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SOUTHWEST AIRLINES CO.

2018 ANNUAL REPORT TO SHAREHOLDERS

To our Shareholders:

I am very pleased to report another strong performance for 2018. Our 46

consecutive year of profitability is a record unmatched by any competitor in the U.S.

airline industry. Despite challenges in first half 2018, our Southwest Warriors showed

their fortitude and resilience, rallying in second half 2018, and finishing the year strong.

Our 2018 net income was $2.5 billion, or $4.29 per diluted share. Excluding

special items

, 2018 net income was a record $2.4 billion, and earnings per diluted share

was a record $4.24. These earnings results translated to record operating cash flow of

$4.9 billion; record free cash flow of $3.1 billion

; and record Shareholder returns of

$2.3 billion. For the fifth year in a row, we produced stellar returns on invested capital,

excluding special items

: in 2018 it was 23.6 percent, pre-tax, and 18.4 percent, after-tax,

well in excess of our weighted average cost of capital.

Total operating revenues were another record at $22.0 billion, up 3.9 percent,

year-over-year. Available seat miles (ASMs, or capacity) also increased 3.9 percent,

year-over-year, resulting in revenue per ASM (RASM, or unit revenue) comparable with

2017. This marks the second year in a row of stable unit revenues, compared with the

declining RASM environment experienced in the preceding 24-month period.

First half 2018 RASM decreased 1.6 percent, year-over-year, and was punctuated

by the soft revenue performance following the Flight 1380 accident. The revenue effects

of the accident reduced second quarter 2018 revenues by $100 million. Second half 2018

RASM increased 1.5 percent, compared with the prior year period, a strong recovery

from first half 2018.

Our reservation system, deployed in 2017, enabled new revenue-generating

capabilities. After managing through the transition in 2017, we experienced relatively

smooth, stable operations in 2018. As a follow-on, we deployed new revenue

management technology and capabilities mid-year 2018. All told, the new revenue-

generating capabilities drove more than $200 million in incremental pre-tax results in

2018, and we expect the benefit to escalate to $500 million per year by 2020.

Our route network is one of the strongest, if not THE strongest, in the continental

U.S., where we serve 84 cities, representing 95 percent of our ASMs. At the end of 2018,

our service beyond the lower 48 included San Juan, Puerto Rico, and destinations in

Mexico, the Caribbean, and Central America, where we served 15 airports, representing

5 percent of our ASMs. Beginning in 2013, our service beyond the continental U.S. has

See Note Regarding Use of Non-GAAP Financial Measures and related reconciliations included in the accompanying Form

10-K for the fiscal year ended December 31, 2018, for additional information on special items and Return on Invested Capital

(ROIC).

Free cash flow is calculated as operating cash flows of $4.9 billion less capital expenditures of $1.9 billion less assets

constructed for others of $54 million plus reimbursements for assets constructed for others of $170 million.

grown rapidly and offers opportunities for continued future growth. In 2018, we continued

our international growth with new service from Indianapolis, Sacramento, San Jose,

Columbus, New Orleans, Pittsburgh, and Raleigh-Durham, ending the year with 23 active

gateway airports (including seasonal) from the continental U.S.

The big news in 2018 and early 2019 was our work to obtain authorization from

the Federal Aviation Administration (FAA) for Extended Operations (ETOPS) to Hawaii

from California. During 2019, we expect to serve four Hawaiian Island destinations from

four California gateways. We published our schedule for sale on March 4, 2019, for flights

that began on March 17, 2019. The first flights quickly sold out; and we are delighted with

the initial response. The expansion to Hawaii is expected to be our primary route

development focus for 2019 and 2020, including inter-Hawaiian Island service. Currently,

I expect our international expansion will resume in 2020. For now, adding Honolulu, Maui,

Kona, and Lihue will keep us very busy and our Customers very happy!

Turning to 2018 operating expenses, they increased 5.8 percent, year-over-year,

to $18.8 billion. That represents a 1.8 percent increase on a unit basis

, driven almost

entirely by higher jet fuel prices. Economic jet fuel prices were up again in 2018 to $2.20

per gallon

, a 6.8 percent increase, compared with a year ago. Somewhat offsetting

higher prices, our fuel efficiency improved by 1.5 percent

, year-over-year. Excluding fuel,

special items, and profitsharing, our unit costs were up slightly, year-over-year.

Our ontime performance improved in 2018, which is notable considering we had to

manage through some operational disruption to fulfill our commitment to inspect engine

fan blades, following the Flight 1380 accident. Our baggage handling is superb. Most

importantly, we were first among marketing carriers

in the U.S. Department of

Transportation’s category of fewest Customer complaints.

In fact, no one else was close.

We are a perennial leader in Customer Service, and I’m very pleased our complaints

were down 19 percent from 2017, a testament to the wonderful Hospitality of our People

and the Reliability of our operation.

Our stellar financial performance and position in 2018 earned us another upgrade

among the rating agencies, with Fitch Ratings moving Southwest to A- in early 2019. We

continue to have the highest credit ratings in the domestic airline industry. We ended the

year with a debt, including off-balance sheet leases, to total capital ratio of less than

30 percent. Our total liquidity was exceptionally strong at $4.7 billion, including

$3.7 billion in cash and short-term investments, plus our fully-available $1.0 billion bank

line of credit.

In addition to $2.0 billion in share repurchases, Southwest paid $332 million in

dividends in 2018. In May 2018, our Board of Directors authorized a $2.0 billion share

repurchase program, which has $850 million remaining as of the date of this letter. The

Operating expenses per available seat mile.

See Note Regarding Use of Non-GAAP Financial Measures and related reconciliations included in the accompanying Form

10-K for the fiscal year ended December 31, 2018, for additional information on economic fuel costs.

Calculated as available seat miles produced per fuel gallon consumed.

Marketing carriers operate and sell flights either by themselves or with their branded codeshare partner airlines.

Source: Air Travel Consumer Reports. Rankings based on complaints filed with the U.S. Department of Transportation per

100,000 passengers enplaned.

Board also authorized a 28 percent increase in the quarterly dividend, to $.16 per share.

This represents the seventh year in a row that Southwest has increased the dividend to

Shareholders.

The U.S. economy produced solid growth in 2018, which translated to strong

travel demand. At the beginning of 2019, expectations called for slower, but still solid,

economic growth. We began 2019 with strong momentum and a bullish revenue outlook

for the year. At this date, despite several first quarter headwinds that have reduced our

momentum, we are still bullish about our prospects for annual unit revenue growth. The

U.S. government shutdown; efforts to reach a tentative agreement with the Aircraft

Mechanics Fraternal Association (AMFA), which represents our Mechanics; and the

temporary grounding of Boeing 737 MAX aircraft following the Ethiopian Airlines Flight

302 accident on March 10, 2019, have all combined to impact revenue and bookings, as

well as costs. We are diligently addressing each of these headwinds:

1) The U.S. government shutdown is behind us.

2) We have reached an agreement in principle for a new contract with AMFA.

Our offer is better for the Mechanics and for the Company than the original

tentative agreement, which the Mechanics did not approve last fall.

3) Lastly, following the world-wide grounding of the 737 MAX aircraft, we

continue to work closely with Boeing and the FAA, with the Safety of our

Customers and our Employees remaining our top priority.

In closing, I want to pay tribute to our beloved Founder and Chairman Emeritus,

Herb Kelleher, who passed away January 3, 2019. It was a huge loss for so many,

because he touched so many lives. I’m grateful for the overwhelming coverage,

recognition, and admiration that flowed following his passing. And I felt, along with many,

an overwhelming sense of gratitude for Herb as a mentor, friend, businessman, and

Leader. So, to our Shareholders, how blessed we are to have had Herb Kelleher in our

Company and our lives.

Rest in peace, Herb. We will always love you. And we vow to honor your legacy

by keeping Southwest flying high.

Sincerely,

Gary C. Kelly

Chairman of the Board and

Chief Executive Officer

March 25, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934

For the fiscal year ended December 31, 2018

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934

For the transition period from to

Commission File No. 1-7259

Southwest Airlines Co.

(Exact name of registrant as specified in its charter)

TEXAS 74-1563240

(State or other jurisdiction of (IRS Employer

incorporation or organization) Identification No.)

P.O. Box 36611

Dallas, Texas 75235-1611

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (214) 792-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock ($1.00 par value) New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Í No ‘

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No Í

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has

been subject to such filing requirements for the past 90 days. Yes Í No ‘

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to

Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such

files). Yes Í No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be

contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this

Form 10-K or any amendment to this Form 10-K. Í

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting

company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and

“emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer Í Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘ Emerging growth company ‘

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No Í

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $29,086,256,077 computed by

reference to the closing sale price of the common stock on the New York Stock Exchange on June 30, 2018, the last trading day of the registrant’s

most recently completed second fiscal quarter.

Number of shares of common stock outstanding as of the close of business on February 1, 2019: 552,688,849 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held May 15, 2019, are incorporated

into Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS

PART I

Item 1.

Business 1

Item 1A.

Risk Factors 25

Item 1B.

Unresolved Staff Comments 34

Item 2.

Properties 35

Item 3.

Legal Proceedings 36

Item 4.

Mine Safety Disclosures 38

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of

Equity Securities 41

Item 6.

Selected Financial Data 44

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 46

Liquidity and Capital Resources 65

Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and

Commitments 67

Critical Accounting Policies and Estimates 70

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk 76

Item 8.

Financial Statements and Supplementary Data 81

Southwest Airlines Co. Consolidated Balance Sheet 81

Southwest Airlines Co. Consolidated Statement of Income 82

Southwest Airlines Co. Consolidated Statement of Comprehensive Income 83

Southwest Airlines Co. Consolidated Statement of Stockholders’ Equity 84

Southwest Airlines Co. Consolidated Statement of Cash Flows 85

Notes to Consolidated Financial Statements 86

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 136

Item 9A.

Controls and Procedures 136

Item 9B.

Other Information 137

PART III

Item 10.

Directors, Executive Officers, and Corporate Governance 138

Item 11.

Executive Compensation 138

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters 138

Item 13.

Certain Relationships and Related Transactions, and Director Independence 139

Item 14.

Principal Accounting Fees and Services 139

PART IV

Item 15.

Exhibits and Financial Statement Schedules 140

Item 16.

Form 10-K Summary 148

Signatures

149

PART I

Item 1. Business

Company Overview

Southwest Airlines Co. (the “Company” or “Southwest”) operates Southwest Airlines, a major

passenger airline that provides scheduled air transportation in the United States and near-international

markets. Southwest commenced service on June 18, 1971, with three Boeing 737 aircraft serving three

Texas cities: Dallas, Houston, and San Antonio. At December 31, 2018, Southwest operated a total of

750 Boeing 737 aircraft and served 99 destinations in 40 states, the District of Columbia, the

Commonwealth of Puerto Rico, and ten near-international countries: Mexico, Jamaica, The Bahamas,

Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos.

The Company is continuing its efforts towards its planned inaugural service to Hawaii in 2019, subject

to requisite governmental approvals, including approval from the Federal Aviation Administration (the

“FAA”) for Extended Operations (“ETOPS”), a regulatory requirement to operate between the U.S.

mainland and the Hawaiian Islands. The Company has announced its intent to serve Honolulu

International Airport, Lihue Airport, Kona International Airport at Keahole, and Kahului Airport from

four initial California cities: Oakland, San Diego, San Jose, and Sacramento. In June 2018, the

Company ceased service at Bishop International Airport in Flint, Michigan. The Company has further

announced its decision to cease service at Benito Juárez Mexico City International Airport, with the

last day of service scheduled on March 30, 2019.

Based on the most recent data available from the U.S. Department of Transportation (the “DOT”), as

of June 30, 2018, Southwest was the largest domestic air carrier in the United States, as measured by

the number of domestic originating passengers boarded.

Industry

The airline industry has historically been an extremely volatile industry subject to numerous

challenges. Among other things, it has been cyclical, energy intensive, labor intensive, capital

intensive, technology intensive, highly regulated, heavily taxed, and extremely competitive. The airline

industry has also been particularly susceptible to detrimental events such as economic recessions, acts

of terrorism, poor weather, and natural disasters.

The U.S. airline industry continued to benefit from modest economic growth during 2018, despite a

very competitive domestic fare environment. The airline industry also experienced a less stable fuel

environment in 2018, as compared with recent years, with year-over-year fuel prices significantly

higher throughout most of 2018, before easing in fourth quarter 2018. In recent years, the U.S. airline

industry, including Southwest, has increased available seat miles (also referred to as “capacity,” an

available seat mile is one seat, empty or full, flown one mile and is a measure of space available to

carry passengers in a given period), and has also increased the number of seats per trip through

slimline seat retrofits and the use of new and larger aircraft. Despite recent fuel price volatility,

strategic capacity increases are expected to continue in 2019.

In 2018, the airline industry continued to be impacted by the significant growth of “Ultra-Low Cost

Carriers” (“ULCCs”). ULCCs provide “unbundled” service offerings, which enable them to appeal to

price-sensitive travelers through promotion to consumers of an extremely low relative base fare for a

seat, while separately charging for related services and products. In response, certain major U.S.

airlines have introduced and have continued to expand new cabin segmentation fare products, such as a

“basic economy” product. The basic economy product provides for a lower base fare to compete with a

ULCC base fare, but may include significant additional restrictions on amenities such as seat

assignments (including restrictions on group and family seating), order of boarding, checked baggage

and use of overhead bin space, flight changes and refunds, and eligibility for upgrades. Also in

response to competitive ULCC pricing, some carriers removed their fare floors for certain routes,

leading to a lower fare offering across the industry. Further, to better derive revenue from customers,

some carriers offer a “premium economy” fare that targets consumers willing to pay extra for

additional amenities such as more favorable seating options in segmented aircraft.

Company Operations

Route Structure

Southwest principally provides point-to-point service, rather than the “hub-and-spoke” service

provided by most major U.S. airlines. The hub-and-spoke system concentrates most of an airline’s

operations at a limited number of central hub cities and serves most other destinations in the system by

providing one-stop or connecting service through a hub. By not concentrating operations through one

or more central transfer points, Southwest’s point-to-point route structure has allowed for more direct

nonstop routing than hub-and-spoke service. The Company continues to focus on adding depth to

schedule offerings in certain key cities, which is expected to benefit operational efficiency and give

Customers additional options to reach their final destination. Approximately 77 percent of the

Company’s Customers flew nonstop during 2018, and, as of December 31, 2018, Southwest served

704 nonstop city pairs.

Southwest’s point-to-point service has also enabled it to provide its markets with frequent,

conveniently timed flights and low fares. For example, Southwest currently offers 20 weekday

roundtrips between Dallas Love Field and Houston Hobby, 12 weekday roundtrips between Burbank

and Oakland, 15 weekday roundtrips between San Diego and San Jose, eight weekday roundtrips

between Denver and Chicago Midway, and 10 weekday roundtrips between Los Angeles International

and Las Vegas.

Southwest complements its high-frequency short-haul routes with long-haul nonstop service between

markets such as Oakland and Orlando, Los Angeles and Nashville, Las Vegas and Orlando, San Diego

and Baltimore, Houston and New York LaGuardia, Los Angeles and Tampa, Oakland and Baltimore,

and San Diego and Newark. During 2018, the Company continued to incorporate the Boeing 737 MAX

8 and the Boeing 737-800 aircraft into its fleet, both of which offer significantly more Customer

seating capacity than the Company’s other aircraft. This has enabled the Company to more

economically serve long-haul routes, as well as high-demand, slot-controlled, and gate-restricted

airports, by adding seats for such routes without increasing the number of flights (a “slot” is the right

of an air carrier, pursuant to regulations of the FAA, to operate a takeoff or landing at a specific time at

certain airports). The Company plans to continue its route network and schedule optimization efforts

through the addition of new markets and itineraries, while also pruning less profitable flights from its

schedule. For 2018, the Company’s average aircraft trip stage length was 757 miles, with an average

duration of approximately 2.0 hours, as compared with an average aircraft trip stage length of 754

miles and an average duration of approximately 2.0 hours in 2017.

The Company continued its focus on California in 2018, and continues to invest significant resources

to solidify its leadership position in California, including the planned addition of new domestic and

international destination options and flights for California Customers, as well as marketing programs

and local outreach efforts designed to retain, engage, and acquire Customers. For example, Hawaii is

an attractive leisure destination for the Company’s California Customers, and the Company has

announced its intent to serve Honolulu International Airport, Lihue Airport, Kona International Airport

at Keahole, and Kahului Airport from four initial California cities: Oakland, San Diego, San Jose, and

Sacramento. The Company is scheduled to offer a record 800 departures from California on peak

flying days in the summer of 2019 and, based on the most recent data available from the DOT, for the

year ended June 30, 2018, Southwest carried more California travelers to, from, and within California

than any other airline.

In order to complement the Company’s network, during 2018, the Company entered into an agreement

with Alaska Airlines to lease 12 slots at New York’s LaGuardia Airport and eight slots at Washington

Reagan National Airport through 2028.

The Company ended 2018 with international service to 14 destinations through 23 international

gateway cities within the 48 contiguous United States. During 2018, the Company commenced

international service out of Indianapolis, San Jose, Sacramento, Columbus, New Orleans, Pittsburgh,

and Raleigh-Durham. In addition, Southwest Airlines Cargo

began shipping cargo to select

international destinations beginning in 2018, including Mexico City, Cancun, Cabo San Lucas/Los

Cabos, Puerto Vallarta, Montego Bay, and San Jose, Costa Rica.

Cost Structure

A key component of the Company’s business strategy is its focus on cost discipline and profitably

charging competitively low fares. Adjusted for stage length, the Company has lower unit costs, on

average, than the majority of the largest domestic carriers. The Company’s strategy includes the use of

a single aircraft type, the Boeing 737, the Company’s operationally efficient point-to-point route

structure, and its highly productive Employees. Southwest’s use of a single aircraft type allows for

simplified scheduling, maintenance, flight operations, and training activities. Southwest’s

point-to-point route structure includes service to and from many secondary or downtown airports such

as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International,

Burbank, Manchester, Oakland, San Jose, Providence, and Ft. Lauderdale-Hollywood. These

conveniently located airports are typically less congested than other airlines’ hub airports, which has

contributed to Southwest’s ability to achieve high asset utilization because aircraft can be scheduled to

minimize the amount of time they are on the ground. This, in turn, has reduced the number of aircraft

and gate facilities that would otherwise be required and allows for high Employee productivity (lower

headcount per aircraft).

The Company’s focus on controlling costs also includes a continued commitment to pursuing,

implementing, and enhancing initiatives to reduce fuel consumption and improve fuel efficiency. Fuel

and oil expense remained the Company’s second largest operating cost for 2018, which increased

compared with 2017, primarily due to higher market jet fuel prices. As evidenced by the table below,

energy prices can fluctuate significantly in a relatively short amount of time. The table below shows

the Company’s average cost of jet fuel for each year beginning in 2003 and during each quarter of

2018.

Year

Cost

(Millions)

Average

Cost Per

Gallon

Percentage of

Operating

Expenses

2003 $ 920 $ 0.80 16.5%

2004 $ 1,106 $ 0.92 18.1%

2005 $ 1,470 $ 1.13 21.4%

2006 $ 2,284 $ 1.64 28.0%

2007 $ 2,690 $ 1.80 29.7%

2008 $ 3,713 $ 2.44 35.1%

2009* $ 3,193 $ 2.22 31.2%

2010* $ 3,755 $ 2.61 33.4%

2011* $ 5,751 $ 3.25 38.2%

2012* $ 6,156 $ 3.32 37.3%

2013* $ 5,823 $ 3.19 35.3%

2014* $ 5,355 $ 2.97 32.6%

2015* $ 3,740 $ 1.96 23.6%

2016* $ 3,801 $ 1.90 22.7%

2017* $ 4,076 $ 1.99 23.0%

2018 $ 4,616 $ 2.20 24.6%

First Quarter 2018 $ 1,018 $ 2.07 23.5%

Second Quarter 2018 $ 1,202 $ 2.21 25.2%

Third Quarter 2018 $ 1,205 $ 2.24 25.2%

Fourth Quarter 2018 $ 1,192 $ 2.25 24.4%

*Effective as of January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2017-12,

Targeted Improvements to Accounting for Hedging Activities, and ASU No. 2017-07, Improving the

Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. See Note 2 to the

Consolidated Financial Statements for further information.

The Company focuses on reducing fuel consumption and improving fuel efficiency through fleet

modernization and other fuel initiatives. For example, the Company previously retired all Boeing

737-300 aircraft from its fleet and has begun scheduled service with the Boeing 737 MAX 8 aircraft.

The Boeing 737 MAX 8 is expected to continue to significantly reduce fuel use and CO

emissions, as

compared with the Company’s other aircraft. The Company added 18 Boeing 737 MAX 8 aircraft to its

fleet in 2018 and ended 2018 with 31 Boeing 737 MAX 8 aircraft in its fleet. In 2019, the Company

expects to continue its fleet modernization initiative through the scheduled delivery of an additional 37

Boeing 737 MAX 8 aircraft and the Company’s initial delivery of seven Boeing 737 MAX 7 aircraft.

The Company’s fleet composition and delivery schedules are discussed in more detail below under

“Properties - Aircraft.” The Company has also undertaken a number of other fuel conservation

initiatives which are discussed in detail under “Regulation - Environmental Regulation.”

To illustrate the results of the Company’s efforts to reduce fuel consumption and improve fuel

efficiency, the table below sets forth the Company’s available seat miles produced per fuel gallon

consumed over the last five years:

Year ended December 31,

2018 2017 2016 2015 2014

Available seat miles per fuel

gallon consumed 76.3 75.2 74.4 73.9 72.8

The Company also enters into fuel derivative contracts to manage its risk associated with significant

increases in fuel prices. The Company’s fuel hedging activities, as well as the risks associated with

high and/or volatile fuel prices, are discussed in more detail below under “Risk Factors,”

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note

10 to the Consolidated Financial Statements.

Salaries, wages, and benefits expense constituted approximately 41 percent of the Company’s

operating expenses during 2018 and was the Company’s largest operating cost. The Company’s ability

to control labor costs is limited by the terms of its collective-bargaining agreements, and increased

labor costs have negatively impacted the Company’s low-cost competitive position. The Company’s

labor costs, and risks associated therewith, are discussed in more detail below under “Risk Factors”

and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Fare Structure

General

Southwest offers a relatively simple fare structure that features competitive fares and product benefits,

including unrestricted fares, as well as lower fares available on a restricted basis. Southwest fare

products include three major categories: “Wanna Get Away

,” “Anytime,” and “Business Select

,”

with the goal of making it easier for Customers to choose the fare they prefer. All fare products include

the privilege of two free checked bags (weight and size limits apply) and complimentary soft drinks

and snacks, as well as free movies-on-demand and live and on-demand television where available on

WiFi-enabled aircraft. In addition, regardless of the fare product, Southwest does not charge fees for

changes to flight reservations although fare differences may apply.

• “Wanna Get Away” fares are generally the lowest fares and are typically subject to advance

purchase requirements. They are nonrefundable, but, subject to Southwest’s No Show Policy,

funds may be applied to future travel on Southwest. Wanna Get Away fares earn six Rapid

Rewards

points, under Southwest’s Rapid Rewards loyalty program, for each dollar spent

on the base fare. The Company’s loyalty program is discussed below under “Rapid Rewards

Loyalty Program.”

• “Anytime” fares are, subject to Southwest’s No Show Policy, refundable if canceled, or

funds may be applied towards future travel on Southwest. If this fare is purchased with

nonrefundable funds, then the flight will be nonrefundable if canceled. Anytime fares earn 10

Rapid Rewards points for each dollar spent on the base fare.

• “Business Select” fares are, subject to Southwest’s No Show Policy, refundable if canceled,

or funds may be applied towards future travel on Southwest. If this fare is purchased with

nonrefundable funds, then the flight will be nonrefundable if canceled. Business Select fares

also include additional perks such as priority boarding with a boarding position in the first 15

boarding positions within boarding group “A,” 12 Rapid Rewards points per dollar spent on

the base fare - the highest loyalty point multiplier of all Southwest fare products, “Fly By

”

priority security and/or ticket counter access in participating airports, and one complimentary

premium beverage coupon for the day of travel (Customers must be of legal drinking age to

drink alcoholic beverages).

Southwest’s No Show Policy applies if a Customer does not change or cancel a flight segment at least

ten minutes prior to scheduled departure and the Customer does not travel on the scheduled flight. In

such event, subject to certain exceptions, all segments associated with the reservation will be canceled,

and (i) with respect to a “Wanna Get Away” fare, unused funds will be forfeited; and (ii) with respect

to an “Anytime” or “Business Select” fare, unused funds will be held as travel credit for future travel

by the Customer on Southwest.

Ancillary Services

The Company offers ancillary services such as Southwest’s EarlyBird Check-In

, Upgraded Boarding,

and transportation of pets and unaccompanied minors, in accordance with Southwest’s respective

policies.

EarlyBird Check-In provides Customers with automatic check-in and an assigned boarding position

before general boarding positions become available, thereby improving Customers’ seat selection

options (priority boarding privileges are already a benefit of being an “A-List” tier member under the

Company’s Rapid Rewards Loyalty Program). During 2018, the Company implemented a variable

pricing model for EarlyBird Check-In based on the length of the flight and the historical popularity of

EarlyBird Check-In on the route.

When available, Southwest sells Upgraded Boarding at the airport. These are open priority boarding

positions in the first 15 positions in its “A” boarding group.

Southwest’s Pet Policy provides Customers an opportunity to bring a small cat or dog into the aircraft

cabin. Southwest also has an unaccompanied minor travel policy to address the administrative costs

and the extra care necessary to safely transport these Customers.

Inflight Entertainment Portal and WiFi Service

Southwest offers inflight entertainment and connectivity service on WiFi-enabled aircraft on the

majority of its fleet. In 2018, Southwest refreshed its suite of complimentary offerings onboard its

inflight entertainment portal to offer Free Movies and Free App Messaging while onboard any WiFi-

enabled aircraft, and Free Music while onboard a majority of WiFi-enabled aircraft. The inflight

entertainment service allows Customers to enjoy gate-to-gate entertainment directly on their personal

wireless devices.

The free inflight entertainment offerings include approximately 30 free movies-on-demand per month

and free app messaging via iMessage or WhatsApp. The Company also continues to offer free access

to its live and on-demand television product on most of its flights. The television product consists of

over 15 live channels and up to 75 on-demand recorded episodes from popular television series.

The Company’s new collaboration with iHeartRadio brings a free digital music and live streaming

radio service to Customers within the onboard entertainment portal on the majority of Southwest

domestic flights. Customers can listen to hundreds of live radio stations, pick from artist radio

channels, listen to selected playlists, and listen to podcasts. Customers may also use their iHeartRadio

app while onboard, and existing subscribers to the All Access and Plus products have access to their

entire music library and saved playlists.

Customers can also purchase satellite internet service while on WiFi-enabled aircraft. Customers do

not have to purchase WiFi to access the free inflight entertainment options including Free Movies, Free

App Messaging, Free Television, Free Music, weather, destination guides, a flight tracker, and

connecting flights information. These onboard offerings are currently available as a limited time offer

only on WiFi-enabled aircraft, where available.

Rapid Rewards Loyalty Program

Southwest’s Rapid Rewards loyalty program enables program members (“Members”) to earn points for

every dollar spent on Southwest 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 is 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 so long as the Member

has points-earning activity during the most recent 24 months.

Under the program, Members continue to accumulate points until the time they decide to redeem them.

As a result, the program provides Members significant flexibility and options for earning and

redeeming rewards. For example, Members can earn more points (and/or achieve tiered status such as

A-List and Companion Pass faster) by purchasing higher fare tickets. Members also have significant

flexibility in redeeming points, such as the opportunity to book in advance to take advantage of a lower

fare ticket (including many fare sales) and redeem fewer points or by being able to redeem more points

and book at the last minute if seats are still available for sale. In addition to redeeming points for

Southwest flights, Members are also able to redeem their points for items such as international flights

on other airlines, cruises, hotel stays, rental cars, gift cards, event tickets, and more. Members can also

earn points through qualifying purchases with Rapid Rewards Partners (which include, for example,

car rental agencies, hotels, restaurants, and retailers), as well as by using Southwest’s co-branded

Chase

Visa credit card. 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.

Southwest’s Rapid Rewards loyalty program features tier and Companion Pass programs for the most

active Members, including “A-List” and “A-List Preferred” status. Both A-List and A-List Preferred

Members enjoy benefits such as “Fly By

” priority check-in and security lane access, where available,

as well as dedicated phone lines, standby priority, and an earnings bonus on eligible revenue flights

(25 percent for A-List and 100 percent for A-List Preferred). In addition, A-List Preferred Members

enjoy free inflight WiFi on equipped flights. Members who attain A-List or A-List Preferred status

receive priority boarding privileges for an entire year. When these Customers purchase travel at least

36 hours prior to flight time, they receive the best boarding pass number available (generally, an “A”

boarding pass). During the day of travel, if an A-List or A-List Preferred Member’s plans change, they

have free same-day standby privileges, which allow them to fly on earlier flights between the same city

pairs if space is available. Members who fly 100 qualifying one-way flights or earn 110,000 qualifying

points in a calendar year automatically receive a Companion Pass, which provides for unlimited travel

for the designated companion free of airline charges (does not include taxes and fees from $5.60

one-way). The Companion Pass is valid for the remainder of the calendar year in which status was

earned and for the following full calendar year to any destination available on Southwest for a

designated companion of the qualifying Member. The Member and designated companion must travel

together on the same flight.

Southwest’s Rapid Rewards loyalty program has been designed to drive more revenue by (i) bringing

in new Customers, including new Members, as well as new holders of Southwest’s co-branded Chase

Visa credit card; (ii) increasing business from existing Customers; and (iii) strengthening the

Company’s Rapid Rewards hotel, rental car, credit card, and retail partnerships.

For the Company’s 2018 consolidated results, Customers of Southwest redeemed approximately

10.4 million flight awards, accounting for approximately 13.8 percent of revenue passenger miles

flown. For the Company’s 2017 consolidated results, Customers of Southwest redeemed approximately

9.6 million flight awards, accounting for approximately 13.8 percent of revenue passenger miles flown.

For the Company’s 2016 consolidated results, Customers of Southwest redeemed approximately

8.3 million flight awards, accounting for approximately 12.7 percent of revenue passenger miles flown.

The Company’s accounting policies with respect to its loyalty programs are discussed in more detail in

Note 1 to the Consolidated Financial Statements.

Digital Customer Platforms including Southwest.com

The Company offers a broad suite of digital platforms to support Customers’ needs across their travel

journey including Southwest.com

, mobile.southwest.com, an iOS app, and an Android app. The

digital platforms comprise the primary storefront for the Company and are designed to allow

Customers to quickly learn, shop, book, and manage their Southwest air travel. The platforms also

showcase and support booking for the Company’s ancillary products including EarlyBird, Business

Select upgrades, vacation packages, rental car reservations, hotel reservations, ridesharing, and travel

activities, as well as provide self-service tools for frequently asked questions and contacting Southwest

for support. The Company also offers Swabiz.com, a website tailored for business Customers, which

offers businesses shared company credit cards, company activity reporting, and centralized traveler

management. These digital tools are designed to help make the Customer’s experience personal,

intuitive, and efficient while supporting the Company’s unique and low-cost focused distribution

strategy.

The platforms are powered by advanced marketing tools with algorithmic learning features for detailed

insight generation, testing, monitoring, and targeting capabilities. In addition, Southwest.com and

Swabiz.com are available in a translated Spanish version, which provides Customers who prefer to

transact in Spanish the same level of Customer Service provided by the English versions of the

websites. Both websites meet Web Content Accessibility Guidelines in order to provide an optimal

experience for Customers with accessibility needs.

The Company continues to invest in and improve these digital assets, with sustained investment in

2018. Southwest.com’s Air Booking, Air Manage, Low Fare Calendar, and Early Bird Booking

experiences were updated with a modern and tablet-friendly experience along with a brand new

architecture to increase speed to market and shopping workflow effectiveness. A new site search tool

was added to help Customers find the right content, as well as better highlight Customer-generated

content from the Southwest Community and social media. Rapid Rewards Enrollment forms were

updated with a modern look and feel to ease the enrollment process. Swabiz.com received major

enhancements to offer corporate travel managers helpful tools including Unused Funds Reports, Hotel

Booking, additional reporting, mobile changes, and shared confirmation receipt emails.

In 2018, the Company also continued to invest in broadening mobile capabilities for Customers. The

mobile shopping and booking experiences were updated to allow Customers to book, change, and

check in for international trips, as well as sign up for the Rapid Rewards credit card while making a

booking. The Company also enhanced the day of travel experience with an improved multi-passenger

boarding experience, more intuitive trip cards, Google Pay-enabled mobile boarding passes for

Android users, and a mobile standby list. The Company added additional Customer experience

enhancements with in-app ratings and review technology, personalization technology, and an iPad

optimized version of the iOS application.

In 2018, the Company also invested in major updates to its messaging platforms with a complete

overhaul of its e-mail experiences. All confirmation emails were updated with a new modern look and

feel, including personalized information and clearer itinerary information, as well as enhanced travel

tips and promotional areas. This overhaul also extended into EarlyBird, Gift Card, LUV Voucher, and

SWABIZ Account notifications. Promotional messaging emails were also updated with new

personalization technology designed to increase click-through rates.

For the year ended December 31, 2018, approximately 80 percent of the Company’s Passenger

revenues originated from its website (including revenues from SWABIZ

Marketing

During 2018, the Company continued to aggressively market and benefit from Southwest’s points of

differentiation from its competitors. For example, the Company’s Transfarency

campaign

emphasizes Southwest’s approach to treating Customers fairly, honestly, and respectfully, with its low

fares and no unexpected bag fees, change fees, or hidden fees.

Southwest continues to be the only major U.S. airline that offers to all ticketed Customers up to two

checked bags that fly free (subject to weight and size limits). Through both its national and local

marketing campaigns, Southwest has continued to aggressively promote this point of differentiation

from its competitors with its “Bags Fly Free

” message. The Company believes its decision not to

charge for first and second checked bags, as reinforced by the Company’s related marketing, has

driven an increase in the Company’s market share and a resulting net increase in revenues.

Southwest also does not charge a fee on any of its fares for a Customer change in flight reservations.

The Company has continued to incorporate this key point of differentiation in its marketing campaigns.

The campaigns highlight the importance to Southwest of Customer Service by showing that Southwest

understands plans can change and therefore does not charge a change fee. While a Customer may pay a

difference in airfare, the Customer will not be charged a change fee on top of any difference in airfare.

Also unlike many of its competitors, Southwest does not impose additional fees for items such as seat

selection, snacks, curb-side check-in, and telephone reservations. In addition, Southwest allows each

ticketed Customer to check one stroller and one car seat free of charge, in addition to the two free

checked bags.

The Company also continues to promote all of the many other reasons to fly Southwest such as its low

fares, network size, Customer Service, free movies-on-demand and live and on-demand television, free

messaging via iMessage or WhatsApp, the iHeartRadio service, and its Rapid Rewards loyalty

program.

The Company’s visual expression of its brand is its Heart. The Company believes its Heart sets it apart

from the industry standard. The Company’s Heart symbol is purposely placed on the Company’s

aircraft livery, airport experience, and logo, and symbolizes the Company’s care, trust, and belief in

providing exceptional Hospitality and its Employees’ dedication to connecting Customers with what is

important in their lives. The Company’s 737-800 and 737 MAX 8 aircraft include a Heart cabin

interior, which gives Southwest Customers a look and feel of the future, with bold blue seats and

additional seat width and legroom, an adjustable headrest, enhanced back comfort, and extra room for

personal belongings. In addition, front-line Employees wear Employee-designed uniforms that

highlight the Company’s red, yellow, and blue Heart brand.

Technology Initiatives

The Company has committed significant resources to technology improvements in support of its

ongoing operations and initiatives that continue to shape and guide the strategic future of the Company.

The Company has completed a multi-year initiative to completely transition its reservation system to

the Amadeus Altéa Passenger Service System. The new reservation system, which represented the

single largest technology project in the Company’s history, was designed to improve flight scheduling

and inventory management, enable operational enhancements to manage flight disruptions, such as

those caused by extreme weather conditions, enable revenue enhancements, support additional

international growth, and enable other foundational and operational capabilities.

The Company continues to focus on the prioritization and execution of its technology investments and

is in the process of continually executing an evolving multi-year plan for technology, with the goal of

developing a stronger, adaptable, and more efficient technology foundation to support the Company’s

strategic priorities.

The Company continues to invest significantly in technology resources including, among others, the

Company’s systems related to (i) aircraft maintenance record keeping, (ii) flight planning and

scheduling, (iii) crew scheduling, and (iv) technology infrastructure.

Regulation

The airline industry is heavily regulated, especially by the federal government, and there are a

significant number of governmental agencies and legislative bodies that have the ability to directly or

indirectly affect the Company and/or the airline industry financially and/or operationally. Examples of

regulations affecting the Company and/or the airline industry, imposed by several of these

governmental agencies and legislative bodies, are discussed below.

Economic and Operational Regulation

Consumer Protection Regulation by the U.S. Department of Transportation

The DOT regulates economic operating authority for air carriers and consumer protection for airline

passengers. The FAA, an agency within the DOT, regulates aviation safety. The DOT and the FAA

may impose civil penalties on air carriers for violating their regulations.

To provide passenger transportation in the United States, a domestic airline is required to hold both a

Certificate of Public Convenience & Necessity from the DOT and an Air Carrier Operating Certificate

from the FAA. A Certificate of Public Convenience & Necessity is unlimited in duration, and the

Company’s certificate generally permits it to operate among any points within the United States and its

territories and possessions. Additional DOT authority, in the form of a certificate or exemption from

certificate requirements, is required for a U.S. airline to serve foreign destinations either with its own

aircraft or via code-sharing with another airline. Exemptions granted by the DOT to serve international

markets are generally limited in duration and are subject to periodic renewal requirements. The DOT

also has jurisdiction over international tariffs and pricing in certain markets. The DOT may revoke a

certificate or exemption, in whole or in part, for intentional failure to comply with federal aviation

statutes, regulations, orders, or the terms of the certificate itself.

The DOT’s consumer protection and enforcement activities relate to areas such as unfair and deceptive

practices and unfair competition by air carriers, deceptive airline advertising (concerning, e.g., fares,

ontime performance, schedules, and code-sharing), and violations of rules concerning denied boarding

compensation, ticket refunds, and baggage liability requirements. The DOT is also charged with

prohibiting discrimination by airlines against consumers on the basis of (i) disability; and (ii) race,

religion, national origin, sex, or ancestry.

Under the above-described authority, from 2008 through 2016, the DOT adopted so-called “Passenger

Protection Rules,” which address a wide variety of matters, including flight delays on the tarmac,

chronically delayed flights, denied boarding compensation, and advertising of airfares, among others.

Under the Passenger Protection Rules, U.S. passenger airlines are required to adopt contingency plans

that include the following: (i) assurances that no domestic flight will remain on the airport tarmac for

more than three hours before beginning to return to the gate and that no international flight will remain

on the tarmac at a U.S. airport for more than four hours before beginning to return to the gate, unless

the pilot-in-command determines there is a safety-related or security-related impediment to deplaning

passengers, or air traffic control advises the pilot-in-command that returning to the gate or permitting

passengers to disembark elsewhere would significantly disrupt airport operations; (ii) an assurance that

air carriers will provide adequate food and potable drinking water no later than two hours after the

aircraft leaves the gate (in the case of departure) or touches down (in the case of arrival) if the aircraft

remains on the tarmac, unless the pilot-in-command determines that safety or security considerations

preclude such service; and (iii) an assurance of operable lavatories, as well as adequate medical

attention, if needed. Air carriers are required to publish their contingency plans on their websites.

The Passenger Protection Rules also subject airlines to potential DOT enforcement action for unfair

and deceptive practices in the event of chronically delayed domestic flights (i.e., domestic flights that

operate at least ten times a month and arrive more than 30 minutes late more than 50 percent of the

time during that month). In addition, airlines are required to (i) display ontime performance on their

websites; (ii) adopt customer service plans, publish those plans on their website, and audit their own

compliance with their plans; (iii) designate an employee to monitor the performance of their flights;

(iv) provide information to passengers on how to file complaints; and (v) respond in a timely and

substantive fashion to consumer complaints.

The Passenger Protection Rules also require airlines to (i) pay up to four times the passenger’s one-way

fare to their final destination that day in compensation to each passenger denied boarding involuntarily

from an oversold flight; (ii) refund any checked bag fee for permanently lost luggage; (iii) prominently

disclose all potential fees for optional ancillary services on their websites; and (iv) refund passenger

fees paid for ancillary services if a flight cancels or oversells and a passenger is unable to take

advantage of such services. The FAA Reauthorization Act of 2018, described below, directs the DOT

to revise regulations to clarify there is no maximum level of compensation for involuntary denied

boarding as a result of an oversold flight.

The Passenger Protection Rules also require that (i) advertised fares include all government-mandated

taxes and fees; (ii) passengers be allowed to either hold a reservation for up to 24 hours without

making a payment or cancel a paid reservation without penalty for 24 hours after the reservation is

made, as long as the reservation is made at least seven days in advance of travel; (iii) fares may not

increase after purchase; (iv) baggage fees must be disclosed to the passenger at the time of booking;

(v) the same baggage allowances and fees must apply throughout a passenger’s trip; (vi) baggage fees

must be disclosed on e-ticket confirmations; and (vii) passengers must be promptly notified in the

event of delays of more than 30 minutes or if there is a cancellation or diversion of their flight.

The DOT has expressed its intent to aggressively investigate alleged violations of its consumer

protection rules. Airlines that violate any DOT regulation are subject to potential fines of up to $33,333

per occurrence.

The Company is also monitoring other potential rulemakings that could impact its business. The DOT

is preparing a proposed rule for the purpose of improving accessibility of lavatories on single-aisle

aircraft and of in-flight entertainment. The proposed rule may require both short-term and long-term

measures be taken to fully address the challenges persons with mobility impairments face when

traveling on single-aisle aircraft, including the eventual requirement that accessible lavatories be

available for individuals who use wheelchairs. The future proposed rule is also expected to address the

improvement of accessibility of in-flight entertainment by requiring certain movies and shows

displayed on such aircraft to be captioned to provide access to deaf and hard of hearing passengers. In

addition, audio described entertainment would be available to enable people who are blind to listen to

the visual narration of movies and shows.

The DOT is also contemplating a proposed rule to consider, among other things, (i) whether carriers

should be required to supply in-flight medical oxygen for a fee to passengers who require it to access

air transportation; and (ii) whether to broaden the scope of passengers with disabilities who must be

afforded seats with extra leg room, and whether carriers should be required to provide seating

accommodations with extra leg room in all classes of service.

The FAA Reauthorization Act of 2018 was passed by Congress on October 3, 2018, and signed into

law on October 5, 2018 (the “Reauthorization Act”). The Reauthorization Act includes various

provisions requiring additional potential DOT rulemaking. For example:

• the DOT has been directed to begin a rulemaking to re-define permissible “service animals”

on commercial aircraft, including considering whether to adopt the same definition of

“service animal” contained in the Department of Justice rules implementing the Americans

with Disabilities Act, in order to reduce the likelihood of passengers falsely claiming that

their pets are service animals;

• the DOT has been given the authority to impose triple the maximum fines for damages to

passengers’ wheelchairs or other mobility aids, as well as for injury to passengers with

disabilities;

• the DOT has been directed to implement a rulemaking to require air carriers to promptly

provide a refund for any ancillary fee paid for services a passenger does not receive; and

• the Reauthorization Act makes it an unfair and deceptive practice to involuntarily deplane a

revenue passenger onboard an aircraft if that passenger is traveling on a confirmed

reservation and is checked-in for the relevant flight prior to the applicable check-in deadline.

Aviation Taxes and Fees

The statutory authority for the federal government to collect most types of aviation taxes, which are

used, in part, to finance programs administered by the FAA, must be periodically reauthorized by the

U.S. Congress. The Reauthorization Act extends most commercial aviation taxes for five years through

September 30, 2023.

In addition to FAA-related taxes, there are additional federal taxes related to the U.S. Department of

Homeland Security. These taxes do not need to be reauthorized periodically. Congress has set the

Transportation Security Fee paid by passengers at $5.60 per one-way passenger trip. In addition,

inbound international passengers are subject to immigration and customs fees that are indexed to

inflation. These fees are used to support the operations of U.S. Customs and Border Protection

(“CBP”). Finally, the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service

imposes an agriculture inspection fee on arriving international passengers.

In 2019, the Company expects to continue to benefit from the comprehensive U.S. tax reform

legislation enacted by Congress in late 2017, which includes, among other items, a reduced federal

corporate tax rate. At the same time, the legislation eliminates certain tax deductions and preferences.

These changes not only impact the Company directly, but could be impacting the U.S. economy as a

whole, including consumer demand.

In 2019, Congress is expected to consider legislation to boost federal spending on public infrastructure,

including at airports. This legislation could result in an increase in the maximum Passenger Facility

Charge, which is assessed by airports and collected by airlines, currently capped at $4.50 per passenger

enplanement (with a maximum of two Passenger Facility Charges on a one-way trip or four Passenger

Facility Charges on a roundtrip, for a maximum of $18.00 total). Conversely, this legislation could also

result in an infusion of federal investment in public infrastructure that may benefit all modes of

transportation.

Finally, the annual congressional budget process is another legislative vehicle by which new aviation

taxes or regulations may be imposed. The annual appropriations bill funds the federal government -

including the DOT, the FAA, the Transportation Security Administration (the “TSA”), and CBP.

Passage of the fiscal year 2020 appropriations bill will be considered throughout 2019 and could result

in an increase in one or more of the taxes and fees discussed above, as well as new mandates on the

DOT to begin or complete rulemakings related to airline consumer protection.

Operational, Safety, and Health Regulation

The FAA has the authority to regulate safety aspects of civil aviation operations. Specifically, the

Company and certain of its third-party service providers are subject to the jurisdiction of the FAA with

respect to aircraft maintenance and operations, including equipment, ground facilities, dispatch,

communications, training, and other matters affecting air safety. The FAA, acting through its own

powers or through the appropriate U.S. Attorney, has the power to bring proceedings for the imposition

and collection of civil penalties for violation of the FAA regulations.

The FAA requires airlines to obtain and maintain an Air Carrier Operating Certificate, as well as other

certificates, approvals, and authorities. These certificates, approvals, and authorities are subject to

suspension or revocation for cause.

The FAA has rules in effect with respect to flight, duty, and rest regulations. Among other things, the

rules (i) require a ten hour minimum rest period prior to a pilot’s flight duty period; (ii) mandate that a

pilot must have an opportunity for eight hours of uninterrupted sleep within the rest period; and

(iii) impose pilot “flight time” and “duty time” limitations based upon report times, the number of

scheduled flight segments, and other operational factors. The Reauthorization Act contains a provision

requiring the implementation of an FAA rule mandating a rest period of at least 10 consecutive hours

prior to a flight attendant’s flight duty period. The rules affect the Company’s staffing flexibility,

which could impact the Company’s operational performance, costs, and Customer Experience.

The Reauthorization Act also contains provisions directing the FAA to issue new regulations to

establish minimum dimensions for seat size that are necessary for the safety of passengers. Further, the

Reauthorization Act expands human trafficking training requirements beyond flight attendants to

include several public-facing Employee work groups.

In addition to its role as safety regulator, the FAA operates the nation’s air traffic control system and

has continued its lengthy and ongoing effort to implement a multi-faceted, air traffic control

modernization program called “NextGen.” The Air Traffic Organization (“ATO”) is the operational

arm of the FAA. The ATO is responsible for providing safe and efficient air navigation services to all

of the United States and large portions of the Atlantic and Pacific Oceans and the Gulf of Mexico. The

Company is subject to any operational changes imposed by the FAA/ATO as they relate to the

NextGen program, as well as the day-to-day management of the air traffic control system. The

Reauthorization Act directs the FAA to (i) undertake a comprehensive review and prepare a full report

on NextGen implementation and (ii) annually report on NextGen progress and return on investment.

The Company is subject to various other federal, state, and local laws and regulations relating to

occupational safety and health, including Occupational Safety and Health Administration and Food and

Drug Administration regulations.

Security Regulation

Pursuant to the Aviation and Transportation Security Act (“ATSA”), the TSA, a division of the

U.S. Department of Homeland Security, is responsible for certain civil aviation security matters. ATSA

and subsequent TSA regulations and procedures implementing ATSA address, among other things,

(i) flight deck security; (ii) the use of federal air marshals onboard flights; (iii) airport perimeter access

security; (iv) airline crew security training; (v) security screening of passengers, baggage, cargo, mail,

employees, and vendors; (vi) training and qualifications of security screening personnel; (vii) provision

of passenger data to CBP; and (viii) background checks.

Under ATSA, substantially all security officers at airports are federal employees, and significant other

elements of airline and airport security are overseen and performed by federal employees, including

federal security managers, federal law enforcement officers, and federal air marshals. TSA personnel

and TSA-mandated security procedures can affect the Company’s operations, costs, and Customer

experience. For example, as part of its security measures, the TSA regulates the types of liquid items

that can be carried onboard aircraft. In addition, as part of its Secure Flight program, the TSA requires

airlines to collect a passenger’s full name (as it appears on a government-issued ID), date of birth,

gender, and Redress Number (if applicable). Airlines must transmit this information to Secure Flight,

which uses the information to perform matching against terrorist watch lists. After matching passenger

information against the watch lists, Secure Flight transmits the matching results back to airlines. This

serves to identify individuals for enhanced security screening and to prevent individuals on watch lists

from boarding an aircraft. It also helps prevent the misidentification of passengers who have names

similar to individuals on watch lists. The TSA has also implemented enhanced security procedures as

part of its enhanced, multi-layer approach to airport security, including physical pat down procedures,

at security checkpoints. Such enhanced security procedures have raised privacy concerns by some air

travelers, and have caused delays at screening checkpoints.

Pursuant to the Reauthorization Act, the FAA is required to issue an order requiring installation of a

physical secondary cockpit barrier on each newly-manufactured aircraft for delivery to a passenger air

carrier. This could impose a substantial cost on the Company.

The Company, in conjunction with the TSA, participates in TSA PreCheck™, a pre-screening initiative

that allows a select group of low risk passengers to move through security checkpoints with greater

efficiency and ease when traveling. Eligible passengers may use dedicated screening lanes at certain

airports the Company serves for screening benefits, which include leaving on shoes, light outerwear,

and belts, as well as leaving laptops and permitted liquids in carryon bags. A similar CBP-administered

program, Global Entry

, allows expedited clearance for pre-approved, low-risk international travelers

upon arrival in the United States.

The Company also participates in the TSA Known Crewmember

program, which is a risk-based

screening system that enables TSA security officers to positively verify the identity and employment

status of flight-crew members. The program expedites flight crew member access to sterile areas of

airports.

The Company works collaboratively with foreign national governments and airports to provide risk-

based security measures at international departure locations.

In September 2017, the Department of Homeland Security granted the Company designation coverage

under the Support Anti-Terrorism by Fostering Effective Technologies Act of 2002 (the “SAFETY

Act”) through September 29, 2022. The designation is based on the security program utilized by the

Company to protect its Employees, Customers, and assets from terrorists and other criminal activities.

Designation coverage affords the Company certain limitations of liability for claims arising out of an

“act of terrorism,” as defined under the SAFETY Act.

The Company has also made significant investments to address the effect of security regulations,

including investments in facilities, equipment, and technology to process Customers, checked baggage,

and cargo efficiently; however, the Company is not able to predict the impact, if any, that various

security measures or the lack of TSA resources at certain airports will have on Passenger revenues and

the Company’s costs, either in the short-term or the long-term.

Environmental Regulation

The Company is subject to various federal laws and regulations relating to the protection of the

environment, including the Clean Air Act, the Resource Conservation and Recovery Act, the Clean

Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response,

Compensation and Liability Act, as well as state and local laws and regulations. These laws and

regulations govern aircraft drinking water, emissions, storm water discharges from operations, and the

disposal of materials such as jet fuel, chemicals, hazardous waste, and aircraft deicing fluid.

Additionally, in conjunction with airport authorities, other airlines, and state and local environmental

regulatory agencies, the Company, as a normal course of business, undertakes voluntary investigation

or remediation of soil or groundwater contamination at various airport sites. The Company does not

believe that any environmental liability associated with these airport sites will have a material adverse

effect on the Company’s operations, costs, or profitability, nor has it experienced any such liability in

the past that has had a material adverse effect on its operations, costs, or profitability.

Further regulatory developments pertaining to the control of engine exhaust emissions from ground

support equipment could increase operating costs in the airline industry. The Company does not

believe, however, that pending environmental regulatory developments in this area will have a material

effect on the Company’s capital expenditures or otherwise materially adversely affect its operations,

operating costs, or competitive position.

The federal government, as well as several state and local governments, the governments of other

countries, and the United Nations’ International Civil Aviation Organization (“ICAO”) are considering

legislative and regulatory proposals and voluntary measures to address climate change by reducing

green-house gas emissions. At the federal level, in July 2016, the Environmental Protection Agency

(the “EPA”) issued a final endangerment finding for greenhouse gas emissions from certain types of

aircraft engines, which the agency determined contribute to the pollution that causes climate change

and endangers public health and the environment. Following this endangerment finding, per the federal

Clean Air Act, the EPA is required to promulgate new regulations for controlling greenhouse gas

emissions from aircraft, including potential new carbon-efficiency standards on aircraft and engine

manufacturers.

The EPA’s endangerment finding preceded adoption by the ICAO Assembly of a new “global market-

based measure” framework in an effort to control carbon dioxide emissions from international aviation.

The focal point of this framework is a carbon offsetting system on aircraft operators designed to cap

the growth of emissions related to international aviation emissions. Assuming the U.S. Government

remains committed to the ICAO framework agreement and adopts terms for implementing it into U.S.

law, this system is scheduled to be phased in beginning in 2021. Regardless of the method of

regulation, policy changes with regard to climate change are possible, which could significantly

increase operating costs in the airline industry and, as a result, adversely affect operations.

In addition to climate change, aircraft noise continues to be an environmental focus, especially as the

FAA implements new flight procedures as part of its NextGen airspace modernization program

discussed above. The Airport Noise and Capacity Act of 1990 gives airport operators the right, under

certain circumstances, to implement local noise abatement programs, provided they do not

unreasonably interfere with interstate or foreign commerce or the national air transportation system.

Some airports have established airport restrictions to limit noise, including restrictions on aircraft types

to be used and limits on the number of hourly or daily operations or the time of operations. These types

of restrictions can cause curtailments in service or increases in operating costs and can limit the ability

of air carriers to expand operations at the affected airports.

At the federal level, the FAA has committed to inform and involve the public, engage with

communities, and give meaningful consideration to community concerns and views when developing

new flight procedures, and there is a possibility that Congress may enact legislation in 2019 to address

local noise concerns at one or more commercial airports in the United States. In addition, the

Reauthorization Act requires the FAA to consider community noise concerns when proposing a new

navigation departure procedure or amending an existing navigation procedure that would direct aircraft

over noise sensitive areas. This requirement could delay or otherwise impede the implementation or

use of more efficient flight paths. In 2017, the FAA published a final rule adopting the ICAO noise

standard for new type design large aircraft submitted for certification after December 31, 2017;

however, this standard does not affect the Company’s in-service fleet, nor does it require that

manufacturers who produce existing aircraft types, such as the Boeing 737, meet the standard with

respect to these types of aircraft.

The Company remains steadfast in its desire to pursue, implement, and enhance initiatives that will

reduce fuel consumption and improve fuel efficiency. During 2018, the Company continued its efforts

at more efficient flight planning and flight operation, while also benefitting from the continued

addition of Boeing 737 MAX 8 aircraft to the Company’s fleet. In addition, over the years, the

Company has undertaken a number of other fuel conservation and carbon emission reduction initiatives

such as the following:

• installation of blended winglets, which reduce drag and increase fuel efficiency, on all

aircraft in the Company’s fleet;

• upgrading of the Company’s 737-800 fleet with designed, split scimitar winglets;

• periodic engine washes;

• use of electric ground power for aircraft air and power at the gate and for ground support

equipment at select locations;

• deployment of auto-throttle and vertical navigation to maintain optimum cruising speeds;

• implementation of engine start procedures to support the Company’s single engine taxi

procedures;

• adjustment of the timing of auxiliary power unit starts on originating flights to reduce

auxiliary power unit usage;

• implementation of fuel planning initiatives to safely reduce loading of excess fuel;

• aircraft cabin interior retrofitting to reduce weight;

• reduction of aircraft engine idle speed while on the ground, which also increases engine life;

• galley refreshes with dry goods weight reduction;

• Company-optimized routes (flying the best wind routes to take advantage of tailwinds or to

minimize headwinds);

• improvements in flight planning algorithms to better match the Company’s aircraft flight

management system and thereby enabling the Company to fly at the most efficient altitudes;

• substitution of Pilot and Flight Attendant flight bags with lighter Electronic Flight Bag

tablets; and

• implementation of Real Time Descent Winds (automatic uplinking of up-to-date wind data to

the aircraft, allowing crews to time the descent to minimize thrust inputs).

The Company has also participated in Required Navigation Performance (“RNP”) operations as part of

the FAA’s Performance Based Navigation program, which is intended to modernize the U.S. air traffic

control system by addressing limitations on air transportation capacity and making more efficient use

of airspace. RNP combines the capabilities of advanced aircraft avionics, Global Positioning System

(“GPS”) satellite navigation (instead of less precise ground-based navigation), and new flight

procedures to (i) enable aircraft to carry navigation capabilities, rather than relying on airports;

(ii) improve operational capabilities by opening up many new and more direct airport approach paths

to produce safer and more efficient flight patterns; and (iii) conserve fuel and reduce carbon emissions.

Since its first use of RNP in 2011, Southwest has conducted approximately 143,000 RNP approaches,

including over 85,000 in 2018. Southwest must rely on RNP approaches published by the FAA, and

the rate of introduction and utilization of RNP approaches continues to be slower than expected, with

fuel efficient RNP approaches currently available at only 50 of Southwest’s airports. In addition, even

at airports with approved RNP approaches, the clearance required from air traffic controllers to

perform RNP approaches is often not granted. Southwest continues to work with the FAA to develop

and seek more use of RNP approaches and to evolve air traffic control rules to support greater

utilization of RNP.

As part of its commitment to corporate sustainability, the Company has published the Southwest One

Report

describing the Company’s sustainability strategies, which include the foregoing and other

efforts to reduce greenhouse gas emissions and address other environmental matters such as energy

and water conservation, waste minimization, and recycling. Information contained in the Southwest

One Report is not incorporated by reference into, and does not constitute a part of, this Form 10-K.

Data Privacy and Security Regulation

The airline industry has experienced heightened legislative and regulatory focus on data privacy and

security in the United States and elsewhere. As a result, the Company must comply with a growing and

fast-evolving set of legal requirements in this area. For example, the California Consumer Privacy Act

of 2018 requires significant compliance efforts from businesses across the United States to the extent

they do business in California and collect personal information from California residents. The new law

gives consumers much broader access and control over their personal information. This regulatory

environment is increasingly challenging and may present material obligations and risks to the

Company’s business, including significantly expanded compliance burdens, costs, and enforcement

risks.

The Company expects the federal government to closely examine cyber-security and data privacy in

2019. This could include the DOT looking at new requirements, guidance, or best practices for the

industry, as well as the introduction of new legislation in Congress.

International Regulation

All international air service is subject to certain U.S. federal requirements and approvals, as well as the

regulatory requirements of the appropriate authorities of the foreign countries involved. The Company

has obtained the necessary economic authority from the DOT, as well as approvals required by the

FAA and applicable foreign government entities, to conduct operations, under certain circumstances, to

points outside of the continental United States currently served by the Company. Certain international

authorities and approvals held by the Company are subject to periodic renewal requirements. The

Company requests extensions of such authorities and approvals when and as appropriate. To the extent

the Company seeks to serve additional foreign destinations in the future, or to renew its authority to

serve certain routes, it may be required to obtain necessary authority from the DOT and/or approvals

from the FAA, as well as any applicable foreign government entity.

Certain international route authorities are governed by bilateral air transportation agreements between

the United States and foreign countries. Changes in U.S. or foreign government aviation policies could

result in the alteration or termination of such agreements, diminish the value of the Company’s existing

international authorities, present barriers to renewing existing or securing new authorities, or otherwise

affect the Company’s international operations. In particular, there is still a degree of uncertainty about

the future of scheduled commercial flight operations between the United States and Cuba as a result of

changes in diplomatic relations between the two governments, as well as travel and trade restrictions

implemented by the U.S. government in 2017. There are also capacity limitations at certain airports in

Mexico and the Caribbean, which could impact future service levels. In general, bilateral agreements

between the United States and foreign countries the Company currently serves, or may serve in the

future, may be subject to renegotiation or reinterpretation from time to time. While the U.S.

government has negotiated “open skies” agreements with many countries, which allow for unrestricted

access between the United States and respective foreign destinations, agreements with other countries

may restrict the Company’s entry into those destinations and/or its related growth opportunities.

The CBP is the federal agency of the U.S. Department of Homeland Security charged with facilitating

international trade, collecting import duties, and enforcing U.S. regulations with respect to trade,

customs, and immigration. As the Company expands its international flight offerings, CBP and its

requirements and resources will also become increasingly important considerations to the Company.

For instance, with the exception of flights from a small number of foreign “preclearance” locations,

arriving international flights may only land at CBP-designated airports, and CBP officers must be

present and in sufficient quantities at those airports to effectively process and inspect arriving

international passengers and cargo. Thus, CBP personnel and CBP-mandated procedures can affect the

Company’s operations, costs, and Customer experience. The Company has made, and expects to

continue to make, significant investments in facilities, equipment, and technologies at certain airports

in order to improve the Customer experience and to assist CBP with its inspection and processing

duties; however, the Company is not able to predict the impact, if any, that various CBP measures or

the lack of CBP resources will have on Company revenues and costs, either in the short-term or the

long-term.

Insurance

The Company carries insurance of types customary in the airline industry and in amounts the Company

deems adequate to protect the Company and its property and to comply both with federal regulations

and certain of the Company’s credit and lease agreements. The policies principally provide coverage

for public and passenger liability, property damage, cargo and baggage liability, loss or damage to

aircraft, engines, and spare parts, and workers’ compensation. In addition, the Company carries a

cyber-security insurance policy with regards to data protection and business interruption associated

with both security breaches from malicious parties and from certain system failures.

Although the Company has been able to purchase aviation, property, liability, and professional

insurance via the commercial insurance marketplace, available commercial insurance could be more

expensive in the future and/or have material differences in coverage than insurance that has historically

been provided and may not be adequate to protect the Company’s risk of loss from future events,

including acts of terrorism. Further, available cyber-security insurance with regards to data protection

and business interruption could be more expensive in the future and/or have material differences in

coverage than insurance that has historically been provided and may not be adequate to protect the

Company’s risk of loss. With respect to any insurance claims, policy coverages and claims are subject

to acceptance by the many insurers involved and may require arbitration and/or mediation to

effectively settle the claims over prolonged periods of time.

Competition

Competition within the airline industry is intense and highly unpredictable, and Southwest currently

competes with other airlines on virtually all of its scheduled routes. As a result of moderately improved

economic conditions and an increased focus by airlines on costs, the airline industry has become

increasingly competitive in recent years with a healthier financial condition and improved profitability.

Key competitive factors within the airline industry include (i) pricing and cost structure; (ii) routes,

loyalty programs, and schedules; and (iii) customer service, operational reliability, and amenities.

Southwest also competes for customers with other forms of transportation, as well as alternatives to

travel. In recent years, the majority of domestic airline service has been provided by Southwest and the

other largest major U.S. airlines, including American Airlines, Delta Air Lines, and United Airlines.

The DOT defines major U.S. airlines as those airlines with annual revenues of at least $1 billion; there

are currently 13 passenger airlines offering scheduled service, including Southwest, that meet this

standard.

Pricing and Cost Structure

Pricing is a significant competitive factor in the airline industry, and the availability of fare information

on the Internet allows travelers to easily compare fares and identify competitor promotions and

discounts. During 2018, the Company experienced competitive challenges associated with industry

changes from both a fare level and product offering perspective. As discussed above under “Business -

Industry,” other carrier offerings ranged from a “Basic Economy” fare product, designed to compete

with ULCC fares, to a “Premium Economy” product, targeted to appeal to customers willing to pay a

premium for additional amenities. Also in response to ULCC pricing, some carriers have removed their

fare floors for certain routes, leading to a lower fare offering across the industry. These changes have

put increased pressure on the industry’s fare environment and have created a challenging revenue

environment.

Pricing can be driven by a variety of factors. For example, airlines often discount fares to drive traffic

in new markets or to stimulate traffic when necessary to improve load factors and/or cash flow. In

addition, multiple airlines have been able to reduce fares because they have been able to lower their

operating costs as a result of reorganization within and outside of bankruptcy. Further, some of the

Company’s competitors have continued to grow and modernize their fleets and expand their networks,

potentially enabling them to better control costs per available seat mile (the average cost to fly an

aircraft seat (empty or full) one mile), which in turn may enable them to lower their fares.

The Company believes its low-cost operating structure continues to provide it with an advantage over

many of its airline competitors by enabling it to continue to charge low fares. However, ULCCs, which

have increased capacity in the Company’s markets, have surpassed the Company’s cost advantage with

larger aircraft, increased seat density, and lower wages. The Company believes it continues to have a

competitive advantage through its differentiation of Southwest from many of its competitors by not

charging additional fees for items such as first and second checked bags for each ticketed Customer,

flight changes, seat selection, snacks, curb-side check-in, and telephone reservations; nevertheless, it

has become increasingly difficult for the Company to improve upon its industry cost position absent

using techniques favored by competitors.

Routes, Loyalty Programs, and Schedules

The Company also competes with other airlines based on markets served, loyalty opportunities, and

flight schedules. Some major airlines have more extensive route structures than Southwest, including

more extensive international networks. In addition, many competitors have entered into significant

commercial relationships with other airlines, such as global alliances, code-sharing, and capacity

purchase agreements, which increase the airlines’ opportunities to expand their route offerings. An

alliance or code-sharing agreement enables an airline to offer flights that are operated by another

airline and also allows the airline’s customers to book travel that includes segments on different

airlines through a single reservation or ticket. As a result, depending on the nature of the specific

alliance or code-sharing arrangement, a participating airline may be able to, among other things,

(i) offer its customers access to more destinations than it would be able to serve on its own, (ii) gain

exposure in markets it does not otherwise serve, and (iii) increase the perceived frequency of its flights

on certain routes. Alliance and code-sharing arrangements not only provide additional route flexibility

for participating airlines, they can also allow these airlines to offer their customers more opportunities

to earn and redeem loyalty miles or points. A capacity purchase agreement enables an airline to expand

its route structure by paying another airline (e.g., a regional airline with smaller aircraft) to operate

flights on its behalf in markets that it does not, or cannot, serve itself. The Company continues to

evaluate and implement initiatives to better enable itself to offer additional itineraries.

The Company’s anticipated new routes to Hawaii in 2019 are expected to be subject to significant

competition. West Coast to Hawaii capacity increased in 2018, and is expected to continue to increase

in 2019 with Southwest flights from California to Hawaii. Certain other major airlines have more

experience with Hawaiian operations and have more extensive Hawaiian route structures and schedules

than Southwest. Further, the longer stage length of the Company’s Hawaiian routes, as compared with

the Company’s average stage length of its other routes, could put pressure on the Company’s revenues

per available seat mile.

Customer Service, Operational Reliability, and Amenities

Southwest also competes with other airlines with respect to customer service, operational reliability

(such as ontime performance), and passenger amenities. According to statistics published by the DOT,

Southwest consistently ranks at or near the top among domestic carriers in Customer Satisfaction for

having the lowest Customer complaint ratio. However, carriers are increasingly focusing on

operational reliability as an opportunity to win and retain Customers. In addition, some airlines have

more seating options and associated passenger amenities than does Southwest, including first-class,

business class, and other premium seating and related amenities. New and different types of aircraft

flown by competitors could have operational attributes and passenger amenities that could be

considered more favorable than those associated with the Company’s existing fleet.

Other Forms of Competition

The airline industry is subject to varying degrees of competition from other forms of transportation,

including surface transportation by automobiles, buses, and trains. Inconveniences and delays

associated with air travel security measures can increase surface competition. In addition, surface

competition can be significant during economic downturns when consumers cut back on discretionary

spending and fewer choose to fly, or when gasoline prices are lower, making surface transportation a

less expensive option. Because of the relatively high percentage of short-haul travel provided by

Southwest, it is particularly exposed to competition from surface transportation in these instances. The

airline industry is also subject to technology advancements that may limit the demand for air travel,

including competition from alternatives to air travel such as videoconferencing and the Internet, which

can increase in the event of travel inconveniences and economic downturns. The Company is subject to

the risk that air travel inconveniences and economic downturns may, in some cases, result in

permanent changes to consumer behavior in favor of surface transportation and electronic

communications.

Seasonality

The Company’s business is seasonal. Generally, in most markets the Company serves, demand for air

travel is greater during the summer months, and, therefore, revenues in the airline industry tend to be

stronger in the second (April 1 - June 30) and third (July 1 - September 30) quarters of the year than in

the first (January 1 - March 31) and fourth (October 1 - December 31) quarters of the year. As a result,

in many cases, the Company’s results of operations reflect this seasonality. Factors that could alter this

seasonality include, among others, the price of fuel, general economic conditions, extreme or severe

weather and natural disasters, fears of terrorism or war, or changes in the competitive environment.

Therefore, the Company’s quarterly operating results are not necessarily indicative of operating results

for the entire year, and historical operating results in a quarterly or annual period are not necessarily

indicative of future operating results.

Employees

At December 31, 2018, the Company had approximately 58,800 active fulltime equivalent Employees,

consisting of approximately 24,900 flight, 3,000 maintenance, 20,800 ground, Customer, and fleet

service, and 10,100 management, technology, finance, marketing, and clerical personnel (associated

with non-operational departments). Approximately 83 percent of these Employees were represented by

labor unions. The Railway Labor Act establishes the right of airline employees to organize and bargain

collectively. Under the Railway Labor Act, collective-bargaining agreements between an airline and a

labor union generally do not expire, but instead become amendable as of an agreed date. By the

amendable date, if either party wishes to modify the terms of the agreement, it must notify the other

party in the manner required by the Railway Labor Act and/or described in the agreement. After receipt

of the notice, the parties must meet for direct negotiations. If no agreement is reached, either party may

request the National Mediation Board to appoint a federal mediator. If no agreement is reached in

mediation, the National Mediation Board may determine an impasse exists and offer binding

arbitration to the parties. If either party rejects binding arbitration, a 30-day “cooling off” period

begins. At the end of this 30-day period, the parties may engage in “self-help,” unless a Presidential

Emergency Board is established to investigate and report on the dispute. The appointment of a

Presidential Emergency Board maintains the “status quo” for an additional period of time. If the parties

do not reach agreement during this period, the parties may then engage in “self-help.” “Self-help”

includes, among other things, a strike by the union or the airline’s imposition of any or all of its

proposed amendments and the hiring of new employees to replace any striking workers.

The following table sets forth the Company’s Employee groups subject to collective bargaining and the

status of their respective collective-bargaining agreements as of December 31, 2018:

Employee Group

Approximate Number

of Employees Representatives Status of Agreement

Southwest Pilots 9,100

Southwest Airlines Pilots’

Association (“SWAPA”) Amendable September 2020

Southwest Flight Attendants 15,200

Transportation Workers of

America, AFL-CIO, Local 556

(“TWU 556”) In negotiations

Southwest Ramp, Operations,

Provisioning, Freight Agents 13,400

Transportation Workers of

America, AFL-CIO, Local 555

(“TWU 555”) Amendable February 2021

Southwest Customer Service

Agents, Customer

Representatives, and Source of

Support Representatives 7,400

International Association of

Machinists and Aerospace

Workers, AFL-CIO (“IAM 142”) In negotiations

Southwest Material Specialists

(formerly known as Stock

Clerks) 300

International Brotherhood of

Teamsters, Local 19 (“IBT 19”)

In negotiations. The

Company reached a tentative

agreement with IBT 19 in

January 2019. If ratified by

the Company’s Material

Specialists, the contract will

become amendable in 2024.

Southwest Mechanics 2,400

Aircraft Mechanics Fraternal

Association (“AMFA”) In negotiations

Southwest Aircraft

Appearance Technicians 200 AMFA Amendable November 2020

Southwest Facilities

Maintenance Technicians 40 AMFA Amendable November 2022

Southwest Dispatchers 300

Transportation Workers of

America, AFL-CIO, Local 550

(“TWU 550”) Amendable June 2019

Southwest Flight Simulator

Technicians 50

International Brotherhood of

Teamsters (“IBT”)

Amendable May 2019. The

Company reached a tentative

agreement with IBT in

February 2019. If ratified by

the Company’s Flight

Simulator Technicians, the

contract will become

amendable in 2024.

Southwest Flight Crew

Training Instructors 130

Transportation Workers of

America, AFL-CIO, Local 557

(“TWU 557”) Amendable January 2020

Southwest Meteorologists 10 TWU 550 Amendable June 2019

Additional Information About the Company

The Company was incorporated in Texas in 1967. The following documents are available free of

charge through the Company’s website, www.southwest.com: the Company’s annual report on

Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to

those reports that are filed with or furnished to the Securities and Exchange Commission (“SEC”)

pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. These materials are made

available through the Company’s website as soon as reasonably practicable after they are electronically

filed with, or furnished to, the SEC. In addition to its reports filed or furnished with the SEC, the

Company publicly discloses material information from time to time in its press releases, at annual

meetings of Shareholders, in publicly accessible conferences and Investor presentations, and through

its website (principally in its Press Room and Investor Relations pages). References to the Company’s

website in this Form 10-K are provided as a convenience and do not constitute, and should not be

deemed, an incorporation by reference of the information contained on, or available through, the

website, and such information should not be considered part of this Form 10-K.

DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION

This Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the

Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking

statements are based on, and include statements about, the Company’s estimates, expectations, beliefs,

intentions, and strategies for the future, and the assumptions underlying these forward-looking

statements. Specific forward-looking statements can be identified by the fact that they do not relate

strictly to historical or current facts and include, without limitation, words such as “anticipates,”

“believes,” “estimates,” “expects,” “intends,” “may,” “will,” “would,” “could,” “should,” “projects,”

“plans,” “goal,” and similar expressions. Although management believes these forward-looking

statements are reasonable as and when made, forward-looking statements are not guarantees of future

performance and involve risks and uncertainties that are difficult to predict. Therefore, actual results

may differ materially from what is expressed in or indicated by the Company’s forward-looking

statements or from historical experience or the Company’s present expectations. Known material risk

factors that could cause these differences are set forth below under “Risk Factors.” Additional risks or

uncertainties (i) that are not currently known to the Company, (ii) that the Company currently deems to

be immaterial, or (iii) that could apply to any company, could also materially adversely affect the

Company’s business, financial condition, or future results.

Caution should be taken not to place undue reliance on the Company’s forward-looking statements,

which represent the Company’s views only as of the date this Form 10-K is filed. The Company

undertakes no obligation to update publicly or revise any forward-looking statement, whether as a

result of new information, future events, or otherwise.

Item 1A. Risk Factors

The airline industry is particularly sensitive to changes in economic conditions; in the event of

unfavorable economic conditions or economic uncertainty, the Company’s results of operations

could be negatively affected, which could require the Company to adjust its business strategies.

The airline industry, which is subject to relatively high fixed costs and highly variable and

unpredictable demand, is particularly sensitive to changes in economic conditions. Historically,

unfavorable U.S. economic conditions have driven changes in travel patterns and have resulted in

reduced spending for both leisure and business travel. For some consumers, leisure travel is a

discretionary expense, and short-haul travelers, in particular, have the option to replace air travel with

surface travel. Businesses are able to forego air travel by using communication alternatives such as

videoconferencing and the Internet or may be more likely to purchase less expensive tickets to reduce

costs, which can result in a decrease in average revenue per seat. Unfavorable economic conditions,

when low fares are often used to stimulate traffic, have also historically hampered the ability of airlines

to raise fares to counteract any increases in fuel, labor, and other costs. Although the U.S. economy has

experienced modest growth over the course of the past several years, any continuing or future U.S. or

global economic uncertainty could negatively affect the Company’s results of operations and could

cause the Company to adjust its business strategies. Further, because expenses of a flight do not vary

significantly with the number of passengers carried, a relatively small change in the number of

passengers can have a disproportionate effect on an airline’s operating and financial results. Therefore,

any general reduction in airline passenger traffic could adversely affect the Company’s results of

operations.

The Company’s business can be significantly impacted by high and/or volatile fuel prices, and

the Company’s operations are subject to disruption in the event of any delayed supply of fuel;

therefore, the Company’s strategic plans and future profitability are likely to be impacted by the

Company’s ability to effectively address fuel price increases and fuel price volatility and

availability.

Airlines are inherently dependent upon energy to operate, and jet fuel and oil represented

approximately 25 percent of the Company’s operating expenses for 2018. As discussed above under

“Business - Cost Structure,” the cost of fuel can be extremely volatile and unpredictable, and even a

small change in market fuel prices can significantly affect profitability. Furthermore, volatility in fuel

prices can be due to many external factors that are beyond the Company’s control. For example, fuel

prices can be impacted by political and economic factors, such as (i) dependency on foreign imports of

crude oil and the potential for hostilities or other conflicts in oil producing areas; (ii) limited domestic

refining or pipeline capacity due to weather, natural disasters, or other factors; (iii) worldwide demand

for fuel, particularly in developing countries, which can result in inflated energy prices; (iv) changes in

U.S. governmental policies on fuel production, transportation, taxes, and marketing; and (v) changes in

currency exchange rates.

The Company’s ability to effectively address fuel price increases could be limited by factors such as its

historical low-fare reputation, the portion of its Customer base that purchases travel for leisure

purposes, the competitive nature of the airline industry generally, and the risk that higher fares will

drive a decrease in demand. The Company attempts to manage its risk associated with volatile jet fuel

prices by utilizing over-the-counter fuel derivative instruments to hedge a portion of its future jet fuel

purchases. However, energy prices can fluctuate significantly in a relatively short amount of time.

Because the Company uses a variety of different derivative instruments at different price points, the

Company is subject to the risk that the fuel derivatives it uses will not provide adequate protection

against significant increases in fuel prices and in some cases could in fact result in hedging losses, and

the Company effectively paying higher than market prices for fuel, thus creating additional volatility in

the Company’s earnings. The Company is also subject to the risk that cash collateral may be required

to be posted to fuel hedge counterparties, which could have a significant impact on the Company’s

financial position and liquidity.

In addition, the Company is subject to the risk that its fuel derivatives will no longer qualify for hedge

accounting under applicable accounting standards, which can create additional earnings volatility.

Adjustments in the Company’s overall fuel hedging strategy, as well as the ability of the commodities

used in fuel hedging to qualify for special hedge accounting, are likely to continue to affect the

Company’s results of operations. In addition, there can be no assurance that the Company will be able

to cost-effectively hedge against increases in fuel prices. Also, see Note 2 to the Consolidated

Financial Statements for information on changes in applicable standards for hedge accounting.

The Company’s fuel hedging arrangements and the various potential impacts of hedge accounting on

the Company’s financial position, cash flows, and results of operations are discussed in more detail

under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”

“Quantitative and Qualitative Disclosures About Market Risk,” and in Note 1 and Note 10 to the

Consolidated Financial Statements.

The Company is also reliant upon the readily available supply and timely delivery of jet fuel to the

airports that it serves. A disruption in that supply could present significant challenges to the

Company’s operations and could ultimately cause the cancellation of flights and/or the inability of the

Company to provide service to a particular airport.

The Company’s low-cost structure has historically been one of its primary competitive

advantages, and many factors have affected and could continue to affect the Company’s ability

to control its costs.

The Company’s low-cost structure has historically been one of its primary competitive advantages, as

it has enabled it to offer low fares, drive traffic volume, grow market share, and protect profits. The

Company’s low-cost position has become even more significant with the increased presence of ULCCs

and changes to the fare offerings of other carriers, as discussed above; however, it has become

increasingly difficult for the Company to improve upon its industry cost position. For example, labor

and fuel costs, as well as other costs such as regulatory compliance costs, can negatively affect the

Company’s ability to control its costs. Furthermore, the Company has limited control over many of

these costs.

Jet fuel and oil constituted approximately 25 percent of the Company’s operating expenses during

2018, and the Company’s ability to control the cost of fuel is subject to the external factors discussed

in the second Risk Factor above.

Salaries, wages, and benefits constituted approximately 41 percent of the Company’s operating

expenses during 2018. The Company’s ability to control labor costs is limited by the terms of its

collective-bargaining agreements, and increased labor costs have negatively impacted the Company’s

low-cost competitive position. As discussed further under “Management’s Discussion and Analysis of

Financial Condition and Results of Operations,” the Company’s unionized workforce, which makes up

approximately 83 percent of its Employees, has had pay scale increases as a result of contractual rate

increases, which has put pressure on the Company’s labor costs. Additionally, as indicated above under

“Business - Employees,” the majority of Southwest’s unionized Employee work groups, including its

Flight Attendants; Customer Service Agents, Customer Representatives, and Source of Support

Representatives; Material Specialists; Mechanics; Dispatchers; Flight Simulator Technicians; and

Meteorologists, are in unions currently in negotiations for labor agreements or have labor agreements

that become amendable in 2019, which could result in additional pressure on the Company’s low-cost

structure.

As discussed above under “Business - Regulation,” the airline industry is heavily regulated, and the

Company’s regulatory compliance costs are subject to potentially significant increases from time to

time based on actions by regulatory agencies that are out of the Company’s control. Additionally, the

Company cannot control decisions by other airlines to reduce their capacity. When this occurs, certain

fixed airport costs are allocated among a fewer number of total flights, which can result in increased

landing fees and other costs for the Company. The Company is also reliant upon third party vendors

and service providers, in particular with respect to its fleet and technology initiatives and performance,

and the Company’s low-cost advantage is also dependent in part on its ability to obtain and maintain

commercially reasonable terms with those parties.

As discussed above under “Business - Insurance,” the Company carries insurance of types customary

in the airline industry. Although the Company has been able to purchase aviation, property, liability,

and professional insurance via the commercial insurance marketplace, available commercial insurance

could be more expensive in the future and/or have material differences in coverage than insurance that

has historically been provided and may not be adequate to protect against the Company’s risk of loss

from future events, including acts of terrorism. Further, available cyber-security insurance with regards

to data protection and business interruption could be more expensive in the future and/or have material

differences in coverage than insurance that has historically been provided and may not be adequate to

protect the Company’s risk of loss. With respect to any insurance claims, policy coverages and claims

are subject to acceptance by the many insurers involved and may require arbitration and/or mediation

to effectively settle the claims over prolonged periods of time. In addition, an accident or other incident

involving Southwest aircraft could result in costs in excess of its related insurance coverage, which

costs could be substantial. Any aircraft accident or other incident, even if fully insured, could also have

a material adverse effect on the public’s perception of the Company, which could harm its reputation

and business.

The Company cannot guarantee it will be able to maintain or improve upon its current level of low-cost

advantage over many of its airline competitors. ULCCs, which have increased capacity in the

Company’s markets, have surpassed the Company’s cost advantage. When competitors grow their

fleets and expand their networks, they are potentially able to better control costs per available seat

mile. In addition, like Southwest, some competitors have added a significant number of new and

different aircraft to their fleets, which could potentially decrease their operating costs through better

fuel efficiencies and lower maintenance costs.

The Company is increasingly dependent on technology to operate its business and continues to

implement substantial changes to its information systems; any failure, disruption, breach, or

delay in implementation of the Company’s information systems could materially adversely affect

its operations.

The Company is increasingly dependent on the use of complex technology and systems to run its

ongoing operations and support its strategic objectives.

Implementation and integration of complex systems and technology presents significant challenges in

terms of costs, human resources, and development of effective internal controls. Implementation and

integration require a balancing between the introduction of new capabilities and the managing of

existing systems, and present the risk of operational or security inadequacy or interruption, which

could materially affect the Company’s ability to effectively operate its business and/or could

negatively impact the Company’s results of operations. The Company is also reliant upon the

performance of its third party vendors for timely and effective completion of many of its technology

initiatives and for maintaining adequate information security measures.

In the ordinary course of business, the Company’s systems will continue to require modification and

refinements to address growth and changing business requirements. In addition, the Company’s

systems may require modification to enable the Company to comply with changing regulatory

requirements. Modifications and refinements to the Company’s systems have been and are expected to

continue to be expensive to implement and can divert management’s attention from other matters. In

addition, the Company’s operations could be adversely affected, or it could face imposition of

regulatory penalties, if it were unable to timely or effectively modify its systems as necessary or

appropriately balance the introduction of new capabilities with the management of existing systems.

The Company has experienced system interruptions and delays that make its websites and operational

systems unavailable or slow to respond, which can prevent the Company from efficiently processing

Customer transactions or providing services, and these could occur again in the future. These system

interruptions and delays can reduce the Company’s operating revenues and the attractiveness of its

services, as well as increase the Company’s costs. The Company’s computer and communications

systems and functions could be damaged or interrupted by catastrophic events such as fires, floods,

earthquakes, tornadoes and hurricanes, power loss, computer and telecommunications failures, acts of

war or terrorism, computer viruses, security breaches, and similar events or disruptions. Any of these

events could cause system interruptions, delays, and loss of critical data, and could prevent the

Company from processing Customer transactions or providing services, which could make the

Company’s business and services less attractive and subject the Company to liability. Any of these

events could damage the Company’s reputation and be expensive to remedy.

The Company’s business is labor intensive; therefore, the Company would be adversely affected

if it were unable to maintain satisfactory relations with its Employees or its Employees’

Representatives.

The airline business is labor intensive. Salaries, wages, and benefits represented approximately

41 percent of the Company’s operating expenses for the year ended December 31, 2018. In addition, as

of December 31, 2018, approximately 83 percent of the Company’s Employees were represented for

collective bargaining purposes by labor unions, making the Company particularly exposed in the event

of labor-related job actions. Employment-related issues that have impacted, and continue to impact, the

Company’s results of operations, some of which are negotiated items, include hiring/retention rates,

pay rates, outsourcing, work rules, health care costs, and retirement benefits.

The Company is currently dependent on single aircraft and engine suppliers, as well as single

suppliers of certain other parts; therefore, the Company would be materially adversely affected

(i) if it were unable to obtain timely or sufficient delivery of aircraft or other equipment from

Boeing or other suppliers or adequate maintenance or other support from any of these suppliers,

(ii) in the event of a mechanical or regulatory issue associated with the Company’s aircraft or

equipment, or (iii) in the event the pricing and operational attributes of the Company’s aircraft

or equipment become less competitive.

The Company is dependent on Boeing as its sole supplier for aircraft and many of its aircraft parts and

is dependent on other suppliers for certain other aircraft parts or other services. Although the Company

is able to purchase some aircraft from parties other than Boeing, most of its purchases are directly from

Boeing. Therefore, if the Company were unable to acquire additional aircraft from Boeing, or if Boeing

were unable or unwilling to make timely or adequate deliveries of aircraft or to provide adequate

support for its products, the Company’s operations would be materially adversely affected. In addition,

the Company would be materially adversely affected in the event of a mechanical or regulatory issue

associated with the Boeing 737 aircraft type, whether as a result of downtime for part or all of the

Company’s fleet, increased maintenance costs, or because of a negative perception by the flying

public. The Company believes, however, that its years of experience with the Boeing 737 aircraft type,

as well as the efficiencies Southwest has historically achieved by operating with a single aircraft type,

continue to outweigh the risks associated with its single aircraft supplier strategy. The Company is also

dependent on sole or limited suppliers for aircraft engines and certain other aircraft parts and services

and would, therefore, also be materially adversely affected in the event of the unavailability of,

inadequate support for, or a mechanical or regulatory issue associated with, engines and other parts.

The Company could also be materially adversely affected if the pricing or operational attributes of its

equipment were to become less competitive.

Developing and expanding data security and privacy requirements could increase the

Company’s operating costs, and any failure of the Company to maintain the security of certain

Customer, Employee, and business-related information could result in damage to the

Company’s reputation and could be costly to remediate.

The Company must receive information related to its Customers in order to run its business, and the

Company’s operations depend upon secure retention and the secure transmission of information over

public networks, including information permitting cashless payments. This information is subject to the

continually evolving risk of intrusion, tampering, and theft. Although the Company maintains systems

to prevent or defend against these risks, these systems require ongoing monitoring and updating as

technologies change, and security could be compromised, personal or confidential information could

be misappropriated, or system disruptions could occur. In the ordinary course of its business, the

Company also provides certain confidential, proprietary, and personal information to third parties.

While the Company seeks to obtain assurances that these third parties will protect this information,

there is a risk the security of data held by third parties could be breached. A compromise of the

Company’s security systems could adversely affect the Company’s reputation and disrupt its

operations and could also result in litigation against the Company or the imposition of penalties. In

addition, it could be costly to remediate. Although the Company has not experienced cyber incidents

that are individually, or in the aggregate, material, the Company has experienced cyber-attacks in the

past, which have thus far been mitigated by preventative, detective, and responsive measures put in

place by the Company.

In addition, in response to these types of threats, there has been heightened legislative and regulatory

focus on data privacy and security in the United States and elsewhere. As a result, the Company must

address a growing and fast-evolving set of legal requirements in this area. This regulatory environment

is increasingly challenging and may present material obligations and risks to the Company’s business,

including significantly expanded compliance burdens, costs, and enforcement risks.

The Company has a dedicated cyber–security team and program that focuses on current and emerging

data security and data privacy matters. The Company continues to assess and invest in the growing

needs of the cyber–security team through the allocation of skilled personnel, ongoing training, and

support of the adoption and implementation of technologies coupled with cyber–security risk

management frameworks.

The Company carries a cyber-security insurance policy with regards to data protection and business

interruption associated with both security breaches from malicious parties and from certain system

failures. However, available cyber-security insurance with regards to data protection and business

interruption could be more expensive in the future and/or have material differences in coverage than

insurance that has historically been provided and may not be adequate to protect the Company’s risk of

loss.

The Company’s results of operations could be adversely impacted if it is unable to effectively

execute its strategic plans.

The Company is reliant on the success of its revenue strategies and other strategic plans and initiatives

to help offset certain increasing costs. The timely and effective execution of the Company’s strategic

plans could be negatively affected by (i) the Company’s ability to timely and effectively implement,

transition, and maintain related information technology systems and infrastructure; (ii) the Company’s

ability to effectively balance its investment of incremental operating expenses and capital expenditures

related to its strategies against the need to effectively control costs; and (iii) the Company’s

dependence on third parties with respect to the execution of its strategic plans.

The airline industry has faced on-going security concerns and related cost burdens; further

threatened or actual terrorist attacks, or other hostilities, even if not made directly on the airline

industry, could significantly harm the airline industry and the Company’s operations.

Terrorist attacks or other crimes and hostilities, actual and threatened, have from time to time

materially adversely affected the demand for air travel and also have resulted in increased safety and

security costs for the Company and the airline industry generally. Safety measures create delays and

inconveniences and can, in particular, reduce the Company’s competitiveness against surface

transportation for short-haul routes. Additional terrorist attacks or other hostilities, even if not made

directly on the airline industry, or the fear of such attacks or other hostilities (including elevated

national threat warnings, government travel warnings to certain destinations, travel restrictions, or

selective cancellation or redirection of flights due to terror threats) would likely have a further

significant negative impact on the Company and the airline industry.

Airport capacity constraints and air traffic control inefficiencies have limited and could

continue to limit the Company’s growth; changes in or additional governmental regulation

could increase the Company’s operating costs or otherwise limit the Company’s ability to

conduct business.

Almost all commercial service airports are owned and/or operated by units of local or state

governments. Airlines are largely dependent on these governmental entities to provide adequate airport

facilities and capacity at an affordable cost. Similarly, the federal government singularly controls all

U.S. airspace, and airlines are dependent on the FAA operating that airspace in a safe and efficient

manner. The current air traffic control system is mainly radar-based and supported in large part by

antiquated equipment and technologies. The FAA’s protracted transition to a satellite-based air traffic

control system, as well as the implementation of policies and standards that account for the precision of

global positioning system-supported aircraft technologies, could continue to adversely impact airspace

capacity and the overall efficiency of the system, resulting in limited opportunities for the Company to

grow, longer scheduled flight times, increased delays and cancellations, and increased fuel

consumption and aircraft emissions. As discussed above under “Business - Regulation,” airlines are

also subject to other extensive regulatory requirements. These requirements often impose substantial

costs on airlines. The Company’s strategic plans and results of operations could be negatively affected

by changes in law and future actions taken by domestic and foreign governmental agencies having

jurisdiction over its operations, including, but not limited to:

• increases in airport rates and charges;

• limitations on airport gate capacity or use of other airport facilities such as the 2016 and 2017

reallocation of slots at John Wayne Airport in Orange County, California, which caused the

Company to reduce service at that airport;

• limitations on route authorities;

• actions and decisions that create difficulties in obtaining access at slot-controlled airports;

• actions and decisions that create difficulties in obtaining operating permits and approvals;

• changes to environmental regulations;

• new or increased taxes or fees;

• changes to laws that affect the services that can be offered by airlines in particular markets

and at particular airports;

• restrictions on competitive practices;

• changes in laws that increase costs for safety, security, compliance, or other Customer

Service standards;

• changes in laws that may limit the Company’s ability to enter into fuel derivative contracts to

hedge against increases in fuel prices;

• changes in laws that may limit or regulate the Company’s ability to promote the Company’s

business or fares; and

• the adoption of more restrictive locally-imposed noise regulations.

The airline industry is affected by many conditions that are beyond its control, which can impact

the Company’s business strategies and results of operations.

In addition to the unpredictable economic conditions and fuel costs discussed above, the Company,

like the airline industry in general, is affected by conditions that are largely unforeseeable and outside

of its control, including, among others:

• adverse weather and natural disasters such as the weather-related disruptions in third quarter

2018, which resulted in approximately 2,200 canceled flights;

• changes in consumer preferences, perceptions, spending patterns, or demographic trends

(including, without limitation, changes in travel patterns due to government shutdowns or

sequestration);

• actual or potential disruptions in the air traffic control system (including, for example, as a

result of inadequate FAA staffing levels due to government shutdowns or sequestration);

• actual or perceived delays at various airports resulting from government shutdowns

(including, for example, longer wait-times at TSA checkpoints due to inadequate TSA

staffing levels);

• changes in the competitive environment due to industry consolidation, industry bankruptcies,

and other factors;

• delays in deliveries of new aircraft (including, without limitation, due to the closure of the

FAA’s aircraft registry during government shutdowns);

• outbreaks of disease; and

• actual or threatened war, terrorist attacks, government travel warnings to certain destinations,

travel restrictions, and political instability.

The airline industry is intensely competitive.

As discussed in more detail above under “Business - Competition,” the airline industry is intensely

competitive. The Company’s primary competitors include other major domestic airlines, as well as

regional and new entrant airlines, surface transportation, and alternatives to transportation such as

videoconferencing and the Internet. The Company’s revenues are sensitive to the actions of other

carriers with respect to pricing, routes, loyalty programs, scheduling, capacity, customer service,

operational reliability, comfort and amenities, cost structure, aircraft fleet, and code-sharing and similar

activities.

The Company’s future results will suffer if it does not effectively manage its expanded

international operations and/or Extended Operations (“ETOPS”).

The Company’s international flight offerings are subject to U.S. Customs and Border Protection

(“CBP”) mandated procedures, which can affect the Company’s operations, costs, and Customer

experience. The Company has made, and is continuing to make, significant investments in facilities,

equipment, and technologies at certain airports in order to improve the Customer experience and to

assist CBP with its inspection and processing duties; however, the Company is not able to predict the

impact, if any, that various CBP measures or the lack of CBP resources will have on Company

revenues and costs, either in the short-term or the long-term.

International flying requires the Company to modify certain processes, as the airport environment is

dramatically different in certain international locations with respect to, among other things,

common-use ticket counters and gate areas, local operating requirements, and cultural preferences. In

addition, international flying exposes the Company to certain foreign currency risks to the extent the

Company chooses to, or is required to, transact in currencies other than the U.S. dollar. To the extent

the Company seeks to serve additional foreign destinations in the future, or to renew its authority to

serve certain routes, it may be required to obtain necessary authority from the DOT and/or approvals

from the FAA, as well as any applicable foreign government entity.

The Company’s operations in non-U.S. jurisdictions may subject the Company to the laws of those

jurisdictions rather than, or in addition to, U.S. laws. Laws in some jurisdictions differ in significant

respects from those in the United States, and these differences can affect the Company’s ability to react

to changes in its business, and its rights or ability to enforce rights may be different than would be

expected under U.S. laws. Furthermore, enforcement of laws in some jurisdictions can be inconsistent

and unpredictable, which can affect both the Company’s ability to enforce its rights and to undertake

activities that it believes are beneficial to its business. As a result, the Company’s ability to generate

revenue and its expenses in non-U.S. jurisdictions may differ from what would be expected if U.S.

laws governed these operations. Although the Company has policies and procedures in place that are

designed to promote compliance with the laws of the jurisdictions in which it operates, a violation by

the Company’s Employees, contractors, or agents or other intermediaries could nonetheless occur. Any

violation (or alleged or perceived violation), even if prohibited by the Company’s policies, could have

an adverse effect on the Company’s reputation and/or its results of operations.

In January 2018, the Company submitted a formal application to the FAA for authorization to conduct

ETOPS using Boeing 737-800 aircraft, in connection with the Company’s plans to begin service to

Hawaii. Due to the government shutdown in late 2018 and early 2019, the Company’s ETOPS

application process was delayed subject to the government reopening and the FAA’s related ability to

resume normal certification activities. If the Company receives FAA authorization and commences

ETOPS, the Company will be subject to additional, ongoing, ETOPS-specific regulatory and

procedural requirements, which could add operational and compliance risks to the Company’s

business, including costs associated therewith. Further, as discussed above under “Business -

Competition,” the longer stage length of the Company’s expected Hawaiian routes, as compared with

the Company’s average stage length of its other routes, could put pressure on the Company’s revenues

per available seat mile.

The Company is currently subject to pending litigation, and if judgment were to be rendered

against the Company in the litigation, such judgment could adversely affect the Company’s

operating results.

As discussed below under “Legal Proceedings,” the Company is subject to pending litigation.

Regardless of merit, these litigation matters and any potential future claims against the Company may

be both time consuming and disruptive to the Company’s operations and cause significant expense and

diversion of management attention. Should the Company fail to prevail in these or other matters, the

Company may be faced with significant monetary damages or injunctive relief that could materially

adversely affect its business and might materially affect its financial condition and operating results.

The Company’s reputation and brand could be harmed if it were to experience significant

negative publicity, including through social media.

The Company operates in a public-facing industry with significant exposure to social media. Negative

publicity, whether or not justified, can spread rapidly through social media. To the extent that the

Company is unable to respond timely and appropriately to negative publicity, the Company’s

reputation and brand can be harmed. Damage to the Company’s overall reputation and brand could

have a negative impact on its financial results.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Aircraft

Southwest operated a total of 750 Boeing 737 aircraft as of December 31, 2018, of which 51 and 72

were under operating and capital leases, respectively. The following table details information on the

750 aircraft as of December 31, 2018:

Type Seats

Average

Age

(Yrs)

Number of

Aircraft

Number

Owned (a)

Number

Leased

737-700 143 15 512 396 116

737-800 175 3 207 200 7

737 MAX 8 175 1 31 31 —

Totals 11 750 627 123

(a) As discussed further in Note 6 to the Consolidated Financial Statements, 169 of the Company’s aircraft were

pledged as collateral as of December 31, 2018, for secured borrowings and/or in the case that the Company

has obligations related to its fuel derivative instruments with counterparties that exceed certain thresholds.

As of December 31, 2018, the Company had firm deliveries and options for Boeing 737 MAX 7 and

737 MAX 8 aircraft as follows:

The Boeing Company

MAX 7

Firm

Orders

MAX 8

Firm

Orders

MAX 8

Options

Additional

MAX 8s Total

2019 7 21 — 16 44

2020 — 35 — 3 38

2021 — 44 — — 44

2022 — 27 14 — 41

2023 12 22 23 — 57

2024 11 30 23 — 64

2025 — 40 36 — 76

2026 — — 19 — 19

30 219 (a) 115 19 (b) 383

(a) The Company has flexibility to substitute 737 MAX 7 in lieu of 737 MAX 8 firm orders beginning in 2019.

(b) To be acquired in leases from various third parties.

Ground Facilities and Services

Southwest either leases or pays a usage fee for terminal passenger service facilities at each of the

airports it serves, to which various leasehold improvements have been made. The Company leases the

land and/or structures on a long-term basis for its aircraft maintenance centers (located at Dallas Love

Field, Houston Hobby, Phoenix Sky Harbor, Chicago Midway, Hartsfield-Jackson Atlanta

International Airport, and Orlando International Airport) and its main corporate headquarters building,

also located near Dallas Love Field. The Company also leases a warehouse and engine repair facility in

Atlanta. In 2018, the Company announced its intent to build a new aircraft maintenance facility,

scheduled to be completed in 2021, subject to FAA approvals, at Baltimore-Washington International

Airport.

The Company has commitments associated with various airport improvement projects, including

ongoing construction at Los Angeles International Airport. These projects include the construction of

new facilities and the rebuilding or modernization of existing facilities. Additional information

regarding these projects is provided below under “Management’s Discussion and Analysis of Financial

Condition and Results of Operations” and in Note 4 to the Consolidated Financial Statements.

The Company owns two additional headquarters buildings, located across the street from the

Company’s main headquarters building, on land owned by the Company including (a) the energy-

efficient, modern building, called TOPS, which houses certain operational and training functions,

including its 24-hour operations and (b) the Wings Complex, completed in 2018, consisting of a

Leadership Education and Aircrew Development (LEAD) Center (housing the Company’s 15 Boeing

737 flight simulators and classroom space for Pilot training), an additional office building, and a

parking garage.

As of December 31, 2018, the Company operated seven Customer Support and Services call centers.

The centers located in Atlanta, San Antonio, Chicago, Albuquerque, and Oklahoma City occupy leased

space. The Company owns its Houston and Phoenix centers.

The Company performs substantially all line maintenance on its aircraft and provides ground support

services at most of the airports it serves. However, the Company has arrangements with certain aircraft

maintenance firms for major component inspections and repairs for its airframes and engines, which

comprise the majority of the Company’s annual aircraft maintenance costs.

Item 3. Legal Proceedings

A complaint alleging violations of federal antitrust laws and seeking certification as a class action was

filed against Delta Air Lines, Inc. and AirTran Holdings, Inc. and its subsidiary AirTran Airways, Inc.

(collectively with AirTran Holdings, Inc., “AirTran”) in the United States District Court for the

Northern District of Georgia in Atlanta on May 22, 2009. The complaint alleged, among other things,

that AirTran attempted to monopolize air travel in violation of Section 2 of the Sherman Act, and

conspired with Delta in imposing $15-per-bag fees for the first item of checked luggage in violation of

Section 1 of the Sherman Act. The initial complaint sought treble damages on behalf of a putative class

of persons or entities in the United States who directly paid Delta and/or AirTran such fees on

domestic flights beginning December 5, 2008. After the filing of the May 2009 complaint, various

other nearly identical complaints also seeking certification as class actions were filed in federal district

courts in Atlanta, Georgia; Orlando, Florida; and Las Vegas, Nevada. All of the cases were

consolidated before a single federal district court judge in Atlanta. A Consolidated Amended

Complaint was filed in the consolidated action on February 1, 2010, which broadened the allegations to

add claims that Delta and AirTran conspired to reduce capacity on competitive routes and to

raise prices in violation of Section 1 of the Sherman Act. In addition to treble damages for the amount

of first baggage fees paid to AirTran and to Delta, the Consolidated Amended Complaint sought

injunctive relief against a broad range of alleged anticompetitive activities, as well as attorneys’

fees. On August 2, 2010, the Court dismissed plaintiffs’ claims that AirTran and Delta had violated

Section 2 of the Sherman Act; the Court let stand the claims of a conspiracy with respect to the

imposition of a first bag fee and the airlines’ capacity and pricing decisions. On July 12, 2016, the

Court granted plaintiffs’ motion to certify a class of all persons who paid first bag fees to AirTran or

Delta from December 8, 2008 to November 1, 2014 (the date on which AirTran stopped charging first

bag fees). Defendants appealed that decision. On March 29, 2017, the Court granted defendants’

motion for summary judgment and dismissed all claims against AirTran. On March 9, 2018, the Court

of Appeals affirmed the district court’s order granting summary judgment to AirTran and Delta, and on

June 8, 2018, the Court of Appeals denied plaintiffs’ petition for rehearing and rehearing en banc. On

November 5, 2018, the plaintiffs petitioned the Supreme Court for a writ of certiorari, which the

Supreme Court denied on January 7, 2019. AirTran denies all allegations of wrongdoing, including

those in the Consolidated Amended Complaint.

Also, on June 30, 2015, the U.S. Department of Justice (“DOJ”) issued a Civil Investigative Demand

(“CID”) to the Company. The CID seeks information and documents about the Company’s capacity

from January 2010 to the date of the CID, including public statements and communications with third

parties about capacity. In June 2015, the Company also received a letter from the Connecticut Attorney

General requesting information about capacity. The Company is cooperating fully with the DOJ CID

and the state inquiry.

Further, on July 1, 2015, a complaint was filed in the United States District Court for the Southern

District of New York on behalf of putative classes of consumers alleging collusion among the

Company, American Airlines, Delta Air Lines, and United Airlines to limit capacity and maintain

higher fares in violation of Section 1 of the Sherman Act. Since then, a number of similar class action

complaints were filed in the United States District Courts for the Central District of California, the

Northern District of California, the District of Columbia, the Middle District of Florida, the Southern

District of Florida, the Northern District of Georgia, the Northern District of Illinois, the Southern

District of Indiana, the Eastern District of Louisiana, the District of Minnesota, the District of New

Jersey, the Eastern District of New York, the Southern District of New York, the Middle District of

North Carolina, the District of Oklahoma, the Eastern District of Pennsylvania, the Northern District of

Texas, the District of Vermont, and the Eastern District of Wisconsin. On October 13, 2015, the

Judicial Panel on Multi-District Litigation centralized the cases to the United States District Court in

the District of Columbia. On March 25, 2016, the plaintiffs filed a Consolidated Amended Complaint

in the consolidated cases alleging that the defendants conspired to restrict capacity from 2009 to

present. The plaintiffs seek to bring their claims on behalf of a class of persons who purchased tickets

for domestic airline travel on the defendants’ airlines from July 1, 2011 to present. They seek treble

damages, injunctive relief, and attorneys’ fees and expenses. On May 11, 2016, the defendants moved

to dismiss the Consolidated Amended Complaint, and on October 28, 2016, the Court denied this

motion. On December 20, 2017, the Company reached an agreement to settle these cases with a

proposed class of all persons who purchased domestic airline transportation services from July 1, 2011,

to the date of the settlement. The Company agreed to pay $15 million and to provide certain

cooperation with the plaintiffs as set forth in the settlement agreement. The Court granted preliminary

approval of the settlement on January 3, 2018. The plaintiffs provided notice to the settlement class

pursuant to a notice program approved by the Court, and the deadline for class members to opt out or

object was January 4, 2019. The fairness hearing for the settlement is scheduled for March 22, 2019.

The Company denies all allegations of wrongdoing.

In addition, on July 8, 2015, the Company was named as a defendant in a putative class action filed in

the Federal Court in Canada alleging that the Company, Air Canada, American Airlines, Delta Air

Lines, and United Airlines colluded to restrict capacity and maintain higher fares for Canadian

residents traveling in the United States and for travel between the United States and Canada. Similar

lawsuits were filed in the Supreme Court of British Columbia on July 15, 2015, Court of Queen’s

Bench for Saskatchewan on August 4, 2015, Superior Court of the Province of Quebec on

September 21, 2015, and Ontario Superior Court of Justice on October 6, 2015. In December 2015, the

Company entered into Tolling and Discontinuance agreements with putative class counsel in the

Federal Court, British Columbia, and Ontario proceedings and a discontinuance agreement with

putative class counsel in the Quebec proceeding. The other defendants entered into an agreement with

the same putative class counsel to stay the Federal Court, British Columbia, and Quebec proceedings

and to proceed in Ontario. On June 10, 2016, the Federal Court granted plaintiffs’ motion to

discontinue that action against the Company without prejudice and stayed the action against the other

defendants. On July 13, 2016, the plaintiff unilaterally discontinued the action against the Company in

British Columbia. On February 14, 2017, the Quebec Court granted the plaintiff’s motion to

discontinue the Quebec proceeding against the Company and to stay that proceeding against the other

defendants. On March 10, 2017, the Ontario Court granted the plaintiff’s motion to discontinue that

proceeding as to the Company. On September 29, 2017, the Company and the other defendants entered

into a tolling agreement suspending any limitations periods that may apply to possible claims among

them for contribution and indemnity arising from the Canadian litigation. The Saskatchewan claim has

not been served on the Company, and the time for the Company to respond to that complaint has not

yet begun to run. The plaintiff in that case generally seeks damages (including punitive damages in

certain cases), prejudgment interest, disgorgement of any benefits accrued by the defendants as a result

of the allegations, injunctive relief, and attorneys’ fees and other costs. The Company denies all

allegations of wrongdoing and intends to vigorously defend this civil case in Canada. The Company

does not currently serve Canada.

The Company is from time to time subject to various legal proceedings and claims arising in the

ordinary course of business, including, but not limited to, examinations by the Internal Revenue

Service.

The Company’s management does not expect that the outcome in any of its currently ongoing legal

proceedings or the outcome of any proposed adjustments presented to date by the Internal Revenue

Service, individually or collectively, will have a material adverse effect on the Company’s financial

condition, results of operations, or cash flow.

Item 4. Mine Safety Disclosures

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following information regarding the Company’s executive officers is as of February 1, 2019.

Name Position Age

Gary C. Kelly Chairman of the Board & Chief Executive Officer 63

Thomas M. Nealon President 57

Michael G. Van de Ven Chief Operating Officer 57

Robert E. Jordan Executive Vice President Corporate Services 58

Tammy Romo Executive Vice President & Chief Financial Officer 56

Mark R. Shaw Executive Vice President & Chief Legal & Regulatory Officer 56

Andrew M. Watterson Executive Vice President & Chief Revenue Officer 52

Gregory D. Wells Executive Vice President Daily Operations 60

Set forth below is a description of the background of each of the Company’s executive officers.

Gary C. Kelly has served as the Company’s Chairman of the Board since May 2008 and as its Chief

Executive Officer since July 2004. Mr. Kelly also served as President from July 2008 to January 2017,

Executive Vice President & Chief Financial Officer from June 2001 to July 2004, and Vice

President Finance & Chief Financial Officer from 1989 to 2001. Mr. Kelly joined the Company in

1986 as its Controller.

Thomas M. Nealon has served as the Company’s President since January 2017. Mr. Nealon also served

as Executive Vice President Strategy & Innovation from January 2016 to January 2017. Prior to

becoming an executive officer of the Company, Mr. Nealon served on the Company’s Board of

Directors from December 2010 until November 2015. Mr. Nealon has also served as Group Executive

Vice President of J.C. Penney Company, Inc., a retail company, from August 2010 until December

2011. In this role Mr. Nealon was responsible for Strategy, jcp.com, Information Technology,

Customer Insights, and Digital Ventures. Mr. Nealon also served as J.C. Penney’s Executive Vice

President & Chief Information Officer from September 2006 until August 2010. Prior to joining J.C.

Penney, Mr. Nealon was a partner with The Feld Group, a provider of information technology

consulting services, where he served in a consultant capacity as Senior Vice President & Chief

Information Officer for the Company from 2002 to 2006. Mr. Nealon also served as Chief Information

Officer for Frito-Lay, a division of PepsiCo, Inc., from 1996 to 2000, and in various software

engineering, systems engineering, and management positions for Frito-Lay from 1983 to 1996.

Michael G. Van de Ven has served as the Company’s Chief Operating Officer since May 2008.

Mr. Van de Ven also served as Executive Vice President & Chief Operating Officer from May 2008 to

January 2017, Chief of Operations from September 2006 to May 2008, Executive Vice

President Aircraft Operations from November 2005 through August 2006, Senior Vice

President Planning from August 2004 to November 2005, Vice President Financial Planning &

Analysis from 2001 to 2004, Senior Director Financial Planning & Analysis from 2000 to 2001, and

Director Financial Planning & Analysis from 1997 to 2000. Mr. Van de Ven joined the Company in

1993 as its Director Internal Audit.

Robert E. Jordan has served as the Company’s Executive Vice President Corporate Services since July

2017 and as President of AirTran Airways, Inc. since May 2011. Mr. Jordan also served as Executive

Vice President & Chief Commercial Officer from September 2011 to July 2017, Executive Vice

President Strategy & Planning from May 2008 to September 2011, Executive Vice

President Strategy & Technology from September 2006 to May 2008, Senior Vice President Enterprise

Spend Management from August 2004 to September 2006, Vice President Technology from 2002 to

2004, Vice President Purchasing from 2001 to 2002, Controller from 1997 to 2001, Director Revenue

Accounting from 1994 to 1997, and Manager Sales Accounting from 1990 to 1994. Mr. Jordan joined

the Company in 1988 as a programmer.

Tammy Romo has served as the Company’s Executive Vice President & Chief Financial Officer since

July 2015. Ms. Romo also served as Senior Vice President Finance & Chief Financial Officer from

September 2012 to July 2015, Senior Vice President of Planning from February 2010 to September

2012, Vice President of Financial Planning from September 2008 to February 2010, Vice President

Controller from February 2006 to August 2008, Vice President Treasurer from September 2004 to

February 2006, Senior Director of Investor Relations from March 2002 to September 2004, Director of

Investor Relations from December 1994 to March 2002, Manager of Investor Relations from

September 1994 to December 1994, and Manager of Financial Reporting from September 1991 to

September 1994.

Mark R. Shaw has served as the Company’s Executive Vice President & Chief Legal & Regulatory

Officer since November 2018. Mr. Shaw also served as Executive Vice President, Chief Legal &

Regulatory Officer, & Corporate Secretary from August 2018 to November 2018, Senior Vice

President, General Counsel, & Corporate Secretary from July 2015 to August 2018, Vice President,

General Counsel, & Corporate Secretary from February 2013 to July 2015, and as Associate General

Counsel - Corporate & Transactions from February 2008 to February 2013. Mr. Shaw joined the

Company in 2000 as an Attorney in the General Counsel Department.

Andrew M. Watterson has served as the Company’s Executive Vice President & Chief Revenue Officer

since July 2017. Mr. Watterson also served as Senior Vice President & Chief Revenue Officer from

January 2017 to July 2017, Senior Vice President of Network & Revenue from January 2016 to

January 2017, and as Vice President of Network Planning & Performance from October 2013 to

January 2016. Prior to becoming an officer of the Company, Mr. Watterson served as Vice President of

Planning and Revenue Management at Hawaiian Airlines from May 2011 to October 2013.

Gregory D. Wells has served as the Company’s Executive Vice President Daily Operations since

January 2017. Mr. Wells also served as Senior Vice President Operational Performance from October

2013 to January 2017, Senior Vice President Operations from September 2006 to October 2013, Senior

Vice President Ground Operations from November 2005 to September 2006, Vice President Ground

Operations from September 2004 to November 2005, Vice President Safety, Security, and Flight

Dispatch from October 2001 to September 2004, Director Flight Dispatch from February 1999 to

October 2001, Senior Director Ground Operations from August 1998 to February 1999, and Director

Ground Operations from August 1996 to August 1998. Prior to August 1996, Mr. Wells had various

other operational experience with the Company including as Station Manager in both San Jose and

Phoenix. Mr. Wells has over 36 years of experience with the Company.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer

Purchases of Equity Securities

The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) and is traded

under the symbol “LUV.” The Company currently intends to continue declaring dividends on a

quarterly basis for the foreseeable future; however, the Company’s Board of Directors may elect to

alter the timing, amount, and payment of dividends on the basis of operational results, financial

condition, cash requirements, future prospects, and other factors deemed relevant by the Board. As of

February 1, 2019, there were approximately 12,267 holders of record of the Company’s common stock.

Stock Performance Graph

The following Performance Graph and related information shall not be deemed “soliciting material”

or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated

by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934.

The following graph compares the cumulative total shareholder return on the Company’s common

stock over the five-year period ended December 31, 2018, with the cumulative total return during such

period of the Standard and Poor’s 500 Stock Index and the NYSE ARCA Airline Index. The

comparison assumes $100 was invested on December 31, 2013, in the Company’s common stock and

in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown

on the graph below represents historical stock performance and is not necessarily indicative of future

stock price performance.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG SOUTHWEST AIRLINES

CO., S&P 500 INDEX, AND NYSE ARCA AIRLINE INDEX

12/31/13

Total Cumulative Return - Dollars

Southwest Airlines Co. S&P 500 NYSE ARCA Airline

12/31/14 12/31/15

Period Ending

12/31/16 12/31/17 12/31/18

100

150

200

250

300

350

400

12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018

Southwest Airlines Co. $ 100 $ 226 $ 232 $ 271 $ 359 $ 257

S&P 500 $ 100 $ 114 $ 115 $ 129 $ 157 $ 150

NYSE ARCA Airline $ 100 $ 150 $ 127 $ 164 $ 174 $ 137

Issuer Repurchases

Issuer Purchases of Equity Securities (1)

(a) (b) (c) (d)

Period

Total

number

of shares

purchased

Average

price paid

per share

Total number of

shares purchased

as part of publicly

announced plans or

programs

Maximum dollar

value of shares that

may yet be purchased

under the plans or

programs

October 1, 2018 through

October 31, 2018

1,848,814 $ — (2)(3) 1,848,814 $ 1,350,032,588

November 1, 2018 through

November 30, 2018

— $ — — $ 1,350,032,588

December 1, 2018 through

December 31, 2018

9,835,633 $ — (3) 9,835,633 $ 1,350,032,588

Total 11,684,447 11,684,447

(1) On May 17, 2017, the Company’s Board of Directors authorized the repurchase of up to $2.0 billion of the

Company’s common stock. On May 16, 2018, the Company’s Board of Directors authorized the

repurchase of up to an additional $2.0 billion of the Company’s common stock in a new share repurchase

authorization, upon the completion of the May 2017 share repurchase authorization. Repurchases are made

in accordance with applicable securities laws in open market or private, including accelerated, repurchase

transactions from time to time, depending on market conditions, and may be discontinued at any time.

(2) Under an accelerated share repurchase program entered into by the Company with a third party financial

institution in third quarter 2018 (the “Third Quarter 2018 ASR Program”), the Company paid $500 million

and received an initial delivery of 6,349,325 shares during August 2018, representing an estimated 75 percent

of the shares to be purchased by the Company under the Third Quarter 2018 ASR Program based on a

volume-weighted average price of $59.0614 per share of the Company’s common stock on the New York

Stock Exchange during a calculation period between August 1, 2018 and August 22, 2018. Final settlement of

the Third Quarter 2018 ASR Program occurred in October 2018 and was determined based generally on a

discount to the volume-weighted average price per share of the Company’s common stock during a

calculation period completed in October 2018. Upon settlement, the third party financial institution delivered

1,848,814 additional shares of the Company’s common stock to the Company. In total, the average purchase

price per share for the 8,198,139 shares repurchased under the Third Quarter 2018 ASR Program, upon

completion of the Third Quarter 2018 ASR Program in October 2018, was $60.9895.

(3) Under an accelerated share repurchase program entered into by the Company with a third party financial

institution in fourth quarter 2018 (the “Fourth Quarter 2018 ASR Program”), the Company paid

$500 million in October 2018 and received an initial delivery of 7,827,176 shares during December 2018,

representing an estimated 75 percent of the shares to be purchased by the Company under the Fourth

Quarter 2018 ASR Program based on a price of $47.91 per share, which was the closing price of the

Company’s common stock on the New York Stock Exchange on October 29, 2018. The third party

financial institution delivered an additional 1,472,253 shares to the Company in further partial settlements

of the Fourth Quarter 2018 ASR Program in December 2018, which was determined based generally on a

discount to the volume-weighted average price per share of the Company’s common stock during

calculation periods completed in December 2018. Final settlement of the Fourth Quarter 2018 ASR

Program occurred in December 2018 and was determined based generally on a discount to the volume-

weighted average price per share of the Company’s common stock during a calculation period completed

in December 2018. Upon settlement, the third party financial institution delivered 536,204 additional

shares of the Company’s common stock to the Company. In total, the average purchase price per share for

the 9,835,633 shares repurchased under the Fourth Quarter 2018 ASR Program, upon completion of the

Fourth Quarter 2018 ASR Program in December 2018, was $50.8356.

Item 6. Selected Financial Data

The following financial information, for the five years ended December 31, 2018, has been derived

from the Company’s Consolidated Financial Statements. This information should be viewed in

conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere

herein. The Company provides the operating data below because these statistics are commonly used in

the airline industry and, therefore, allow readers to compare the Company’s performance against its

results for prior periods, as well as against the performance of the Company’s peers.

As of January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09: Revenue

from Contracts with Customers (the “New Revenue Standard”), ASU 2017-07: Improving the

Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the “New

Retirement Standard”), and ASU 2017-12: Targeted Improvements to Accounting for Hedging Activities

(the “New Hedging Standard”). As a result, certain prior period results have been recast due to the

transition methods applied. See Note 2 to the Consolidated Financial Statements for further information.

Year ended December 31,

2018 2017 2016 2015 2014

As Recast As Recast As Recast (k) As Recast (k)

Financial Data (in millions, except per share amounts):

Operating revenues $ 21,965 $ 21,146 $ 20,289 $ 19,820 $ 18,605

Operating expenses 18,759 17,739 16,767 15,821 16,437

Operating income 3,206 3,407 3,522 3,999 2,168

Other expenses (income) net 42 142 72 520 352

Income before taxes 3,164 3,265 3,450 3,479 1,816

Provision for income taxes 699 (92) 1,267 1,298 680

Net income $ 2,465 $ 3,357 $ 2,183 $ 2,181 $ 1,136

Net income per share, basic $ 4.30 $ 5.58 $ 3.48 $ 3.30 $ 1.65

Net income per share, diluted $ 4.29 $ 5.57 $ 3.45 $ 3.27 $ 1.64

Cash dividends per common share $ 0.6050 $ 0.4750 $ 0.3750 $ 0.2850 $ 0.2200

Total assets at period-end $ 26,243 $ 25,110 $ 23,286 $ 21,312 $ 19,723

Long-term obligations at period-end $ 2,771 $ 3,320 $ 2,821 $ 2,541 $ 2,434

Stockholders’ equity at period-end $ 9,853 $ 9,641 $ 7,784 $ 7,358 $ 6,775

Operating Data:

Revenue passengers carried 134,890,243 130,256,190 124,719,765 118,171,211 110,496,912

Enplaned passengers 163,605,833 157,677,218 151,740,357 144,574,882 135,767,188

Revenue passenger miles (RPMs) (000s) (a) 133,322,322 129,041,420 124,797,986 117,499,879 108,035,133

Available seat miles (ASMs) (000s) (b) 159,795,153 153,811,072 148,522,051 140,501,409 131,003,957

Load factor (c) 83.4% 83.9% 84.0% 83.6% 82.5%

Average length of passenger haul (miles) 988 991 1,001 994 978

Average aircraft stage length (miles) 757 754 760 750 721

Trips flown 1,375,030 1,347,893 1,311,149 1,267,358 1,255,502

Seats flown (d) 207,223,050 200,878,967 193,167,695 184,955,094 179,733,055

Seats per trip (e) 150.70 149.03 147.33 145.94 143.16

Average passenger fare $ 151.64 $ 151.73 $ 152.89 $ 154.85 $ 159.80

Passenger revenue yield per RPM (cents) (f) 15.34 15.32 15.28 15.57 16.34

Operating revenue per ASM (cents) (g)(j) 13.75 13.75 13.66 13.98 14.20

Passenger revenue per ASM (cents) (h) 12.80 12.85 12.84 13.02 13.48

Operating expenses per ASM (cents) (i) 11.74 11.53 11.29 11.26 12.55

Operating expenses per ASM, excluding fuel (cents) 8.85 8.88 8.73 8.60 8.46

Operating expenses per ASM, excluding fuel and

profitsharing (cents)

8.51 8.53 8.34 8.16 8.19

Fuel costs per gallon, including fuel tax $ 2.20 $ 1.99 $ 1.90 $ 1.96 $ 2.97

Fuel costs per gallon, including fuel tax, economic $ 2.20 $ 2.06 $ 2.00 $ 2.13 $ 2.95

Fuel consumed, in gallons (millions) 2,094 2,045 1,996 1,901 1,801

Active fulltime equivalent Employees 58,803 56,110 53,536 49,583 46,278

Aircraft at end of period 750 706 723 704 665

(a) A revenue passenger mile is one paying passenger flown one mile. Also referred to as “traffic,” which is a measure of demand for a

given period.

(b) An available seat mile is one seat (empty or full) flown one mile. Also referred to as “capacity,” which is a measure of the space

available to carry passengers in a given period.

(d) Seats flown is calculated using total number of seats available by aircraft type multiplied by the total trips flown by the same aircraft

type during a particular period.

(e) Seats per trip is calculated using seats flown divided by trips flown.

(f) Calculated as passenger revenue divided by revenue passenger miles. Also referred to as “yield,” this is the average cost paid by a

paying passenger to fly one mile, which is a measure of revenue production and fares.

(g) Calculated as operating revenues divided by available seat miles. Also referred to as “operating unit revenues” or “RASM,” this is a

measure of operating revenue production based on the total available seat miles flown during a particular period.

(h) Calculated as passenger revenue divided by available seat miles. Also referred to as “passenger unit revenues,” this is a measure of

passenger revenue production based on the total available seat miles flown during a particular period.

(i) Calculated as operating expenses divided by available seat miles. Also referred to as “unit costs” or “cost per available seat mile,” this is

the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.

(j) Year ended 2015 RASM excludes a $172 million one-time special revenue adjustment in July 2015 as a result of the Company’s

amendment of its co-branded credit card agreement with Chase Bank USA, N.A. and the resulting required change in accounting

methodology. Including the special revenue adjustment, RASM would have been 14.11 cents for the year ended 2015.

(k) The Company has chosen to not recast 2015 and 2014 results for the New Revenue Standard, as permitted. Therefore, 2015 and 2014

only reflect recast results for the New Retirement Standard and the New Hedging Standard.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

Operations

YEAR IN REVIEW

For the 46

consecutive year, the Company was profitable, recording GAAP and non-GAAP results

for 2018 and 2017 as noted in the following tables. See Note Regarding Use of Non-GAAP Financial

Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for

additional detail regarding non-GAAP financial measures.

The fiscal years ended December 31, 2017 and 2016 reflect recast financial information related to the

Company’s January 1, 2018, adoption of the New Revenue Standard, the New Retirement Standard,

and the New Hedging Standard, as detailed in Note 2 to the Consolidated Financial Statements.

(in millions, except per share amounts)

Year ended

December 31,

GAAP

2018 2017

As Recast

Percent

Change

Operating income $ 3,206 $ 3,407 (5.9)

Net income $ 2,465 $ 3,357 (26.6)

Net income per share, diluted $ 4.29 $ 5.57 (23.0)

Non-GAAP

Operating income $ 3,167 $ 3,347 (5.4)

Net income $ 2,435 $ 2,116 15.1

Net income per share, diluted $ 4.24 $ 3.51 20.8

Net income for the year ended December 31, 2018, was $2.47 billion, a 26.6 percent decrease year-

over-year, as compared to the 2017 record Net income of $3.36 billion. Diluted earnings per share for

2018 was $4.29, as compared to the 2017 record diluted earnings per share of $5.57. Non-GAAP Net

income was a record of $2.44 billion, a 15.1 percent increase year-over-year. Non-GAAP diluted

earnings per share for 2018 was a record of $4.24. The decrease in GAAP Net income was primarily

driven by a prior year $1.3 billion adjustment to reduce the Company’s Provision for income taxes

related to the Tax Cuts and Jobs Act legislation enacted in December 2017 (“Tax Reform”), which

resulted in a re-measurement of the Company’s deferred tax assets and liabilities at the new federal

corporate tax rate of 21 percent. This non-cash item is excluded from the Company’s non-GAAP

results. Operating income for the year ended December 31, 2018, was $3.2 billion, a decrease of

5.9 percent year-over-year, and non-GAAP Operating income was also $3.2 billion. The decrease in

Operating income was primarily driven by higher market jet fuel prices. These factors were partially

offset by a 3.5 percent increase in Passenger revenues driven by a 3.9 percent increase in capacity, as

strong demand enabled the Company to fill the majority of the additional seats offered.

For the twelve months ended December 31, 2018, the Company’s earnings performance, combined

with its actions to manage invested capital, produced a 23.6 percent pre-tax non-GAAP return on

invested capital (“ROIC”), or 18.4 percent on an after-tax basis, compared with the Company’s pre-tax

ROIC of 27.6 percent, or 17.6 percent on an after-tax basis, for the twelve months ended December 31,

2017. The cause of the year-over-year decline in pre-tax ROIC was the decrease in Operating income

for the twelve months ended December 31, 2018, compared with the twelve months ended

December 31, 2017, as well as the increase in Equity, driven by the impacts of Tax Reform. The

increase in after-tax ROIC was primarily due to the reduction in the federal corporate tax rate in 2018.

See the Company’s calculation of ROIC in the accompanying reconciliation tables as well as the Note

Regarding Use of Non-GAAP Financial Measures.

During 2018, the Company continued to return value to its Shareholders. The Company returned

$2.3 billion to Shareholders through $332 million in dividend payments and $2.0 billion through four

separate accelerated share repurchase programs. During October 2018, the Company launched the

Fourth Quarter 2018 ASR Program by advancing $500 million to a financial institution in a privately

negotiated transaction. The Company received 9.8 million shares in total under the Fourth Quarter

2018 ASR Program, which was completed in December 2018. The purchase was recorded as a treasury

share purchase for purposes of calculating earnings per share.

On January 28, 2019, the Company launched a new accelerated share repurchase program by

advancing $500 million to a financial institution in a privately negotiated transaction (“First Quarter

2019 ASR Program”). The specific number of shares that the Company ultimately will repurchase

under the First Quarter 2019 ASR Program will be determined based generally on a discount to the

volume-weighted average price per share of the Company’s common stock during a calculation period

to be completed no later than April 2019. The purchase will be recorded as a treasury share purchase

for purposes of calculating earnings per share. Subsequent to the launch of the First Quarter 2019 ASR

Program, the Company has $850 million remaining under its May 2018 $2.0 billion share repurchase

authorization. See Part II, Item 5 for further information on the Company’s share repurchase

authorizations.

Company Overview

The Company now serves 99 destinations across 40 states and ten near-international countries, and

operates over 4,000 departures a day. Additionally, the Company has announced plans to begin service

to Hawaii, subject to requisite governmental approvals, including approval from the Federal Aviation

Administration (the “FAA”) for Extended Operations (“ETOPS”), a regulatory requirement to operate

between the U.S. mainland and the Hawaiian Islands. The Company has also announced its intent to

begin service to four Hawaiian airports: Honolulu International Airport, Lihue Airport, Kona

International Airport at Keahole, and Kahului Airport, from four initial gateway airports in California:

Oakland Metropolitan Airport, San Diego International Airport, Mineta San Jose International Airport,

and Sacramento International Airport. The Company has further announced its decision to cease

service at Benito Juárez Mexico City International Airport, with the last day of service scheduled on

March 30, 2019.

During 2018, the Company took delivery of 26 new 737-800 aircraft and 18 new 737 MAX 8 aircraft

from Boeing, as well as 1 pre-owned Boeing 737-700 aircraft from a third party. The Company became

the first airline in North America to offer scheduled service utilizing Boeing’s new, more fuel-efficient,

737 MAX 8 aircraft, which entered service in fourth quarter 2017. The Company is scheduled to be the

launch customer for the Boeing 737 MAX 7 series aircraft, with deliveries expected to begin in 2019.

As of December 31, 2018, the Company had firm orders in place with Boeing for 219 737 MAX 8

aircraft and 30 737 MAX 7 aircraft. For 2019, the Company’s current firm aircraft commitments and

forecasted Boeing 737-700 retirements would result in approximately 775 aircraft by year-end 2019.

See Part I, Item 2 for further information.

The Company plans to continue its route network and schedule optimization efforts through the

addition of new markets and itineraries, while also pruning less profitable flights from its schedule.

The Company currently plans to grow its 2019 available seat miles no more than five percent, year-

over-year, with first quarter 2019 year-over-year growth in the 3.5 to 4 percent range. The Company

continues to expect the retirement of its Boeing 737-300 (“Classic”) aircraft, the last of which took

place at the end of third quarter 2017, to produce significant incremental cost savings and

improvements in pre-tax results of at least $200 million, cumulatively, by the end of 2020.

On May 9, 2017, the Company completed a multi-year initiative to completely transition its reservation

system to the Amadeus Altéa Passenger Service System. As expected, the new reservation system

produced incremental benefits in pretax results of approximately $200 million in 2018 through the

deployment of certain revenue management tools and techniques.

2018 Compared with 2017

Operating Revenues

Passenger revenues for 2018 increased by $692 million, or 3.5 percent, compared with 2017. The

increase was largely due to a 3.9 percent increase in capacity, as strong demand enabled the Company

to fill the majority of the additional seats offered. Passenger revenues for 2018 included an estimated

$130 million negative impact to revenue due to temporarily lower passenger yields from an aggressive

May 2018 fare sale for June through October 2018 travel, which was offered in conjunction with the

Company’s broad marketing efforts following the Flight 1380 accident. On April 17, 2018, Southwest

Airlines Flight 1380 from New York-LaGuardia to Dallas Love Field suffered an uncontained failure

of its port CFM56-7B engine, resulting in a Customer fatality. On a unit basis, Passenger revenues

decreased 0.4 percent, year-over-year, driven by a slight decrease in Load factor to 83.4 percent,

partially offset by a 0.1 percent increase in Passenger revenue yield. The increase in yield was largely

due to the successful deployment of several revenue management enhancements enabled by the

Company’s new reservation system, an improved fare environment in second half 2018, and strong

passenger demand for low fares.

Freight revenues for 2018 increased by $2 million, or 1.2 percent, compared with 2017, primarily due

to increased capacity. Based on current trends, the Company currently expects Freight revenues in first

quarter 2019 to increase, compared with first quarter 2018.

Other revenues for 2018 increased by $125 million, or 10.3 percent, compared with 2017, primarily

due to an increase in revenues associated with cardholder spend on the Company’s co-branded Chase

Visa credit card. The Company currently expects Other revenues in first quarter 2019 to increase,

compared with first quarter 2018.

Operating unit revenues for 2018 were flat compared with 2017. Based on revenue and booking trends

thus far in first quarter 2019, and assuming no further significant impact on bookings from the recent

government shutdown, the Company currently estimates first quarter 2019 operating unit revenues to

increase in the four to five percent range, compared with first quarter 2018.

Operating Expenses

Operating expenses for 2018 increased by $1.0 billion, or 5.8 percent, compared with 2017, while

capacity increased 3.9 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. The following table presents the Company’s Operating expenses per ASM for 2018 and 2017,

followed by explanations of these changes on a per ASM basis and dollar basis:

Year ended December 31,

(in cents, except for percentages)

2018 2017

As Recast

Per ASM

change

Percent

change

Salaries, wages, and benefits 4.79¢ 4.74¢ 0.05¢ 1.1%

Fuel and oil 2.89 2.65 0.24 9.1

Maintenance materials and repairs 0.69 0.65 0.04 6.2

Landing fees and airport rentals 0.83 0.84 (0.01) (1.2)

Depreciation and amortization 0.75 0.79 (0.04) (5.1)

Other operating expenses 1.79 1.86 (0.07) (3.8)

Total 11.74¢ 11.53¢ 0.21¢ 1.8%

Operating expenses per ASM for 2018 increased by 1.8 percent, compared with 2017, primarily due to

increases in market jet fuel prices. Operating expenses per ASM for 2018, excluding Fuel and oil

expense and special items (a non-GAAP financial measure), increased 0.6 percent year-over-year,

primarily due to wage rate increases. 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. Based on current trends and excluding Fuel and oil expense

and profitsharing expense, the Company expects its first quarter 2019 unit costs to increase

approximately six percent, compared with first quarter 2018’s unit costs of 8.65, which excluded Fuel

and oil expense, profitsharing expense, and special items.

Salaries, wages, and benefits expense for 2018 increased by $344 million, or 4.7 percent, compared

with 2017. Salaries, wages, and benefits expense per ASM for 2018 increased 1.1 percent, compared

with 2017. On both a dollar and per ASM basis, the majority of the increases were the result of higher

salaries expense, primarily driven by contractual wage rate increases. These increases more than offset

the impact in 2017 of the $1,000 per Employee bonus awarded as a result of Tax Reform, which

totaled $70 million in the 2017 results. Based on current cost trends and anticipated capacity, the

Company expects first quarter 2019 Salaries, wages, and benefits expense per ASM, excluding

profitsharing expense, to increase, compared with first quarter 2018.

During 2018, the Company conducted negotiations with various unionized Employee groups. The

following table sets forth the Company’s unionized Employee groups that are currently in negotiations

on collective-bargaining agreements:

Employee Group

Approximate

Number of

Employees Representatives Amendable Date

Southwest Flight Attendants 15,200

Transportation Workers of

America, AFL-CIO, Local

556 (“TWU 556”) November 2018

Southwest Customer Service

Agents, Customer

Representatives, and Source of

Support Representatives 7,400

International Association of

Machinists and Aerospace

Workers, AFL-CIO

(“IAM 142”) December 2018

Southwest Material Specialists

(formerly known as Stock

Clerks) 300

International Brotherhood of

Teamsters, Local 19

(“IBT 19”)

August 2013. The Company

reached a tentative agreement

with IBT 19 in January 2019. If

ratified by the Company’s

Material Specialists, the contract

will become amendable in 2024.

Southwest Mechanics 2,400

Aircraft Mechanics Fraternal

Association (“AMFA”) August 2012

Southwest Flight Simulator

Technicians 50

International Brotherhood of

Teamsters (“IBT”)

May 2019. The Company reached

a tentative agreement with IBT in

February 2019. If ratified by the

Company’s Flight Simulator

Technicians, the contract will

become amendable in 2024.

Fuel and oil expense for 2018 increased by $540 million, or 13.2 percent, compared with 2017. On a

per ASM basis, Fuel and oil expense for 2018 increased 9.1 percent, compared with 2017. On both a

dollar and per ASM basis, the increases were attributable to higher market jet fuel prices, partially

offset by the recognition of $168 million in net hedging gains in 2018 versus the recognition of

$416 million in net hedging losses in 2017. 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. These totals include cash settlements

realized from the settlement of fuel derivative contracts associated with the Company’s economic fuel

hedge totaling $154 million received from counterparties in 2018, compared with $572 million paid to

counterparties in 2017. However, these cash settlement totals exclude the impact from derivatives that

did not qualify for hedge accounting for both periods, and gains and/or losses recognized from hedge

ineffectiveness in 2017. Those items are recorded as a component of Other (gains) losses, net. See

Note 10 to the Consolidated Financial Statements. The Company’s average economic jet fuel cost per

gallon, which includes hedge settlements in both years, increased 6.8 percent, year-over-year, to $2.20

during 2018 from $2.06 during 2017. These figures include premium expense associated with the

Company’s fuel hedges, which on a per gallon basis equated to approximately $0.06 and $0.07 for

2018 and 2017, respectively. The Company also slightly improved its fuel efficiency during 2018,

compared with 2017, when measured on the basis of ASMs generated per gallon of fuel, driven

primarily by the retirement of the Classic aircraft and the addition of the more fuel-efficient 737-800

and 737 MAX 8 aircraft. Fuel gallons consumed increased 2.4 percent, compared with 2017, while

year-over-year capacity increased 3.9 percent.

As of January 18, 2019, on an economic basis, the Company had derivative contracts in place related

to expected future fuel consumption as follows:

Period

Maximum percent of estimated fuel consumption covered by

fuel derivative contracts at varying West Texas Intermediate/Brent

Crude Oil, Heating Oil, and Gulf Coast Jet Fuel-equivalent price levels (a)

2019 70%

2020 53%

2021 25%

Beyond 2021 less than 5%

(a) The Company’s hedge position can vary significantly at different price levels, including prices at which the

Company considers “catastrophic” coverage. The percentages 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 10 to the

Consolidated Financial Statements for further information.

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 10 to the Consolidated Financial

Statements for further information), as well as the amount of deferred gains/losses in AOCI at

December 31, 2018, and the expected future periods in which these items are expected to settle and/or

be recognized in earnings (in millions):

Year

Fair value of fuel

derivative contracts

at December 31, 2018

Amount of losses

deferred in AOCI at

December 31, 2018 (net of tax)

2019 $ 43 $ (36)

2020 65 (6)

2021 26 (1)

2022 4 —

Total $ 138 $ (43)

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 2019 and full year 2019 jet fuel prices at different crude oil assumptions as of January 18,

2019, and for expected premium costs associated with settling contracts each period, respectively.

Estimated economic fuel price per gallon, including taxes and

fuel hedging premiums (e)

Average Brent Crude Oil

price per barrel First Quarter 2019 (c) Full Year 2019 (d)

$50 $1.75 - $1.80 $1.65 - $1.75

$55 $1.85 - $1.90 $1.80 - $1.90

Current Market (a) $2.00 - $2.05 $2.00 - $2.10

$70 $2.15 - $2.20 $2.20 - $2.30

$80 $2.25 - $2.30 $2.35 - $2.45

$90 $2.30 - $2.35 $2.50 - $2.60

Estimated fuel hedging premium expense

per gallon (b) $0.06 $0.04

(a) Brent crude oil average market prices as of January 18, 2019, were approximately $62.01 and $62.40 per

barrel for first quarter 2019 and full year 2019, respectively.

(b) Fuel hedging premium expense per gallon is included in the Company’s estimated economic fuel price per

gallon estimates above.

quarter 2019 GAAP and economic fuel costs are estimated to be in the $2.00 to $2.05 per gallon range, including

fuel hedging premium expense of approximately $28 million, or $.06 per gallon, and an estimated $.02 per gallon

in favorable cash settlements from fuel derivative contracts. 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 18, 2019, annual

2019 GAAP and economic fuel costs are estimated to be in the $2.00 to $2.10 per gallon range, including fuel

hedging premium expense of approximately $95 million, or $.04 per gallon, and an estimated $.01 per gallon in

favorable cash settlements from fuel derivative contracts. See Note Regarding Use of Non-GAAP Financial

Measures.

(e) The Company’s current hedge positions contain a combination of instruments based in West Texas

Intermediate 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 18, 2019.

Maintenance materials and repairs expense for 2018 increased by $106 million, or 10.6 percent,

compared with 2017. On a per ASM basis, Maintenance materials and repairs expense for 2018

increased 6.2 percent, compared with 2017. On both a dollar and per ASM basis, the majority of the

increases were due to the timing of regular airframe maintenance checks. The remainder of the

increases were due to engine maintenance and repairs. The Company currently expects Maintenance

materials and repairs expense per ASM for first quarter 2019 to increase, compared with first quarter

2018.

Landing fees and airport rentals expense for 2018 increased by $42 million, or 3.3 percent, compared

with 2017. On a per ASM basis, Landing fees and airport rentals expense for 2018 decreased

1.2 percent, compared with 2017, as the dollar increases were more than offset by the 3.9 percent

increase in capacity. On a dollar basis, the majority of the increase was due to an increase in rental

rates at various stations throughout the network. The Company currently expects Landing fees and

airport rentals expense per ASM for first quarter 2019 to increase, compared with first quarter 2018.

Depreciation and amortization expense for 2018 decreased by $17 million, or 1.4 percent, compared

with 2017. On a per ASM basis, Depreciation and amortization expense decreased 5.1 percent,

compared with 2017. On both a dollar and per ASM basis, the majority of the decreases were

associated with the reduction in depreciation expense associated with the accelerated retirement of the

Company’s Classic fleet in third quarter 2017, as this exceeded the additional depreciation associated

with purchases of new owned aircraft and pre-owned aircraft on capital leases. The Company currently

expects Depreciation and amortization expense per ASM for first quarter 2019 to increase, compared

with first quarter 2018.

Other operating expenses for 2018 increased by $5 million, or 0.2 percent, compared with 2017. On a

per ASM basis, Other operating expenses for 2018 decreased 3.8 percent, compared with 2017, as the

dollar increases were more than offset by the 3.9 percent increase in capacity. Other operating

expenses in 2017 included charges totaling $96 million, associated with the grounding of the

Company’s remaining Classic aircraft. These charges included a $63 million aircraft grounding charge

related to the leased portion of the Classic fleet and $33 million of lease termination expenses

associated with eight Classic aircraft that were acquired during 2017 prior to their grounding. During

first quarter 2018, the Company also recognized $25 million of gains from the sale of 39 owned

Classic aircraft and a number of spare engines to a third party which reduced Other operating expenses.

The charges related to the grounding of the Classic fleet, as well as the gain on sale of grounded

aircraft, 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.

Excluding these items, approximately 50 percent of the year-over-year dollar increase was due to

technology-related expenses associated with various projects, 30 percent due to revenue related costs

as a result of the 3.6 percent increase in Revenue Passengers carried, and the remainder was due to

higher property taxes assessed in 2018. The Company currently expects Other operating expenses per

ASM for first quarter 2019 to increase, compared with first quarter 2018.

Other

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

and losses.

Interest expense for 2018 increased by $17 million, or 14.9 percent, compared with 2017, primarily

due to the issuance of two debt facilities in November 2017, including $300 million of 2.75% senior

unsecured notes and $300 million of 3.45% senior unsecured notes.

Capitalized interest for 2018 decreased by $11 million, or 22.4 percent, compared with 2017, primarily

due to timing of aircraft deliveries and progress payments associated with future orders.

Interest income for 2018 increased by $34 million, or 97.1 percent, compared with 2017, primarily due

to higher interest rates.

Other (gains) losses, net, primarily includes amounts recorded as a result of the Company’s hedging

activities. With the adoption of the New Hedging Standard, the elimination of the requirement to

separately measure and record ineffectiveness for all future cash flow hedges in a hedging relationship,

as well as a change in classification of premium expense associated with option contracts from Other

(gains) losses, net, in the Consolidated Statement of Income, to Fuel and oil expense, has significantly

reduced amounts reflected for hedging activities in Other (gains) losses, net. With the adoption of the

New Retirement Standard, the Company is required to include all components of its net periodic

benefit cost (income), with the exception of service cost, in Other (gains) losses, net, versus previously

having been classified and reported as operating expenses in Salaries, wages, and benefits. For 2018,

this periodic benefit cost was $12 million. See Note 2 to the Consolidated Financial Statements for

further information on both new standards. Also, see Note 10 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 the years ended December 31, 2018, and 2017:

Year ended December 31,

(in millions)

2018 2017

As Recast

Mark-to-market impact from fuel contracts settling in future periods $ — $ 69

Ineffectiveness from fuel hedges settling in future periods (a) — 31

Realized ineffectiveness and mark-to-market (gains) or losses (a) — 6

Other 18 6 (b)

$ 18 $ 112

(a) With the adoption of the New Hedging Standard, the separate measurement and recording of ineffectiveness

has been eliminated for all cash flow hedges in a hedging relationship effective January 1, 2018. See Note 2 to

the Consolidated Financial Statements for further information.

(b) Includes $14 million reclassified from Salaries, wages, and benefits to Other (gains) losses, net, as a result of

the New Retirement Standard. See Note 2 to the Consolidated Financial Statements for further information.

Income Taxes

The Company’s effective tax rate was 22.1 percent for 2018, compared with a 2.8 percent benefit for

2017. The increase in rate was driven by a prior year $1.3 billion reduction in Provision for income

taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a

re-measurement of the Company’s deferred tax assets and liabilities at the new federal corporate tax

rate of 21 percent. The Company’s 2018 effective tax rate of 22.1 percent was lower than its previously

forecasted rate of approximately 23 percent, primarily due to additional tax credits realized during

fourth quarter 2018. The Company currently projects a full year 2019 effective tax rate to be

approximately 23.5 percent based on currently forecasted financial results.

2017 Compared with 2016

Operating Revenues

Passenger revenues for 2017 increased by $695 million, or 3.6 percent, compared with 2016. The

increase was primarily attributable to a 3.6 percent increase in capacity, as strong demand enabled the

Company to fill the majority of the additional seats offered. This increase was partially offset by

approximately $100 million in reduced revenues as a result of the hurricanes and earthquakes during

third quarter 2017. On a unit basis, Passenger revenues was relatively flat. Load factor remained solid

at 83.9 percent.

Freight revenues for 2017 increased by $2 million, or 1.2 percent, compared with 2016, primarily due

to increased demand.

Other revenues for 2017 increased by $160 million, or 15.2 percent, compared with 2016, primarily

due to an increase in revenues associated with cardholder spend on the Company’s co-branded Chase

Visa credit card.

Operating Expenses

Operating expenses for 2017 increased by $972 million, or 5.8 percent, compared with 2016, while

capacity increased 3.6 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. The following table presents the Company’s Operating expenses per ASM for 2017 and 2016,

followed by explanations of these changes on a per ASM basis and dollar basis:

Year ended December 31,

Per ASM

change

Percent

change(in cents, except for percentages)

2017

As Recast

2016

As Recast

Salaries, wages, and benefits 4.74¢ 4.57¢ 0.17¢ 3.7%

Fuel and oil 2.65 2.56 0.09 3.5

Maintenance materials and repairs 0.65 0.70 (0.05) (7.1)

Landing fees and airport rentals 0.84 0.82 0.02 2.4

Depreciation and amortization 0.79 0.82 (0.03) (3.7)

Other operating expenses 1.86 1.82 0.04 2.2

Total 11.53¢ 11.29¢ 0.24¢ 2.1%

Operating expenses per ASM for 2017 increased 2.1 percent, compared with 2016, primarily due to

wage rate increases, increases in market jet fuel prices, and charges associated with the grounding of

the Company’s remaining Classic aircraft. Operating expenses in 2016 included $356 million of

accrued ratification bonuses, associated with collective-bargaining agreements reached with multiple

unionized workgroups. Operating expenses per ASM for 2017, excluding Fuel and oil expense and

special items (a non-GAAP financial measure), increased 4.3 percent year-over-year, primarily due to

wage rate increases. 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 2017 increased by $519 million, or 7.6 percent, compared

with 2016. Salaries, wages, and benefits expense per ASM for 2017 increased 3.7 percent, compared

with 2016. On both a dollar and per ASM basis, the majority of the increases were the result of higher

salaries and resulting Company contributions to the Company sponsored 401(k) plans, primarily driven

by wage rate increases. In addition, the Company announced a $1,000 per Employee bonus as a result

of the 2017 tax reform, which comprised approximately $70 million of the increase in Salaries, wages,

and benefits expense. Salaries, wages, and benefits expense in 2016 included $356 million of accrued

ratification bonuses, associated with collective-bargaining agreements reached with multiple unionized

workgroups.

Fuel and oil expense for 2017 increased by $275 million, or 7.2 percent, compared with 2016. On a per

ASM basis, Fuel and oil expense for 2017 increased 3.5 percent, compared with 2016. On both a dollar

and per ASM basis, the increases were attributable to higher market jet fuel prices, partially offset by a

decrease in net hedging losses recognized compared to 2016. See Note Regarding Use of Non-GAAP

Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures

for additional detail regarding non-GAAP financial measures. The Company’s average economic jet

fuel price per gallon increased 3.0 percent, year-over-year, to $2.06 during 2017 from $2.00 during

2016. These figures include premium expense associated with the Company’s fuel hedges, which on a

per gallon basis equated to approximately $0.07 and $0.08 for 2017 and 2016, respectively. The

Company also improved its fuel efficiency during 2017, compared with 2016, when measured on the

basis of ASMs generated per gallon of fuel. Fuel gallons consumed increased 2.5 percent, compared

with 2016, while year-over-year capacity increased 3.6 percent. As a result of the Company’s fuel

hedging program, the Company recognized net losses totaling $416 million in Fuel and oil expense

for 2017, compared with net losses totaling $820 million for 2016. These totals include cash

settlements realized from the settlement of fuel derivative contracts associated with the Company’s

economic fuel hedge totaling $572 million paid to counterparties for 2017, compared with $1.0

billion paid to counterparties for 2016. These cash settlement totals exclude gains and/or losses

recognized from hedge ineffectiveness for both years and from derivatives that did not qualify for

hedge accounting for both periods. Those items are recorded as a component of Other (gains) losses,

net.

Maintenance materials and repairs expense for 2017 decreased by $44 million, or 4.2 percent,

compared with 2016. On a per ASM basis, Maintenance materials and repairs expense for 2017

decreased 7.1 percent, compared with 2016. On both a dollar and per ASM basis, the majority of the

decreases were attributable to a decrease in airframe maintenance expenses primarily as a result of the

retirement of the Company’s Classic fleet, partially offset by increases in Boeing 737-700 engine

maintenance due to increased utilization of that fleet to replace a portion of the retired Classic aircraft.

Landing fees and airport rentals expense for 2017 increased by $81 million, or 6.7 percent, compared

with 2016. On a per ASM basis, Landing fees and airport rentals expense for 2017 increased

2.4 percent, compared with 2016. On a dollar basis, approximately 50 percent of the increase was due

to an increase in Landing fees as a result of the 2.8 percent increase in Trips flown and a change in

fleet mix to larger capacity aircraft. Approximately 25 percent of the increase on a dollar basis was an

increase in space rentals related to rate escalations and capital projects at many airports across the

Company’s network. The remaining increase was due to growth in international markets which gives

rise to additional fees. The increase per ASM was primarily due to rate escalations at many airports

across the Company’s network.

Depreciation and amortization expense for 2017 decreased by $3 million, or 0.2 percent, compared

with 2016. On a per ASM basis, Depreciation and amortization expense decreased 3.7 percent,

compared with 2016. On both a dollar and per ASM basis, the majority of the decreases were

associated with a net decrease in depreciation expense related to the Company’s flight equipment, as

the decrease from the retirement of the Company’s Classic fleet exceeded the additional depreciation

from the addition of new 737 MAX 8 aircraft, new 737-800 aircraft, and pre-owned 737-700 aircraft

on capital leases. These decreases were partially offset by the deployment of new technology assets.

Other operating expenses for 2017 increased by $144 million, or 5.3 percent, compared with 2016. On

a per ASM basis, Other operating expenses for 2017 increased 2.2 percent, compared with 2016. These

increases were both impacted by charges associated with the retirement of the Company’s remaining

Classic aircraft. These charges included a $63 million aircraft grounding charge related to the leased

portion of the Classic fleet, representing the remaining net lease payments due and certain lease return

requirements that could have to be performed on these leased aircraft prior to their return to the lessors,

as of the cease-use date. The Classic fleet charges in 2017 also included $33 million in lease

termination expenses associated with Classic aircraft being acquired off their operating leases,

compared with $22 million related to the acquisition of aircraft coming off operating leases in 2016.

These charges related to the grounding or cease-use of the Classic fleet 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. The remainder of the increase on a

dollar basis was primarily due to increased personnel expenses due to higher travel expenses for Flight

Crews and higher hotel rates, as well as new Heart-themed uniforms for the Company’s operations

personnel.

Other

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

and losses.

Interest expense for 2017 decreased by $8 million, or 6.6 percent, compared with 2016, primarily due

to the timing of debt activity. The Company had three debt facilities mature during or since 2016 with

higher interest expense than the four debt facilities issued during or since 2016. The three debt

facilities that matured during or since 2016 included the Company’s remaining 5.25% convertible

senior notes in October 2016, $300 million of 5.75% senior unsecured notes in December 2016, and

$300 million of 5.125% senior unsecured notes in March 2017. The four debt facilities issued during or

since 2016 included a $215 million floating rate term loan in October 2016, $300 million of 3.00%

senior unsecured notes in November 2016, $300 million of 2.75% senior unsecured notes in November

2017, and $300 million of 3.45% senior unsecured notes in November 2017.

Capitalized interest for 2017 increased by $2 million, or 4.3 percent, compared with 2016, primarily

due to interest on facility construction projects.

Interest income for 2017 increased by $11 million, or 45.8 percent, compared with 2016, primarily due