasury.

In accordance with restrictions contained in the CARES Act, and except as
permitted or required under the Payroll Support Program, the Company did not (1)
conduct involuntary terminations or furloughs or (2) reduce the salaries, wages,
or benefits of any Employee, in each case between the date of the Payroll
Support Program agreement and September 30, 2020.

In January 2021, the Company entered into definitive documentation with the
Treasury for further payroll support under the Consolidated Appropriations Act,
2021 (the "Payroll Support Program Extension"). Amounts received or to be
received under the Payroll Support Program Extension are expected to total
approximately $1.7 billion and will be utilized to directly offset payroll
expenses incurred by the Company, including specified benefits, between January
2021 and March 2021. Of this total, approximately $1.2 billion consists of a
grant that will not require repayment. The Company currently expects this direct
payroll support of $1.2 billion will be classified as a contra-expense line item
in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)
during first quarter 2021. The Company has issued a promissory note in favor of
the Treasury in an initial amount of approximately $229 million and expects the
amount to total approximately $488 million once the remaining payroll support is
received. See Note 2 for further information.

In accordance with restrictions contained in the Payroll Support Program
Extension, and except as permitted or required under the Payroll Support Program
Extension, the Company has agreed not to (1) conduct involuntary terminations or
furloughs or (2) reduce the salaries, wages, or benefits of any Employee, in
each case between the date of the Payroll Support Program Extension agreement
and March 31, 2021.

During second quarter 2020, the Company introduced Voluntary Separation Program
2020 and the Extended Emergency Time Off ("Extended ETO") program which aligned
staffing to reduced flight schedules and enabled the Company to avoid
involuntary furloughs and layoffs through 2020. Employees had until July 15,
2020, to determine whether to participate in one of these programs, and
approximately 15,000 Employees elected to do so. The Company continues to
evaluate and evolve its Extended ETO program in early 2021, including offering
additional
                                       55
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Extended ETO opportunities of one, two, or three month durations to certain
Employees who are either not currently participating in Extended ETO, or who are
currently on Extended ETO set to expire in coming months. In accordance with
applicable accounting guidance, the Company recorded a total charge of $1.4
billion in 2020 related to the special termination benefits for Employees who
had accepted the Company's offer to participate in its Voluntary Separation
Program 2020 and the special benefits for Employees who participated in its
Extended ETO program; the accrual is being reduced as program benefits are paid.
This program has allowed the Company to reduce its fixed cost structure in the
near-term, while maintaining the ability to adjust to a recovery in travel
demand. See Note 2 to the Consolidated Financial Statements for further
information. As a result of these voluntary programs, the Company's salaries,
wages, and benefits costs were lowered by approximately $565 million in 2020.
The Company expects an incremental $600 million of annual 2021 cost savings from
these two programs, for a total reduction in salaries, wages, and benefits of
approximately $1.2 billion, compared with annual 2019. In addition, Employees
could take Emergency Time Off ("ETO") for a calendar month, or Time Off Without
Pay ("TOWOP") or Leave Without Pay ("LWOP") in smaller time increments. Between
March 2020 and December 2020, the ETO, TOWOP, and LWOP programs accounted for a
savings of approximately $265 million.

Company Overview


As of December 31, 2020, the Company operated approximately 50 percent of the
daily departures operated as of December 31, 2019, prior to the impacts of the
pandemic. The Company is pursuing additional revenue opportunities that utilize
idle aircraft and Employees to provide Southwest's legendary Customer Service to
new, popular destinations. The Company is leveraging additional airports in or
near cities where its Customer base is large, along with adding easier access to
popular leisure-oriented destinations from across its domestic-focused network.
These additional service points on the Company's map are opportunities it can
provide Customers now, all while better positioning the Company for a travel
demand rebound. The Company launched service to six new destinations in 2020:

•Hilo International Airport - January 19, 2020
•Cozumel International Airport - March 7, 2020
•Miami International Airport and Palm Springs International Airport - November
15, 2020
•Montrose Regional Airport (Telluride and Crested Butte) and Yampa Valley
Regional Airport (Steamboat Springs) - December 19, 2020

The Company has also announced other new destinations and expected service
commencement dates including:
•Chicago O'Hare International Airport and Sarasota Bradenton International
Airport - February 14, 2021
•Colorado Springs Municipal Airport and Savannah/Hilton Head InternationalAirport - March 11, 2021
•Houston's George Bush Intercontinental Airport and Santa Barbara Airport -
April 12, 2021
•Fresno Yosemite International Airport - April 25, 2021
•Jackson-Medgar Wiley Evers International Airport in Mississippi - June 6, 2021

As previously reported, the Company suspended international operations in first
quarter 2020 and has resumed selected service as follows:
•Mexico and the Caribbean via Cancun, San Jose del Cabo/Los Cabos, and Montego
Bay - July 1, 2020
•Puerto Vallarta, Mexico - October 8, 2020
•Punta Cana, Dominican Republic, and Aruba - November 4, 2020
•Havana, Cuba - December 6, 2020

The Company also resumed service to Nassau on July 1, 2020, but in response to
new local restrictions imposed by the Bahamian government, the Company again
suspended operations effective July 22, 2020. The Company is scheduled to resume
service to Cozumel, Mexico in first quarter 2021. Service to the Company's other
international destinations is expected to resume pending the easing of
government restrictions.

The Company achieved its goal of launching global distribution system ("GDS")
access for corporate travelers in 2020, now at industry-standard participation
with Amadeus' GDS platform and Travelport's multiple GDS platforms: Apollo,
Worldspan, and Galileo. Also, in December 2020, the Company reached a
full-participation GDS
                                       56
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agreement with Sabre, planned to launch in the second half of 2021. The Company's enhancement of its GDS channel strategy complements its goal of distributing its everyday low fares to more corporate travelers through their preferred channel.


On November 18, 2020, the Federal Aviation Administration (the "FAA") issued
official requirements to enable airlines to return the Boeing 737 MAX to
service. The Company is currently working to meet the FAA's requirements by
modifying certain operating procedures, implementing enhanced Pilot training
requirements, installing FAA-approved flight control software updates, and
completing other required maintenance tasks specific to the MAX aircraft. The
Company has scheduled the MAX return to revenue service on March 11, 2021, after
the Company is expected to have met all FAA requirements and all active Pilots
are expected to have received updated, MAX-related training.

The Company continues its fleet modernization program and expects to retire a
significant amount of its Boeing 737-700 fleet over the next 10-15 years. The
Company evaluates whether to adhere to or alter its aircraft retirement plans in
light of the COVID-19 pandemic and other factors, including whether to retain
aircraft longer or accelerate retirements and replacements. The Company plans to
use the Boeing 737 MAX 8 aircraft in its fleet modernization program and
believes it will also have use for smaller aircraft such as the Boeing 737 MAX
7.

During December 2020, the Company took delivery of seven new leased Boeing 737
MAX 8 aircraft from third parties. The Company recently reached an agreement
with The Boeing Company (the "Boeing Agreement") to take delivery of the delayed
MAX aircraft and currently expects to receive 35 MAX 8 deliveries through the
end of 2021 consisting of 19 purchased aircraft and 16 leased aircraft
(including the seven leases received in December 2020). Based on current
delivery and retirements plans, the Company currently expects its fleet in 2021
to decrease from its fleet of 747 aircraft as of December 31, 2019. The details
of the Boeing Agreement, which included the settlement of 2020 estimated damages
relating to the grounding of the Company's 737 MAX 8 aircraft, are confidential.
However, as a result of certain delivery credits provided in the Boeing
Agreement, as well as progress payments made to date on undelivered aircraft,
the Company currently estimates an immaterial amount of aircraft capital
expenditures in 2021. See Note 17 to the Consolidated Financial Statements and
"Liquidity and Capital Resources" for further information.

The Company and Boeing are in discussions to change the Company's aircraft order book, and the Company expects to make further adjustments to the delivery schedule. The Company offers no assurances that current estimations and timelines will not be changed.

2020 Compared with 2019

Operating Revenues


Passenger revenues for 2020 decreased by $13.1 billion, or 63.1 percent,
compared with 2019. On a unit basis, Passenger revenues decreased 43.9 percent,
year-over-year. The decreases in Passenger revenues on both a dollar and unit
basis were primarily due to the impact of the COVID-19 pandemic, which resulted
in significant reductions in capacity and a sharp decline in passenger demand
and bookings during 2020.

Freight revenues for 2020 decreased by $11 million, or 6.4 percent, compared
with 2019, primarily due to fewer trips flown, coupled with worldwide supply
chain disruptions which reduced cargo demand. This reduction was partially
offset by an increase in freight only activities, as the Company transported
supplies in response to the COVID-19 pandemic.

Other revenues for 2020 decreased by $258 million, or 17.4 percent, compared
with 2019. The decrease was primarily due to a decrease in income from business
partners, including Chase Bank USA, N.A. ("Chase") and the impact on spend on
the Company's co-brand card, driven by the decline in consumer spending due to
economic uncertainty and widespread restrictions related to the COVID-19
pandemic.

                                       57
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Operating Expenses


Operating expenses for 2020 decreased by $6.6 billion, or 33.9 percent, compared
with 2019, while capacity decreased 34.2 percent over the same period.
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.
However, the Company's Operating expenses are largely fixed once flight
schedules are published, and the Company has experienced significant ASM
reductions as a result of flight schedule adjustments related to the COVID-19
pandemic. Flight schedule adjustments are expected to drive unit cost pressure
for the duration of the COVID-19 pandemic, excluding any impacts associated with
grants received under the CARES Act, the Payroll Support Program Extension, or
other legislation. See "COVID-19 Pandemic" above and Note 2 to the Consolidated
Financial Statements for further information. The following table presents the
Company's Operating expenses per ASM for 2020 and 2019, followed by explanations
of these changes on a per ASM basis and dollar basis:

                                                         Year ended December 31,                    Per ASM                Percent
(in cents, except for percentages)                    2020                    2019                   change                 change
Salaries, wages, and benefits                             6.58  ¢                 5.27  ¢                1.31  ¢                24.9  %
Payroll support and voluntary Employee
programs, net                                            (0.94)                      -                  (0.94)                     n.m.
Fuel and oil                                              1.78                    2.76                  (0.98)                 (35.5)
Maintenance materials and repairs                         0.72                    0.78                  (0.06)                  (7.7)
Landing fees and airport rentals                          1.21                    0.87                   0.34                   39.1
Depreciation and amortization                             1.21                    0.78                   0.43                   55.1
Other operating expenses, net                             1.87                    1.92                  (0.05)                  (2.6)
Total                                                    12.43  ¢                12.38  ¢                0.05  ¢                 0.4  %



Operating expenses per ASM for 2020 increased by 0.4 percent, compared with
2019. The year-over-year unit cost increase in 2020 was primarily driven by
significant capacity reductions as a result of the COVID-19 pandemic. The
increase was partially offset by decreases in market jet fuel prices, coupled
with the funding received through the Payroll Support Program, net of an accrual
made for Employees that elected to participate in Voluntary Separation Program
2020 or Extended ETO programs. See Note 2 to the Consolidated Financial
Statements for further information. Operating expenses per ASM for 2020,
excluding Fuel and oil expense, special items, and profitsharing (a non-GAAP
financial measure), increased 28.1 percent year-over-year, primarily due to the
significant reduction in capacity associated with the COVID-19 pandemic. See
Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of
Reported Amounts to Non-GAAP Financial Measures for additional detail regarding
non-GAAP financial measures.

Salaries, wages, and benefits expense for 2020 decreased by $1.5 billion, or
17.9 percent, compared with 2019. On a per ASM basis, Salaries, wages, and
benefits expense for 2020 increased 24.9 percent, compared with 2019. On a
dollar basis, the decrease was primarily the result of no profitsharing expense
accrual in 2020 due to the Company's net loss, compared with a profitsharing
accrual of $667 million in 2019. On a per ASM basis, however, the dollar
decrease was more than offset by the 34.2 percent decrease in capacity.
Excluding profitsharing in both years, the dollar decrease was driven by lower
salaries, wages, and benefits expense, as a result of Employees electing
Voluntary Separation Program 2020, Extended ETO, and other time off programs
offered by the Company.

On October 5, 2020, the Company announced planned pay reductions for
non-contract Employees and its intention to approach union leaders for
concessions, in further efforts to reduce operating expenses, as there was
uncertainty surrounding an extension of the Payroll Support Program. The Company
conducted negotiations with various unionized Employee groups. WARN notices were
subsequently issued to various groups that were unable to reach agreements on
concessions. These WARN notices and pay reduction intentions were retracted
after the Payroll Support Program Extension was signed into law.
                                       58
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The following table sets forth the Company's unionized Employee groups with
amendable contracts that are currently in negotiations on collective-bargaining
agreements:

                               Approximate Number of
Employee Group                 Employees               Representatives                Amendable Date
                                                       Southwest Airlines Pilots'
Southwest Pilots               8,500                   Association ("SWAPA")          September 2020
                                                       Transportation Workers of
                                                       America, AFL-CIO, Local 556
Southwest Flight Attendants    15,400                  ("TWU 556")          

November 2018


Southwest Customer Service
Agents, Customer                                       International Association of
Representatives, and Source of                         Machinists and 

Aerospace

Support Representatives        6,400                   Workers, AFL-CIO 

("IAM 142") December 2018


Southwest Aircraft Appearance                          Aircraft Mechanics Fraternal
Technicians                    160                     Association ("AMFA")           November 2020
                                                       Transportation Workers of
                                                       America, AFL-CIO, Local 550
Southwest Dispatchers          390                     ("TWU 550")                    June 2019

Southwest Meteorologists       10                      TWU 550                        June 2019



During January 2021, the Company's Flight Crew Training Instructors, represented
by Transportation Workers of America, ratified a tentative collective-bargaining
agreement with the Company. The newly ratified contract becomes amendable in
January 2022.

Payroll support and voluntary Employee programs, net for 2020 was a net decrease
to expense of $967 million, compared with no amounts for 2019. On a per ASM
basis, Payroll support and voluntary Employee programs, net for 2020 was a net
reduction of 0.94 cents. The Company recognized a $2.3 billion allocation of
Payroll Support Program proceeds as a reduction to 2020 expenses as part of the
CARES Act. The Company also recognized a total of $1.4 billion in expense in
2020 associated with the Voluntary Separation Program 2020 and Extended ETO
elections. Given the unusual nature of each of these items, the Company has
chosen to net them within a single line item in the Consolidated Statement of
Income (Loss). See Note 2 to the Consolidated Financial Statements for further
information.

Fuel and oil expense for 2020 decreased by $2.5 billion, or 57.5 percent,
compared with 2019. On a per ASM basis, Fuel and oil expense decreased 35.5
percent, compared with 2019, due to lower market jet fuel prices. On a dollar
basis, the majority of the decrease was attributable to a significant decrease
in fuel gallons consumed, and the remainder of the decrease was due to lower
market jet fuel prices. The following table provides more information on the
Company's economic fuel cost per gallon:
                                                      Year ended December 

31,

(per gallon)                                             2020               

2019

Economic fuel costs per gallon                  $      1.49

$ 2.09


Fuel hedging premium expense per gallon         $      0.08$  0.05
Fuel hedging cash settlement gains per gallon   $         -                

$ (0.02)




See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of
Reported Amounts to Non-GAAP Financial Measures for additional detail regarding
non-GAAP financial measures. The Company continued to operate fewer of its
oldest, least fuel-efficient Boeing 737-700 aircraft as a result of capacity
reductions due to the COVID-19 pandemic, which, combined with lower Load
factors, resulted in a year-over-year improvement of 7.4 percent in fuel
efficiency in 2020. The Company currently estimates first quarter 2021 fuel
efficiency to improve in the range of five to six percent, year-over-year,
primarily driven by a continuation of lower utilization of its 737-700
                                       59
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aircraft and the Company's continued efforts to reduce its fuel consumption through fleet modernization with the anticipated benefits of the reintroduction of the MAX aircraft.

As of January 21, 2021, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:

    Period            Maximum fuel hedged (gallons in millions) (a)(b)
     2021                                  1,283
     2022                                  1,220
     2023                                   643
 Beyond 2023                                101


(a) The Company's hedge position includes prices at which the Company considers
"catastrophic" coverage. The maximum gallons provided are not indicative of the
Company's hedge coverage at every price, but represent the highest level of
coverage at a single price. See Note 11 to the Consolidated Financial Statements
for further information.
(b) The Company holds derivative contracts at various Brent crude oil and West
Texas Intermediate ("WTI") crude oil price levels to provide protection against
energy market price fluctuations. These gallons that are covered by derivative
contracts represent the maximum number of gallons hedged for each respective
period, which may be at different strike prices and at strike prices materially
higher than the current market prices. The volume of gallons covered by
derivative contracts that ultimately get exercised in any given period may vary
significantly from the volumes provided, as market prices and the Company's fuel
consumption fluctuates.

As a result of applying hedge accounting in prior periods, the Company has
amounts in Accumulated other comprehensive income (loss) ("AOCI") that will be
recognized in earnings in future periods when the underlying fuel derivative
contracts settle. The following table displays the Company's estimated fair
value of remaining fuel derivative contracts (not considering the impact of the
cash collateral provided to or received from counterparties - see Note 11 to the
Consolidated Financial Statements for further information), as well as the
amount of deferred losses in AOCI at December 31, 2020, and the expected future
periods in which these items are expected to settle and/or be recognized in
earnings (in millions):

                               Fair value of fuel       Amount of losses deferred
                              derivative contracts       in AOCI at December 31,
           Year               at December 31, 2020          2020 (net of tax)
           2021              $                 13      $                     (54)
           2022                                71                            (25)
           2023                                41                            (13)
           Beyond 2023                          9                              -
           Total             $                134      $                     (92)



Assuming no changes to the Company's current fuel derivative portfolio, but
including all previous hedge activity for fuel derivatives that have not yet
settled, and considering only the expected net cash receipts related to hedges
that will settle, the Company is providing the below sensitivity table for first
quarter 2021 and full year 2021 jet fuel prices at different crude oil
assumptions as of January 21, 2021, and for expected premium costs associated
with settling contracts each period, respectively.

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                                         Estimated economic fuel price per 

gallon, including taxes and fuel

                                                                hedging 

premiums (e)

        Average Brent Crude Oil
            price per barrel                 First Quarter 2021 (c)              Full Year 2021 (d)
                  $40$1.30 - $1.40$1.25 - $1.35$50$1.45 - $1.55$1.50 - $1.60
           Current Market (a)                    $1.60 - $1.70$1.65 - $1.75$60$1.65 - $1.75$1.75 - $1.85$70$1.85 - $1.95$2.05 - $2.15$80$1.90 - $2.00$2.15 - $2.25

Estimated fuel hedging premium expense

             per gallon (b)                          $0.09                              (f)
      Estimated premium costs (b)                 $25 million$100 million



(a) Brent crude oil average market prices as of January 21, 2021, were
approximately $56 and $55 per barrel for first quarter 2021 and full year 2021,
respectively.
(b) Fuel hedging premium expense per gallon is included in the Company's
estimated economic fuel price per gallon estimates above.
(c) Based on the Company's existing fuel derivative contracts and market prices
as of January 21, 2021, first quarter 2021 economic fuel costs are estimated to
be in the $1.60 to $1.70 per gallon range, including fuel hedging premium
expense of approximately $25 million, or $.09 per gallon, and no cash
settlements from fuel derivative contracts, on a per gallon basis. See Note
Regarding Use of Non-GAAP Financial Measures.
(d) Based on the Company's existing fuel derivative contracts and market prices
as of January 21, 2021, annual 2021 economic fuel costs are estimated to be in
the $1.65 to $1.75 per gallon range, including fuel hedging premium expense of
approximately $100 million and no cash settlements from fuel derivative
contracts, on a per gallon basis. See Note Regarding Use of Non-GAAP Financial
Measures.
(e) The Company's current fuel derivative contracts contain a combination of
instruments based in WTI and Brent crude oil; however, the economic fuel price
per gallon sensitivities provided, assume the relationship between Brent crude
oil and refined products based on market prices as of January 21, 2021. Economic
fuel cost projections do not reflect the potential impact of special items
because the Company cannot reliably predict or estimate the hedge accounting
impact associated with the volatility of the energy markets, the impact of
COVID-19 cases on air travel demand, or the impact to its financial statements
in future periods. Accordingly, the Company believes a reconciliation of
non-GAAP financial measures to the equivalent GAAP financial measures for
projected results is not meaningful or available without unreasonable effort.
See Note Regarding Use of Non-GAAP Financial Measures.
(f) Due to continued uncertainty regarding available seat mile plans for 2021,
the Company cannot reasonably provide an estimate for its full year 2021 full
hedging premium expense per gallon.

Maintenance materials and repairs expense for 2020 decreased by $473 million, or
38.7 percent, compared with 2019. On a per ASM basis, Maintenance materials and
repairs expense decreased 7.7 percent, compared with 2019, as the dollar
decrease was largely offset by the 34.2 percent decrease in capacity in response
to the COVID-19 pandemic. On a dollar basis, approximately 50 percent of the
decrease was due to lower engine maintenance expense due to the reduction in
flight hours, approximately 25 percent of the decrease was due to the timing of
regular airframe maintenance checks, and the majority of the remainder of the
decrease was due to reduced operations and placing a portion of the fleet in
storage.

Landing fees and airport rentals expense for 2020 decreased by $123 million, or
9.0 percent, compared with 2019. On a per ASM basis, Landing fees and airport
rentals expense increased 39.1 percent, compared with 2019, as the dollar
decrease was more than offset by the 34.2 percent decrease in capacity in
response to the COVID-19 pandemic. On a dollar basis, the majority of the
decrease was due to lower landing fees as a result of the reduced number of
Trips flown in 2020 as a result of the COVID-19 pandemic.

Depreciation and amortization expense for 2020 increased by $36 million, or 3.0
percent, compared with 2019. On a per ASM basis, Depreciation and amortization
expense increased 55.1 percent, compared with 2019, primarily as a result of the
34.2 percent decrease in capacity in response to the COVID-19 pandemic. On a
dollar basis, the increase was primarily associated with the deployment of new
technology assets.
                                       61
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Other operating expenses, net for 2020 decreased by $1.1 billion, or 36.4
percent, compared with 2019. On a per ASM basis, Other operating expenses, net
decreased 2.6 percent, compared with 2019. On both a dollar and per ASM basis, a
significant portion of the decreases were due to $222 million gains from the
sale-leaseback of ten 737-800 and ten 737 MAX 8 aircraft to third parties in two
separate transactions in second quarter 2020, which reduced Other operating
expenses for second quarter 2020. The gains were partially offset by $32 million
in impairment charges associated with 20 of the Company's Boeing 737-700
aircraft that were retired in fourth quarter 2020. The gains from the
sale-leaseback transactions and impairment charges were considered special items
and thus excluded from the Company's non-GAAP results. 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. See Note 8 to the Company's Consolidated Financial Statements for
further information. Excluding these special items, on a per ASM basis, Other
operating expenses increased as the dollar decrease was more than offset by the
34.2 percent decrease in capacity in response to the COVID-19 pandemic. On a
dollar basis, excluding the impact of the special items, approximately 40
percent of the decrease was due to lower credit card fees driven by a severe
reduction in revenues associated with the COVID-19 pandemic, and the majority of
the remainder of the decrease was from various savings as a result of supporting
a reduced operation and efforts to reduce discretionary spend.

Other

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


Interest expense for 2020 increased by $231 million, or 195.8 percent, compared
with 2019, primarily due to higher debt balances in 2020, and a $9 million
write-off of remaining unamortized costs from the Company's 364-day term loan
entered into in first quarter 2020 and repaid in full during second quarter
2020. For further information on the Company's debt transactions in 2020, see
Note 7 to the Consolidated Financial Statements. Based on current debt
outstanding and current market interest rates, the Company expects first quarter
2021 interest expense to be approximately $113 million.

Capitalized interest for 2020 decreased by $1 million, or 2.8 percent, compared with 2019, primarily due to Boeing's halt of production of the Company's undelivered MAX aircraft. The decrease was partially offset by capitalized interest on technology projects.

Interest income for 2020 decreased by $58 million, or 64.4 percent, compared with 2019, due to lower interest rates, partially offset by higher cash balances.


Other (gains) losses, net, primarily includes amounts recorded as a result of
the Company's hedging activities. See Note 11 to the Consolidated Financial
Statements for further information on the Company's hedging activities. The
following table displays the components of Other (gains) losses, net, for 2020
and 2019:


                                                                       Year ended December 31,
(in millions)                                                        2020                    2019

Mark-to-market impact from fuel contracts settling in current and future periods

                                            $            40          $           -
Premium cost of fuel contracts not designated as hedges                    34                      -
Mark-to-market impact from interest rate swap agreements                   28                      -
Post-retirement curtailment charge                                         53                      -
Other                                                                       3                      8
                                                              $           158          $           8



Income Taxes

                                       62
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The Company's annual 2020 effective tax rate was 27.8 percent, higher than the
federal statutory tax rate primarily due to the Company's annual net operating
loss ("NOL") which, under the CARES Act, can be applied to prior tax years
beginning with 2015, when the Company was subject to a higher federal statutory
tax rate. The Company's estimated tax refund from its annual 2020 NOL carryback
is approximately $470 million. The Company estimates its first quarter 2021
effective tax rate to be in the range of 21 to 22 percent, lower than the annual
2020 tax rate, as the NOL carryback provisions available under the CARES Act are
not applicable to years beyond 2020.

2019 Compared with 2018

The Company's comparison of 2019 results to 2018 results is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

                                       63
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Reconciliation of Reported Amounts to Non-GAAP Financial Measures (excluding
special items) (unaudited) (in millions, except per share amounts and per ASM
amounts)
                                                                      Year ended December 31,                 Percent
                                                                      2020                 2019               Change
Fuel and oil expense, unhedged                                  $       1,810$   4,299
Add: Premium cost of fuel contracts designated as hedges                   64                 95
Deduct: Fuel hedge gains included in Fuel and oil expense, net            (25)               (47)
Fuel and oil expense, as reported                               $       

1,849 $ 4,347 Add: Contracts settling in the current period, but for which losses were reclassified from AOCI (a)

                                     25                  -
Add: Premium cost of fuel contracts not designated as hedges               34                  -

Fuel and oil expense, excluding special items (economic) $ 1,908$ 4,347

                 (56.1) %

Total operating expenses, as reported                           $      12,864$  19,471
Add: Payroll support and voluntary Employee programs, net                 967                  -

Add: Contracts settling in the current period, but for which losses were reclassified from AOCI (a)

                                     25                  -
Add: Premium cost of fuel contracts not designated as hedges               34                  -
Add: Gain from aircraft sale-leaseback transactions                       222                  -
Deduct: Impairment of long-lived assets                                   (32)                 -
Total operating expenses, excluding special items               $      14,080$  19,471                 (27.7) %

Operating income (loss), as reported                            $      (3,816)$   2,957
Deduct: Payroll support and voluntary Employee programs, net             (967)                 -

Deduct: Contracts settling in the current period, but for which losses were reclassified from AOCI (a)

                                    (25)                 -

Deduct: Premium cost of fuel contracts not designated as hedges (34)

                 -
Deduct: Gain from aircraft sale-leaseback transactions                   (222)                 -
Add: Impairment of long-lived assets                                       32                  -
Operating income (loss), excluding special items                $      (5,032)$   2,957                     n.m.

Other (gains) losses, net, as reported                          $         

158 $ 8 Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (a)

                                            (40)                 -

Deduct: Premium cost of fuel contracts not designated as hedges (34)

                 -

Deduct: Mark-to-market impact from interest rate swap agreements

                                                                (28)                 -
Deduct: Post-retirement curtailment charge                                (53)                 -
Other (gains) losses, net, excluding special items              $           3          $       8                 (62.5) %

Income (loss) before income taxes, as reported                  $      (4,256)$   2,957
Deduct: Payroll support and voluntary Employee programs, net             (967)                 -

Deduct: Contracts settling in the current period, but for which losses were reclassified from AOCI (a)

                                    (25)                 -
Deduct: Gain from aircraft sale-leaseback transactions                   (222)                 -
Add: Impairment of long-lived assets                                       32                  -

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

                                             40                  -
Add: Mark-to-market impact from interest rate swap agreements              28                  -
Add: Post-retirement curtailment charge                                    53                  -

Income (loss) before income taxes, excluding special items $ (5,317)$ 2,957

                     n.m.



                                       64
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Provision (benefit) for income taxes, as reported $ (1,182)

$ 657 Deduct: Net income (loss) tax impact of fuel and special items, excluding GAAP to Non-GAAP tax rate difference (b) (376)

-

Deduct: GAAP to Non-GAAP tax rate difference (c)               (247)        

-

Provision (benefit) for income taxes, net, excluding special items

                                             $  (1,805)$     657                    n.m.

Net income (loss), as reported                            $  (3,074)

$ 2,300 Deduct: Payroll support and voluntary Employee programs, net

                                                            (967)        

-

Deduct: Contracts settling in the current period, but for which losses were reclassified from AOCI (a)

                    (25)        

-

Deduct: Gain from aircraft sale-leaseback transactions (222)

-

Add: Impairment of long-lived assets                             32         

-

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

                                40         

-

Add: Mark-to-market impact from interest rate swap agreements

                                                       28         

-

Add: Post-retirement curtailment charge                          53         

-

Add: Net income (loss) tax impact of special items, excluding GAAP to Non-GAAP tax rate difference (b)

              376         

-

Add: GAAP to Non-GAAP tax rate difference (c)                   247         

-

Net income (loss), excluding special items                $  (3,512)$   2,300                    n.m.

Net income (loss) per share, diluted, as reported $ (5.44)

  $    4.27
Deduct: Impact of special items                               (1.83)        

-

Deduct: Net impact of net income (loss) above from fuel contracts divided by dilutive shares

                          (0.04)        

-

Add: Net income (loss) tax impact of special items, excluding GAAP to Non-GAAP tax rate difference (b)

             0.66         

-

Add: GAAP to Non-GAAP tax rate difference (c)                  0.43         

-

Net income (loss) per share, diluted, excluding special items

                                                     $   (6.22)$    4.27                    n.m.

Operating expenses per ASM (cents)                            12.43  ¢           12.38  ¢
Add: Impact of special items                                   1.18         

-

Deduct: Fuel and oil expense divided by ASMs                  (1.84)        

(2.76)

Deduct: Profitsharing expense divided by ASMs                     -         

(0.43)

Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)

             11.77  ¢            9.19  ¢              28.1  %


(a) See Note 11 to Consolidated Financial Statements for further information.
(b) Tax amounts for each individual special item are calculated at the Company's
effective rate for the applicable period and totaled in this line item. The
Non-GAAP tax rate considers the appropriate tax treatment for special items and
also reflects the anticipated benefit of carrying back full year 2020 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. The
impact to Net income (loss) may not be equivalent to the special item multiplied
by the effective tax rate, in all cases.
(c) Adjustment related to GAAP and Non-GAAP tax rate differences, primarily due
to the Payroll Support Program being excluded as a special item.

                                       65
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Note Regarding Use of Non-GAAP Financial Measures


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

As a result, the Company also provides financial information in this filing that
was not prepared in accordance with GAAP and should not be considered as an
alternative to the information prepared in accordance with GAAP. The Company
provides supplemental non-GAAP financial information (also referred to as
"excluding special items"), including results that it refers to as "economic,"
which the Company's management utilizes to evaluate its ongoing financial
performance and the Company believes provides additional insight to investors as
supplemental information to its GAAP results. The non-GAAP measures provided
that relate to the Company's performance on an economic fuel cost basis include
Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating
income (loss), non-GAAP; Other (gains) losses, net, non-GAAP; Income (loss)
before income taxes, non-GAAP; Provision (benefit) for income taxes, net,
non-GAAP; Net income (loss), non-GAAP; Net income (loss) per share, diluted,
non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil
expense and profitsharing (cents). The Company's economic Fuel and oil expense
results differ from GAAP results in that they only include the actual cash
settlements from fuel hedge contracts - all reflected within Fuel and oil
expense in the period of settlement. Thus, Fuel and oil expense on an economic
basis has historically been utilized by the Company, as well as some of the
other airlines that utilize fuel hedging, as it reflects the Company's actual
net cash outlays for fuel during the applicable period, inclusive of settled
fuel derivative contracts. Any net premium costs paid related to option
contracts that are designated as hedges are reflected as a component of Fuel and
oil expense, for both GAAP and non-GAAP (including economic) purposes in the
period of contract settlement. The Company believes these economic results
provide further insight into the impact of the Company's fuel hedges on its
operating performance and liquidity since they exclude 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 Note 11 to the Consolidated Financial Statements.


The Company's GAAP results in the applicable periods may include other charges
or benefits that are also deemed "special items," that the Company believes make
its results difficult to compare to prior periods, anticipated future periods,
or industry trends. Financial measures identified as non-GAAP (or as excluding
special items) have been adjusted to exclude special items. For the periods
presented, in addition to the items discussed above, special items include:
1.Proceeds related to the Payroll Support Program under the CARES Act, which
were used to pay Employee salaries, wages, and benefits;
2.Accrued charges related to the special termination benefits upon Employees
accepting Voluntary Separation Program 2020 or Extended ETO as of December 31,
2020;
3.Gains associated with the sale-leaseback of ten Boeing 737-800 aircraft and
ten Boeing 737 MAX 8 aircraft to third parties;
4.A noncash impairment charge related to 20 Boeing 737-700 aircraft that were
retired during 2020;
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5.Unrealized losses related to twelve forward-starting interest rate swap
agreements. During 2020, the interest rate swap agreements, which were related
to twelve 737 MAX 8 aircraft leases (with deliveries originally scheduled
between June 2020 and September 2020), were de-designated as hedges due to the
scheduled delivery range no longer being probable, resulting in the
mark-to-market changes being recorded to earnings; and
6.A post-retirement curtailment charge related to Employees who accepted
Voluntary Separation Program 2020 and elected to participate in the Company's
retiree medical benefits plan.

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

The Company has also utilized and provided average cash burn and average daily
core cash burn, which are non-GAAP financial measures. Cash burn is a
supplemental measure that most U.S. airlines began providing in 2020 to measure
liquidity in light of the negative financial effects of the pandemic. For the
three months ended December 31, 2020, average daily core cash burn was
approximately $12 million, calculated as Loss before income taxes, non-GAAP, of
$1.3 billion (as provided in the Non-GAAP reconciliation below), adjusted for
Depreciation and amortization expense of $316 million; Capital expenditures of
$90 million; and adjusted amortizing debt service payments of approximately
$43 million; divided by the number of days in the period. The Company utilizes
average daily core cash burn to monitor the performance of its core business as
a proxy for its ability to achieve sustainable cash and profit break-even
results. The following table provides the components of Loss before income
taxes, non-GAAP for the three months ended December 31, 2020:

                                                                            Three months ended
(in millions)                                                               December 31, 2020
Loss before income taxes, as reported                                     $            (1,331)
Deduct: Payroll support and voluntary Employee programs, net                              (34)

Deduct: Contracts settling in the current period, but for which losses were reclassified from AOCI (a)

                                                            (9)
Add: Impairment of long-lived assets                                                       32
Add: Post-retirement curtailment charge                                                    53
Loss before income taxes, excluding special items                         $            (1,289)


(a) See Note 11 to Consolidated Financial Statements for further information.


Given that the Company's cash burn calculation is derived from Loss before
income taxes, non-GAAP, the Company excludes the following items in its
calculation of average core cash burn: financing transactions; Payroll Support
Program proceeds; Supplier proceeds; voluntary separation and extended emergency
time off program payments; and other changes in working capital. Cash burn
methodology varies by airline, and the Company's fourth quarter 2020 average
daily core cash burn of $12 million may differ materially by utilizing cash burn
calculations that adjust for changes in working capital. Utilizing an
alternative cash burn approach, which adjusts for changes in working capital,
among other items, the Company's fourth quarter 2020 daily cash burn was
approximately $15 million.

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Liquidity and Capital Resources


The enormous impact of the COVID-19 pandemic on the U.S. travel industry created
an urgent liquidity crisis for the entire airline industry, including the
Company. However, due to the Company's pre-pandemic low balance sheet leverage,
large base of unencumbered assets, and investment-grade credit ratings, the
Company was able to quickly access additional liquidity during 2020, as Customer
cancellations spiked and sales and revenues dropped while the Company continued
to experience significant fixed operating expenses. See Note 2 and Note 7 to the
Consolidated Financial Statements for further information regarding the impact
of the COVID-19 pandemic, as well as the transactions completed and assistance
obtained under the CARES Act. Much uncertainty remains about the time it will
take for air travel demand to recover, and the Company continues to assess its
immediate and near-term liquidity needs. The Company also continues to assess
various sources and options including public and private financings to bolster
its liquidity and believes that, given current market conditions, it has
opportunities to do so.

Net cash used in operating activities for 2020 was $1.1 billion, and net cash
provided by operating activities for 2019 was $4.0 billion. Operating cash
inflows are primarily derived from providing air transportation to Customers.
The vast majority of tickets are purchased prior to the day on which travel is
provided and, in some cases, several months before the anticipated travel date.
Operating cash outflows are related to the recurring expenses of airline
operations. The operating cash flows for 2020 were affected primarily by the
COVID-19 pandemic, which resulted in a significant drop in travel demand, sales,
and revenues, leading to the Company's Net loss (as adjusted for noncash items),
the Company's funding of its $667 million 2019 profitsharing distribution to
Employees in 2020, a significant decline in amounts payable for passenger excise
taxes and segment fees as a result of the decline in passenger ticket sales, and
the suspension of collection of certain ticket taxes as dictated by the CARES
Act. These were partially offset by $2.4 billion in Payroll Support Program
grant proceeds received as part of the CARES Act, of which approximately $2.3
billion of this direct payroll support were used to offset eligible costs and
thus included in operating activities, with the remaining $40 million allocated
to the value of warrants issued and thus included in financing activities. These
net decreases in operating activities were partially offset by a $1.6 billion
increase in Air traffic liability. The increase in Air traffic liability was due
to ticket sales in 2020 for future travel that have not been flown, as a result
of the significant number of Customer trip cancellations associated with the
COVID-19 pandemic, and growth in Rapid Rewards points earned due to multiple
loyalty credit card promotions throughout 2020. The operating cash flows for
2019 were impacted primarily by the Company's results of operations, as adjusted
for non-cash items as well as changes in the Air traffic liability and Accrued
liabilities balances. Cash flows associated with entering into new fuel
derivatives, which are classified as Other, net, operating cash flows, were net
outflows of $129 million in 2020 and $131 million in 2019. See Note 11 to the
Consolidated Financial Statements for further information. Net cash provided by
operating activities is primarily used to finance capital expenditures, repay
debt, and provide working capital. Historically, the Company has also used net
cash provided by operations to fund stock repurchases and pay dividends; however
these shareholder return activities have been suspended due to restrictions
associated with the CARES Act and the Payroll Support Program Extension. See
Note 2 to the Consolidated Financial Statements for further information.

Net cash used in investing activities for 2020 and 2019 was $16 million and $303
million, respectively. Investing activities in both years included Capital
expenditures, and changes in the balance of the Company's short-term and
noncurrent investments. The Company also raised $815 million from the
sale-leaseback of 20 aircraft (see Note 8 to the Consolidated Financial
Statements for more details on the sale-leaseback transactions) and received
$428 million of Supplier proceeds during 2020, which the Company considers an
offset to its aircraft capital expenditures. See Note 17 to the Consolidated
Financial Statements for further information on Supplier proceeds. During 2020,
Capital expenditures were $515 million, compared with $1.0 billion in the same
prior year period, the majority of which included ongoing technology projects,
airport and other facility construction projects, and progress payments related
to future aircraft deliveries from the manufacturer. Capital expenditures
decreased, year-over-year, largely due to a decrease in technology project
expenditures, progress payments, and several projects in process during 2019 but
completed and placed into service during 2020. The Company more than offset its
originally planned annual 2020 capital spending of approximately $1.4 billion to
$1.5 billion, primarily due to no purchased aircraft deliveries from Boeing,
combined with its receipt of proceeds from sale-leaseback transactions, Supplier
proceeds, and the cancellation or deferral of the majority of its capital
investment projects originally
                                       68
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planned for 2020. See Notes 5 and 17 to the Condensed Consolidated Financial
Statements for further information. As a result of certain delivery credits
provided in the Boeing Agreement, as well as progress payments made to date on
undelivered aircraft, the Company currently estimates an immaterial amount of
aircraft capital expenditures in 2021. Therefore, the Company currently
estimates its annual 2021 capital expenditures to be no more than $500 million,
driven primarily by technology, facilities, and operational investments. The
Company has reduced its combined 2020 and 2021 capital spending by approximately
$5.5 billion, compared with planning projections prior to the pandemic. The
Company continues its fleet modernization program and expects to retire a
significant amount of its Boeing 737-700 fleet over the next 10-15 years. The
Company evaluates whether to adhere to or alter its aircraft retirement plans in
light of the COVID-19 pandemic and other factors, including whether to retain
aircraft longer or accelerate retirements and replacements. The Company plans to
use the Boeing 737 MAX 8 aircraft in its fleet modernization program and
believes it will also have use for a smaller aircraft such as the Boeing 737 MAX
7. In light of the current environment, the Company expects to take delivery of
35 MAX 8 aircraft through December 31, 2021, including 16 leased aircraft, 7 of
which were delivered in December 2020. The Company and Boeing are in discussions
to change the Company's aircraft order book and to formally revise the existing
purchase agreement for years after 2021. As a result, the Company expects to
make further adjustments to its aircraft purchase quantities, aircraft variants,
delivery schedule and related capital expenditures, although no assurance can be
given about the outcome of discussions. The Company cannot predict when the
effects of the COVID-19 pandemic on air travel will end, but the Company expects
that its capital expenditures will increase from current levels after U.S. air
travel returns to normal.

Net cash provided by financing activities for 2020 was $9.7 billion, and net
cash used in financing activities for 2019 was $3.0 billion. During 2020, the
Company borrowed $13.6 billion, through various transactions, as explained in
detail in Notes 2 and 7 to the Consolidated Financial Statements. An additional
$2.3 billion was raised from a public offering of 80,500,000 shares of common
stock. These financings were partially offset by the repayment in 2020 of all
$3.7 billion borrowed under the Company's Amended and Restated 364-Day Credit
Agreement, the full repayment of the $1.0 billion drawn under the Company's $1.0
billion revolving credit facility, and the full repayment of the $500 million
2.65% Notes due 2020. See Note 7 to Consolidated Financial Statements for
further information on the Company's debt agreements. During 2019, the Company
repurchased $2.0 billion of its outstanding common stock, repaid $615 million in
debt and finance lease obligations, and paid $372 million in cash dividends to
Shareholders.

A discussion of the Company's most significant drivers impacting cash flow for
2018 are included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2019, under Part II Item 7, Liquidity and Capital
Resources.

Since March 2020, the Company reduced annual 2020 spending by approximately $8
billion, compared with original plans. Average daily core cash burn was
approximately $12 million in fourth quarter 2020. The Company expects average
core cash burn of approximately $17 million per day in the first quarter of
2021, as a result of continued softness in demand and a seasonally weaker travel
period in January and February 2021, as well as rising fuel prices. Including
certain changes in working capital, the Company expects average core cash burn
in first quarter 2021 to be in the range of $10 million to $15 million per day,
compared with approximately $15 million per day in fourth quarter 2020. While
vaccine availability should mark the beginning of the end of the pandemic,
current passenger booking trends do not indicate significant improvement through
March 2021. In response to current trends, the Company's capacity plans remain
conservative through, at least, March 2021, and the Company will continue to
monitor bookings and adjust flight activity, accordingly. While the Company
hopes to achieve cash burn break even in 2021, it is wholly dependent upon a
substantial rebound in passenger traffic and revenue; and, it is difficult to
predict the timing of such a rebound, especially with respect to business
travel. In order to achieve cash burn break even, the Company continues to
estimate operating revenues will need to recover to a range of 60 to 70 percent
of 2019 levels, which is roughly double current levels. Average core cash burn
projections do not reflect the potential impact of special items because the
Company cannot reliably predict or estimate those items or expenses or their
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
                                       69
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Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures including the cash burn formula.


Cash burn methodology varies by airline, and the Company's average daily core
cash burn may differ materially by utilizing cash burn calculations that adjust
for changes in working capital. The Company's average daily core cash burn was
approximately $14 million in December 2020 and approximately $12 million in
fourth quarter 2020. Utilizing an alternative cash burn approach, which adjusts
for changes in working capital-including changes in Air traffic liability and
cash payments for voluntary separation and Extended ETO programs, among other
items - the Company's average daily core cash burn was approximately $18 million
in December 2020 and approximately $15 million in fourth quarter 2020.

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 Agreement, as amended (the "Amended A&R Credit Agreement"). The Amended
A&R Credit Agreement has an accordion feature that would allow the Company,
subject to, among other things, the procurement of incremental commitments, to
increase the size of the facility to $1.5 billion. Interest on the facility is
based on the Company's credit ratings at the time of borrowing. At the
Company's current ratings, the interest cost would be LIBOR plus a spread of
200.0 basis points. The facility contains a financial covenant to maintain total
liquidity, as defined in the Amended A&R Credit Agreement, of $1.5 billion at
all times under the Amended A&R Credit Agreement; the Company was compliant with
this requirement as of December 31, 2020. There were no amounts outstanding
under the Amended A&R Credit Agreement as of December 31, 2020.

The Company entered into the following share repurchases during 2020, which were
each recorded as a treasury share purchase for purposes of calculating earnings
per share. See Part II, Item 5 for further information on the Company's share
repurchase authorizations.
Share repurchases (in millions)                                 Shares received                Cash paid
First Quarter 2020 Accelerated Share Repurchase
Program                                                               6.4                  $           366

Open Market Share Repurchases                                         1.9                               85
Total                                                                 8.3                  $           451



On March 17, 2020, Moody's downgraded the Company's credit ratings to "Baa1"
from "A3." On March 18, 2020, Standard & Poor's downgraded the Company's credit
ratings to "BBB" from "BBB+." On April 10, 2020, Fitch downgraded the Company's
credit ratings to "BBB+" from "A-." The downgrades of the Company's
investment-grade ratings were based on the Company's increased level of credit
risk as a result of the financial impacts of the COVID-19 pandemic. See Note 2
to the Consolidated Financial Statements for further information on the impacts
of the COVID-19 pandemic.

Although not the case at December 31, 2020 due to the Company's recent
significant financing activities, the Company has historically carried a working
capital deficit, in which its current liabilities exceed its current assets.
This is common within the airline industry and is primarily due to the nature of
the Air traffic liability account, which is related to advance ticket sales,
unused funds available to Customers, and loyalty deferred revenue, which are
performance obligations for future Customer flights, do not require future
settlement in cash, and are mostly nonrefundable. See Note 6 to the Consolidated
Financial Statements for further information. The Company has various options
available to meet its capital and operating commitments, including unrestricted
cash and short-term investments of $13.3 billion as of December 31, 2020, and
anticipated future internally generated funds from operations. However, the
COVID-19 pandemic continues to evolve and could have a material adverse impact
on the Company's ability to meet its capital and operating commitments. See Note
2 to the Consolidated Financial
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Statements for further information on the impacts of the COVID-19 pandemic. The Company will continue to consider various financing options to maximize liquidity and supplement cash requirements, as necessary.


The Company has a large net deferred tax liability on its Consolidated Balance
Sheet. The deferral of income taxes has resulted in a significant benefit to the
Company and its liquidity position. Since the Company purchases the majority of
the aircraft it acquires, it has been able to utilize accelerated depreciation
methods (including bonus depreciation) available under the Internal Revenue Code
of 1986, as amended, in 2020 and in previous years, which has enabled the
Company to accelerate cash tax benefits of depreciation. Based on the Company's
scheduled future aircraft deliveries from Boeing and existing tax laws in
effect, the Company will continue to accelerate the cash income tax benefits
related to aircraft purchases. However, due to the Company's net taxable loss
incurred in 2020, and a provision within the CARES Act that allows entities to
carry back such 2020 losses to prior periods of up to five years, and claim
refunds of federal taxes paid, the Company expects to receive a significant cash
tax refund once it completes all the necessary requirements to make the
appropriate filings with the Internal Revenue Service. See Note 15 to the
Consolidated Financial Statements for further information. The Company has paid
in the past, and will continue to pay in the future, significant cash taxes to
the various taxing jurisdictions where it operates. The Company expects to be
able to continue to meet such obligations utilizing cash and investments on
hand, as well as cash generated from its ongoing operations.
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Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments


The Company has contractual obligations and commitments primarily with regard to
future purchases of aircraft, payment of debt, and lease arrangements. For
aircraft commitments with Boeing, the Company is required to make cash deposits
toward the purchase of aircraft in advance. These deposits are classified as
Deposits on flight equipment purchase contracts in the Consolidated Balance
Sheet until the aircraft is delivered, at which time deposits previously made
are deducted from the final purchase price of the aircraft and are reclassified
as Flight equipment. See Part I, Item 2 for a complete table of the Company's
contractual firm deliveries and options for Boeing 737 MAX 7 and 737 MAX 8
aircraft, Note 5 to the Consolidated Financial Statements for the financial
commitments related to these firm deliveries, and Note 17 to the Consolidated
Financial Statements for further information about the MAX groundings and
expected return to service.

The leasing of aircraft (including the sale and leaseback of aircraft) provides
flexibility to the Company as a source of financing. Although the Company is
responsible for all maintenance, insurance, and expense associated with
operating leased aircraft, and retains the risk of loss for these aircraft, it
has generally not made guarantees to the lessors regarding the residual value
(or market value) of the aircraft at the end of the lease terms. Assets and
obligations under operating leases are included in the Company's Consolidated
Balance Sheet. See Note 3 and Note 8 to the Consolidated Financial Statements
for further information. Disclosure of the expected contractual obligations
associated with the Company's leased aircraft is included below.

As of December 31, 2020, the Company had 184 leased aircraft, including 47
Boeing 717-200 aircraft ("B717s") subleased to Delta. Of these leased aircraft,
112 are under operating leases, including 45 B717s subleased to Delta. See Note
8 to the Consolidated Financial Statements for further information on this
transaction.

The Company is required to provide standby letters of credit to support certain
obligations that arise in the ordinary course of business and may choose to
provide letters of credit in place of posting cash collateral related to its
fuel hedging positions. Although the letters of credit are off-balance sheet,
the majority of the obligations to which they relate are reflected as
liabilities in the Consolidated Balance Sheet. Outstanding letters of credit
totaled $138 million at December 31, 2020.

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The following table aggregates the Company's material expected contractual obligations and commitments as of December 31, 2020:


                                                                       Obligations by period (in millions)
Contractual obligations                      2021             2022 - 2023           2024 - 2025           Thereafter            Total
Long-term debt (a)                        $    136$      1,763

$ 3,987$ 4,291$ 10,177 Interest commitments - fixed (b)

               340                   625                   469                  298             1,732
Interest commitments - floating (c)              8                    11                     8                    3                30

Facility and other operating lease              91                   122                    83                  557               853
commitments
Aircraft operating lease
commitments (d)                                280                   350                   266                  599             1,495
Aircraft finance lease commitments
(e)                                            102                   192                   164                  156               614
Aircraft purchase commitments (f)            3,727                 2,778                 3,416                    -             9,921
Other commitments                              150                   252                   183                  293               878
Total contractual obligations             $  4,834$      6,093

$ 8,576$ 6,197$ 25,700




(a)Includes principal only. See Note 7 to the Consolidated Financial Statements
for additional information.
(b)Related to fixed-rate debt (either at issuance or through swaps) only.
(c)Interest obligations associated with floating-rate debt is estimated
utilizing forward interest rate curves as of December 31, 2020, and can be
subject to significant fluctuation.
(d)Includes the impact of the B717 sublease transaction entered into in 2012.
See Note 8 to the Consolidated Financial Statements for additional information.
(e)Includes principal and interest on finance leases. See Note 8 to the
Consolidated Financial Statements for additional information.
(f)This reflects firm orders for purchased MAX aircraft from Boeing; assuming a
shift of the 27 MAX aircraft and 35 MAX aircraft contractually scheduled for
delivery in 2019 and 2020, respectively, into 2021, due to the MAX grounding
from March 13, 2019 until late 2020 which consisted of $743 million from 2019
and $1.3 billion from 2020. See Note 5 to the Consolidated Financial Statements
for further information. See Part I, Item 2 for a complete table of the
Company's contractual firm deliveries.

Airport Projects


The Company periodically enters into commitments associated with various airport
improvement projects that could impact its future liquidity needs in differing
ways. These projects, which are typical within the airline industry, include the
construction of new facilities and the rebuilding or modernization of existing
facilities and are discussed in more detail in Note 5 to the Consolidated
Financial Statements.

  Dallas Love Field
For the rebuilding of the facilities at Dallas Love Field, the Company
guaranteed principal, premium, and interest on $456 million in bonds issued by
the Love Field Airport Modernization Corporation ("LFAMC") that were utilized to
fund the majority of the project. The amount of bonds outstanding as of
December 31, 2020, was $399 million. Repayment of the bonds is through the
"Facilities Payments" described below. Reimbursement of the Company for its
payment of Facilities Payments is made through recurring ground rents, fees, and
other revenues collected at the airport.
Prior to the issuance of the bonds by the LFAMC, the Company entered into two
separate funding agreements: (i) a "Facilities Agreement" pursuant to which the
Company is obligated to make debt service payments on the principal and interest
amounts associated with the bonds ("Facilities Payments"), less other sources of
funds the City of Dallas may apply to the repayment of the bonds (including, but
not limited to, passenger facility charges collected from passengers originating
from the airport); and (ii) a "Revenue Credit Agreement" pursuant to which the
City of Dallas reimburses the Company for the Facilities Payments made by the
Company.
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A majority of the monies transferred from the City of Dallas to the Company
under the Revenue Credit Agreement originate from a reimbursement account
created in the "Use and Lease Agreement" between the City of Dallas and the
Company. The Use and Lease Agreement is a 20-year agreement providing for, among
other things, the Company's lease of space at the Airport from the City of
Dallas. The remainder of such monies transferred from the City of Dallas to the
Company under the Revenue Credit Agreement originates from (i) use and lease
agreements with other airlines, (ii) various concession agreements, and
(iii) other airport miscellaneous revenues.
The Company's liquidity could be impacted by this project to the extent there
are timing differences between the Company's payment of the Facilities Payments
pursuant to the Facilities Agreement and the transfer of monies back to the
Company pursuant to the Revenue Credit Agreement; however, the Company does not
currently expect that to occur. The project has not had a significant impact on
the Company's capital resources or financial position.
  Los Angeles International Airport
In October 2017, the Company executed a lease agreement (the "T1.5 Lease") with
Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles
International Airport ("LAX"). Under the T1.5 Lease, the Company oversaw and
managed 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 includes ticketing, baggage claim, passenger
screening, and a bus gate at a cost not to exceed $464 million for site
improvements and non-proprietary improvements.
Funding for the Terminal 1.5 Project is primarily through the Regional Airports
Improvement Corporation (the "RAIC"), which is a quasi-governmental special
purpose entity that acts 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 December 31, 2020, the Company's outstanding guaranteed obligation under the
credit facility for the Terminal 1.5 Project was $318 million.
The Company's liquidity could be impacted by this project under certain
circumstances; however, the Company does not expect this to occur based on its
past experience with other projects. This project is not expected to have a
significant impact on the Company's capital resources or financial position.
Construction on the Terminal 1.5 Project began during third quarter 2017 and was
substantially completed as of December 31, 2020; however, the Terminal 1.5
Project will not be placed into service until second quarter 2021, at which time
LAWA is expected to repay the outstanding loan and purchase the remaining
completed assets for accounting purposes.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES


The Company's Consolidated Financial Statements have been prepared in accordance
with GAAP. The Company's significant accounting policies are described in Note 1
to the Consolidated Financial Statements. The preparation of financial
statements in accordance with GAAP requires the Company's management to make
estimates and assumptions that affect the amounts reported in the Consolidated
Financial Statements and accompanying footnotes. The Company's estimates and
assumptions are based on historical experience and changes in the business
environment. However, actual results may differ from estimates under different
conditions, sometimes materially. Critical accounting policies and estimates are
defined as those that both (i) are most important to the portrayal of the
Company's financial condition and results and (ii) require management's most
subjective judgments. The Company's critical accounting policies and estimates
are described below.

Revenue Recognition

Tickets sold for Passenger air travel are initially deferred as Air traffic
liability. Passenger revenue is recognized and Air traffic liability is reduced
when the service is provided (i.e., when the flight takes place). Air traffic
liability primarily represents tickets sold for future travel dates, funds that
are past flight date and remain unused, but are expected to be used in the
future, and the Company's liability for loyalty benefits that are expected to be
redeemed in the future. Air traffic liability fluctuates throughout the year
based on seasonal travel patterns, fare sale activity, and activity associated
with the Company's loyalty program. See Note 1 to the Consolidated Financial
Statements for information about the Company's revenue recognition policies.

For air travel on Southwest, the amount of tickets that will expire unused are
estimated and recognized in Passenger revenue once the scheduled flight date has
passed. Estimating the amount of tickets that will expire unused involves some
level of subjectivity and judgment. The majority of the Company's tickets sold
are nonrefundable, which is the primary source of unused tickets. The Company
has a No Show policy that applies to fares that are not canceled or changed by a
Customer at least ten minutes prior to a flight's scheduled departure. See Note
1 to the Consolidated Financial Statements for further information. According to
the Company's current "Contract of Carriage," all refundable tickets that are
sold but not flown on the travel date can be reused for another flight up to a
year from the date of sale, or some tickets can be refunded. This policy also
applies to unused Customer funds that may be the result of an exchange
downgrade, in which a Customer exchanges their ticket from a previously
purchased flight for a lower priced ticket, with the price difference being
effectively refunded through it being made available for use by the Customer
towards travel up to twelve months from the date of original purchase. As a
result of the COVID-19 pandemic, for all Customer travel funds created or
scheduled to expire between March 1 and September 7, 2020 associated with flight
cancellations, the Company has extended the expiration date to September 7,
2022. Further, the Company announced in August 2020, that it would allow
qualified travel funds to be converted to Rapid Rewards points through December
15, 2020. Despite the possibility that some of these travel funds may be
redeemed beyond the following twelve-month period, the Company has continued to
classify them as "current" in the accompanying Consolidated Balance Sheet as
they remain a demand liability and the Company does not have sufficient data to
enable it to accurately estimate the portion that will not be redeemed for
travel in the subsequent twelve months. Fully refundable tickets rarely expire
unused. Estimates of tickets that will expire unused are based on historical
experience over many years. The Company has consistently applied this accounting
method to estimate revenue from unused tickets at the date of scheduled travel.
Holding other factors constant, a 10 percent change in the Company's estimate of
the amount of tickets that will expire unused would have resulted in a $26
million, or less than one percent, change in Passenger revenues recognized for
the year ended December 31, 2020.

Events and circumstances outside of historical fare sale activity or historical
Customer travel patterns can result in actual spoiled tickets differing
significantly from estimates. The Company evaluates its estimates within a
narrow range of acceptable amounts. If actual spoilage results in an amount
outside of this range, estimates and assumptions are reviewed and adjustments to
Air traffic liability and to Passenger revenue are recorded, as necessary.
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. The Company's
estimation techniques have been
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consistently applied from year to year; however, as with any estimates, actual
spoiled tickets may vary from estimated amounts. Given the unprecedented amount
of 2020 Customer flight cancellations and the amount of travel funds available
to Customers for use through September 2022, the Company expects additional
variability in the amount of spoilage revenue recorded in future periods,
especially as a percentage of revenues, as the estimates of the portion of sold
tickets that will expire unused may differ from historical experience and the
Company's overall revenues remain well below pre-COVID-19 pandemic levels.

Impairment Accounting


The Company applies a fair value based impairment test to the carrying value of
goodwill and indefinite-lived intangible assets annually on October 1st, or more
frequently if certain events or circumstances indicate that an impairment loss
may have been incurred. The Company assesses the value of goodwill and
indefinite-lived intangible assets under either a qualitative or quantitative
approach. Under a qualitative approach, the Company considers various market
factors, including applicable key assumptions also used in the quantitative
assessment listed below. These factors are analyzed to determine if events and
circumstances could reasonably have affected the fair value of goodwill and
indefinite-lived intangible assets. If the Company determines that it is more
likely than not that an indefinite-lived intangible asset or reporting unit
goodwill is impaired, the quantitative approach is used to assess the asset or
reporting unit fair value and the amount of the impairment. Under a quantitative
approach, the fair value of the Company's indefinite-lived intangible assets or
reporting unit is calculated based on key market participant assumptions. If the
indefinite-lived intangible assets' carrying value exceeds the fair value
calculated using the quantitative approach, an impairment charge is recorded for
the difference in fair value and carrying value. If the reporting unit carrying
value exceeds the reporting unit fair value calculated using the quantitative
approach, an impairment charge is recorded for the difference between fair value
and carrying value, limited to the amount of goodwill in the reporting unit.

When performing a quantitative impairment assessment of goodwill and
indefinite-lived intangible assets, fair value is estimated based on (i) recent
market transactions, where available, (ii) projected discounted cash flows (an
income approach), or (iii) a combination of limited market transactions and the
lease savings method (which reflects potential annual after-tax lease savings
arising from owning the certain indefinite-lived intangibles rather than leasing
them from another airline at market rates).

Key Assumptions. Key assumptions and/or estimates made in the Company's
quantitative impairment tests included the following: (i) a projection of
revenues, expenses, and cash flows; (ii) terminal period revenue growth and cash
flows; (iii) an estimated weighted average cost of capital; (iv) an assumed
discount rate, depending on the asset, (v) a tax rate, and (vi) market purchase
prices and/or lease rates for comparable assets. The Company believes these
assumptions are consistent with those a hypothetical market participant would
use given circumstances that were present at the time the estimates were made.
However, actual results and amounts may be significantly different from the
Company's estimates. Due to the drastic reduction in air travel as a result of
the pandemic in 2020, the Company determined that it would perform a
quantitative assessment of its Goodwill and indefinite-lived intangible assets.
Based on the result of the annual impairment tests performed as of October 1,
2020, no impairment was determined to exist for Goodwill or indefinite-lived
intangible assets, as the fair values of the reporting unit and indefinite-lived
intangible assets exceeded their respective carrying values.

Future impairment of Goodwill and indefinite-lived intangible assets may result
from changes in assumptions, estimates, or circumstances, some of which are
beyond the Company's control. Factors which could result in an impairment of
Goodwill, holding other assumptions constant, could include, but are not limited
to: (i) a significant reduction in passenger demand as a result of domestic or
global economic conditions; (ii) significantly higher prices for jet fuel; (iii)
lower fares or passenger yields as a result of increased competition or lower
demand; (iv) a significant increase in future capital expenditure commitments;
and (v) significant disruptions to the Company's operations as a result of both
internal and external events such as terrorist activities, actual or threatened
war, labor actions by Employees, or further industry regulation. Factors which
could result in an impairment of owned domestic slots, holding other assumptions
constant, could include, but are not limited to: (i) a change in competition in
the slotted airport; (ii) a change in governmental regulations in the slotted
airport; (iii) significantly higher prices for jet fuel; and (iv) increased
competition at a nearby airport.

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Long lived assets. Long-lived assets, which primarily consist of Flight
equipment and related assets, are evaluated for impairment when events and
circumstances indicate the assets may be impaired. Indicators include, but are
not limited to: (i) a decision to permanently remove long-lived assets from
operations, (ii) significant changes in the estimated useful life, (iii)
significant changes in projected cash flows, (iv) significant decreases in
market value and (v) changes in technology. For long-lived assets held for sale,
when the carrying amount of these assets is greater than the fair value, less
the cost to sell, depreciation is discontinued and an impairment loss is
recorded.

In evaluating the potential for impairment associated with aircraft used in
operations, assets are grouped at the entire Boeing 737 fleet level, as the
Company has determined this is the lowest level for which there are identifiable
cash flows. Future cash flows are estimated based on projections of capacity,
passenger yield, fuel, labor costs, and other relevant factors. If an impairment
were to exist, the impairment loss recognized is the amount by which the fleet's
carrying amount exceeds its estimated fair value. Aircraft fair values are
estimated using published sources, appraisals, and bids received from third
parties, as available. In 2020, the Company recorded an impairment charge of $32
million, associated with 20 of the Company's Boeing 737-700 aircraft that were
retired early in fourth quarter 2020.

Fair Value Measurements and Financial Derivative Instruments


The Company utilizes unobservable (Level 3) inputs in determining the fair value
of certain assets and liabilities. At December 31, 2020, these consisted of its
fuel derivative option contracts, which were an asset of $134 million. The
Company utilizes financial derivative instruments primarily to manage its risk
associated with changing jet fuel prices. See "Quantitative and Qualitative
Disclosures about Market Risk" for more information on these risk management
activities, Note 11 to the Consolidated Financial Statements for more
information on the Company's fuel hedging program and financial derivative
instruments, and Note 12 to the Consolidated Financial Statements for more
information about fair value measurements.

All derivatives are required to be reflected at fair value and recorded on the
Consolidated Balance Sheet. At December 31, 2020, the Company was a party to
over 250 separate financial derivative instruments related to its fuel hedging
program for future periods. Changes in the fair values of these instruments can
vary dramatically based on changes in the underlying commodity prices. For
example, during 2020, market "spot" prices for Brent crude oil peaked at a high
average daily price of approximately $69 per barrel and hit a low average daily
price of approximately $19 per barrel. During 2019, market spot prices ranged
from a high average daily price of approximately $75 per barrel to a low average
daily price of approximately $55 per barrel. Market price changes can be driven
by factors such as supply and demand, inventory levels, weather events, refinery
capacity, political agendas, the value of the U.S. dollar, geopolitical events,
the extent of the COVID-19 pandemic, and general economic conditions, among
other items. The financial derivative instruments utilized by the Company
primarily are a combination of collars, purchased call options, call spreads,
put spreads, and fixed price swap agreements.

The Company enters into financial derivative instruments with third party
institutions in "over-the-counter" markets. Since the majority of the Company's
financial derivative instruments are not traded on a market exchange, the
Company estimates their fair values. Depending on the type of instrument, the
values are determined by the use of present value methods or standard option
value models with assumptions about commodity prices based on those observed in
underlying markets.

The Company determines the fair value of fuel derivative 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 quoted by its counterparties. In situations
where the Company obtains inputs via quotes from its counterparties, it verifies
the reasonableness of these quotes via similar quotes from another counterparty
as of each date for which financial statements are prepared. 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. Due to the fact that certain inputs used in
determining the estimated fair value of its option contracts are considered
unobservable (primarily implied volatility), the Company has categorized these
option contracts as Level 3. Although implied volatility is not directly
observable, it is derived primarily from changes in market prices, which are
observable. Based on the Company's portfolio of option contracts as of
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December 31, 2020, a 10 percent change in implied volatility, holding all other factors constant, would have resulted in a change in the fair value of this portfolio of less than $15 million.


Fair values for financial derivative instruments are estimated prior to the time
that the financial derivative instruments settle. However, once settlement of
the financial derivative instruments occurs and the hedged jet fuel is purchased
and consumed, all values and prices are known and are recognized in the
financial statements. Although the Company continues to use a prospective
assessment to determine that commodities continue to qualify for hedge
accounting in specific locations where the Company hedges, there are no
assurances that these commodities will continue to qualify in the future. This
is due to the fact that future price changes in these refined products may not
be consistent with historical price changes. 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. Further, should the
anticipated fuel purchases covered by the Company's fuel hedges no longer be
probable of occurring, the Company would discontinue hedge accounting. The loss
of hedge accounting would create further volatility in the Company's GAAP
financial results.

As discussed in Note 11 to the Consolidated Financial Statements, any changes in
fair value of cash flow derivatives designated as hedges are offset within AOCI
until the period in which the expected future cash flow impacts earnings. Any
changes in the fair value of fuel derivatives that do not qualify for hedge
accounting are reflected in earnings within Other (gains) losses, net, in the
period of the change. Because the Company has extensive historical experience in
valuing the derivative instruments it holds, and such experience is continually
evaluated against its counterparties each period when such instruments expire
and are settled for cash, the Company believes it is unlikely that an
independent third party would value the Company's derivative contracts at a
significantly different amount than what is reflected in the Company's financial
statements. In addition, the Company also has bilateral credit provisions in
some of its counterparty agreements, which provide for parties (or the Company)
to provide cash collateral when the fair value of fuel derivatives with a single
party exceeds certain threshold levels. Since this cash collateral is based on
the estimated fair value of the Company's outstanding fuel derivative contracts,
this provides further validation to the Company's estimate of fair values.

Loyalty Accounting

The Company utilizes estimates in the recognition of revenues and liabilities associated with its loyalty program. These estimates primarily include the liability associated with Rapid Rewards loyalty member ("Member") account balances that are expected to be redeemed for travel or other products at a future date. Loyalty account balances include points earned through flights taken, points sold to Customers, or points earned through business partners participating in the loyalty program.


Under the Southwest Rapid Rewards loyalty program, Members earn points for every
dollar spent on Southwest base fares. The amount of points earned under the
program is based on the fare and fare class purchased, with higher fare products
(e.g., Business Select) earning more points than lower fare products (e.g.,
Wanna Get Away). Each fare class is associated with a points earning multiplier,
and points for flights are calculated by multiplying the fare for the flight by
the fare class multiplier. Likewise, the amount of points required to be
redeemed for a flight can differ based on the fare purchased. Under the program,
(i) Members are able to redeem their points for every available seat, every day,
on every flight, with no blackout dates; and (ii) points do not expire. In
addition, Members are able to redeem their points for items other than travel on
Southwest Airlines, such as international flights on other airlines, cruises,
hotel stays, rental cars, gift cards, event tickets, and more. In addition to
earning points for revenue flights and qualifying purchases with Rapid Rewards
Partners, Members also have the ability to purchase, gift, and transfer points,
as well as the ability to donate points to selected charities.

The Company utilizes the deferred revenue method of accounting for points earned
through flights taken in its loyalty program. The Company also sells points and
related services to business partners participating in the loyalty program.
Liabilities are recorded for the relative standalone selling price of the Rapid
Rewards points which are awarded each period. The liabilities recorded represent
the total number of points expected to be redeemed by Members, regardless of
whether the Members may have enough to qualify for a full travel award.
At December 31,
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2020, the loyalty liabilities were approximately $4.4 billion, including $1.1
billion classified within Air traffic liability and $3.3 billion classified as
Air traffic liability - noncurrent.

In order to determine the value of each loyalty point, certain assumptions must
be made at the time of measurement, which include an allocation of passenger
revenue between the flight and loyalty points earned by passengers, and the fair
value of Rapid Rewards points, which are generally based on their redemption
value to the Customer. See Note 6 to the Consolidated Financial Statements for
further information on determining the estimated fair value of each loyalty
point.

The majority of the points sold to business partners are through the Southwest
co-branded credit card agreement ("Agreement") with Chase Bank USA, N.A.
Consideration received as part of this Agreement is subject to Accounting
Standards Codification 606, Revenue From Contracts With Customers. The Agreement
has the following multiple elements: travel points to be awarded, use of the
Southwest Airlines' brand and access to Rapid Rewards Member lists, advertising
elements, and the Company's resource team. These elements are combined into two
performance obligations, transportation and marketing, and consideration from
the Agreement is allocated based on the relative selling price of each
performance obligation.

Significant management judgment was used to estimate the selling price of each
of the performance obligations in the Agreement at inception. The objective is
to determine the price at which the Company would transact a sale if the product
or service was sold on a stand-alone basis. The Company determines the best
estimate of selling price by considering multiple inputs and methods including,
but not limited to, the estimated selling price of comparable travel, discounted
cash flows, brand value, published selling prices, number of points awarded, and
the number of points redeemed. The Company estimates the selling prices and
volumes over the term of the Agreement in order to determine the allocation of
proceeds to each of the multiple performance obligations. The Company records
revenue related to air transportation when the transportation is delivered and
revenue related to marketing elements when the performance obligation is
satisfied. A one percent increase or decrease in the Company's estimate of the
standalone selling prices, implemented as of January 1, 2020, resulting in an
allocation of proceeds to air transportation would
not have had a material impact on the Company's Operating revenues for the year
ended December 31, 2020.

Under its current program, Southwest estimates the portion of loyalty points
that will not be redeemed. In estimating the spoilage, the Company takes into
account the Member's past behavior, as well as several factors related to the
Member's account that are expected to be indicative of the likelihood of future
point redemption. These factors are typically representative of a Member's level
of engagement in the loyalty program. They include, but are not limited to,
tenure with the program, points accrued in the program, and points redeemed in
the program. The Company believes it has obtained sufficient historical
behavioral data to develop a predictive statistical model to analyze the amount
of spoilage expected for all loyalty points. The Company updates this model at
least annually, and applies the new spoilage rates effective October 1st each
year, or more frequently if required by changes in the business. Changes in the
spoilage rates applied annually in recent years have not had a material impact
on Passenger revenues. For the year ended December 31, 2020, based on actual
redemptions of points sold to business partners and earned through flights, a
hypothetical one percentage point change in the estimated spoilage rate would
have resulted in a change to Passenger revenue of approximately $61 million (an
increase in spoilage would have resulted in an increase in revenue and a
decrease in spoilage would have resulted in a decrease in revenue). Given that
Member behavior will continue to develop as the program matures, the Company
expects the current estimates may change in future periods. However, the Company
believes its current estimates are reasonable given current facts and
circumstances.

                                       79

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© Edgar Online, source Glimpses

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