Southwest Airlines LUV · USD

REVENUEPassenger RevenuesThe Company’s contracts with its Customers primarily consist of its tickets sold, which are initially deferred as Air traffic liability. Passenger revenue associated with tickets is recognized when the performance obligation to the Customer is satisfied, which is primarily when travel is provided. Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow. The following table provides the components of Passenger revenue recognized for the years ended December 31, 2025, 2024, and 2023: Year ended December 31,(in millions)202520242023Passenger non-loyalty$20,441 $20,467 $19,073 Passenger loyalty - air transportation3,259 3,484 3,639 Passenger ancillary sold separately1,835 1,029 925 Total passenger revenues$25,535 $24,980 $23,637 Passenger non-loyalty includes all revenues recognized from Passengers for flights purchased primarily with credit card. Passenger loyalty - air transportation primarily consists of the revenue associated with award flights taken by loyalty program Members upon redemption of loyalty points. Passenger ancillary sold separately includes any revenue associated with ancillary fees charged separately, such as in-flight purchases, baggage fees, EarlyBird Check-In®, and Upgraded Boarding.In order to determine the value of each loyalty point in a flight transaction, certain assumptions must be made at the time of measurement, which include the following:•Allocation of Passenger Revenue - Revenues from Passengers, related to travel, who also earn Rapid Rewards points have been allocated between flight (recognized as revenue when transportation is provided) and loyalty (deferred until points are redeemed) based on each obligation’s relative stand-alone selling price. The Company utilizes historical earning patterns to assist in this allocation.•Fair Value of Rapid Rewards Points - Determined from the base fare value of tickets which were purchased using prior point redemptions for travel and other products and services, which the Company believes to be indicative of the fair value of points as perceived by Customers and representative of the value of each point at the time of redemption. The Company’s booking site allows a Customer to toggle between fares utilizing either cash (or equivalent) or point redemptions, which provides the Customer with an approximation of the equivalent value of their points.

COMMITMENTS AND CONTINGENCIESCommitmentsThe Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, repayment of debt (see Note 6), and lease arrangements (see Note 7). During the year ended December 31, 2025, the Company entered into supplemental agreements with Boeing relating to its contractual order book for -7 and -8 aircraft. The Company's contractual order book with Boeing for -7 and -8 aircraft, which extends to 2031, was designed to support the Company's growth and fleet modernization plans, while also providing significant flexibility and optionality to manage its fleet gauge and size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize. The Company received 55 -8 aircraft deliveries from Boeing in 2025 and retired 48 -700 aircraft and seven -800 aircraft, including the sale of five -800 aircraft. During fourth quarter 2025, the Company exercised six -7 options for delivery in 2027, converted one 2025 -7 firm order into a 2025 -8 firm order, and converted 12 2026 -7 firm orders into 2026 -8 firm orders. Boeing continues to experience delays in fulfilling its commitments with regards to delivery of MAX aircraft to the Company and delays in achieving FAA certification of one of its new aircraft types, the -7, for which Southwest expects to be the launch customer. During 2025, as a result of Boeing's ongoing delivery delays, the Company conservatively re-planned its capacity and delivery expectations for 2026. The Company will continue to closely monitor the ongoing aircraft delivery delays with Boeing and adjust expectations as needed. Based on the Company's current agreement with Boeing, capital commitments associated with its firm orders as of December 31, 2025 were: (in billions)202620272028202920302031TotalPayments for capital commitments$4.2 (a)$2.7 $2.7 $2.5 $1.5 $1.2 $14.8 (a) Capital commitments associated with the Company's firm orders in 2026 of $4.2 billion include approximately $2.5 billion primarily related to the existing scheduled 86 MAX aircraft to be delivered in 2026 and $1.7 billion related to 81 MAX aircraft (27 -7s and 54 -8s) that were contractually committed for 2024 and 2025, but were not received. In addition, subsequent to December 31, 2025, and through February 5, 2026, the Company exercised four -7 options for delivery in 2027, resulting in an increase of the Company's 2027 capital commitments to $2.8 billion.

INCOME TAXESDeferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities as of December 31, 2025 and 2024, are as follows: (in millions)20252024DEFERRED TAX LIABILITIES:Accelerated depreciation$3,655 $3,351 Prepaid insurance329 282 Operating lease right-of-use assets249 314 Other99 99 Total deferred tax liabilities4,332 4,046 DEFERRED TAX ASSETS:Accrued employee benefits356 337 Loyalty program and flight credit liability540 604 Operating lease liabilities252 319 Net operating losses and tax credits (a)644 352 Other260 267 Valuation allowance(9)— Total deferred tax assets2,043 1,879 Net deferred tax liability$2,289 $2,167 (a) As of December 31, 2025 and 2024, the Company had approximately $66 million and $56 million, respectively, of state net operating loss carryforwards (tax effected) to reduce future state taxable income. These state net operating loss carryforwards will expire in years 2026 through 2046 if unused. As of December 31, 2025 and 2024, the Company had $504 million and $253 million, respectively, of federal net operating loss carryforwards (tax effected) that may be carried forward indefinitely. As of December 31, 2025 and 2024, the Company had $75 million and $53 million, respectively, of federal research and development tax credit carryforwards subject to expiration beginning in 2043 if unused. A valuation allowance is recorded when it is more likely than not that some portion of deferred tax assets will not be realized. During 2025, the Company established deferred tax assets related to Texas research and development tax credits. The gross deferred tax asset totaled $13 million, of which approximately $12 million is not expected to be realized based on current projections of taxable income and applicable utilization limitations. Accordingly, as of December 31, 2025, the Company recorded a valuation allowance of approximately $12 million against these assets. The change in the valuation allowance during the year reflects the initial recognition of the deferred tax assets and updated assessments of future utilization.Foreign pretax income, income tax expense, and income taxes paid were immaterial for all periods presented. As a result, foreign amounts have not been separately disaggregated.

LEASESThe Company enters into leases for aircraft, property, and other types of equipment in the normal course of business. As allowed under ASC 842, Leases, the Company has elected a practical expedient to exclude from recognition lease assets and lease liabilities associated with leases that have an initial term of twelve months or less. Such expense was not material for the twelve months ended December 31, 2025, 2024, and 2023.As of December 31, 2025, the Company held aircraft leases with remaining terms extending up to eight years. The aircraft leases generally can be renewed for three months to three years at rates based on the fair market value at the end of the lease term. Residual value guarantees included in the Company's lease agreements are not material. The lease return costs incurred by the Company for returns completed in 2025 were $33 million, recognized as a component of Other operating expenses but were not material for all other periods presented.In fourth quarter 2024, the Company entered into an agreement with UMB Bank, N.A. ("UMB Bank") involving the sale of 36 of the Company’s -800 aircraft that qualified as sale-leaseback arrangements under applicable accounting guidance. Of the 36 -800 sale-leasebacks, 35 were executed in fourth quarter 2024 and one was executed in first quarter 2025. The Company sold the 35 -800 aircraft in fourth quarter 2024 to UMB Bank for $871 million, then immediately leased the aircraft back for approximately two to three years. In first quarter 2025, the Company sold one -800 aircraft to UMB Bank for $24 million, then immediately leased the aircraft back for approximately three years. As such, 36 aircraft were de-recognized from Property and equipment at their remaining net book values at the time of sale. All of the leases from the sale-leasebacks are accounted for as operating leases, and thus are now reflected as part of the Company’s Operating lease right-of-use assets and operating lease liabilities in the accompanying Consolidated Balance Sheet. The -800 sale-leaseback transaction resulted in a recognized gain of $92 million and operating lease right-of-use assets and liabilities of $319 million in fourth quarter 2024 and resulted in a recognized gain of $3 million and operating lease right-of-use assets and liabilities of $9 million in first quarter 2025. These gains were reflected within Other operating expenses, net in the accompanying Consolidated Statement of Comprehensive Income.

Risk Assessment and ManagementThe Company is increasingly dependent on the use of complex technology and systems to run its operations and support its strategic objectives. These technologies and systems include, among others, the Company's website and reservation system; mobile application; flight dispatch and tracking systems; flight simulators; check-in kiosks; aircraft maintenance, planning, and record keeping systems; telecommunications systems; flight planning and scheduling systems; crew scheduling systems; human resources systems; and financial planning, management, and accounting systems. Additionally, the Company must receive and process certain confidential or personal information related to its Customers and Employees to run its business, and the Company's operations depend upon secure collection, processing, retention, and transmission of such information. Therefore, the performance, reliability, and security of the Company's technology infrastructure and information systems are critical to the Company's operations and initiatives. The Company has an enterprise risk management (“ERM”) program to identify, evaluate, and manage risks. Cybersecurity risks are evaluated alongside other critical business risks under the ERM program to align cybersecurity efforts with the Company's broader business goals and objectives. The Company believes that integrating cybersecurity risks into its ERM program fosters a proactive and holistic approach to cybersecurity, which helps safeguard the Company’s operations, financial condition, and reputation in an ever-evolving threat landscape.The Company maintains a cybersecurity program that is designed to identify, protect from, detect, respond to, and recover from cybersecurity threats and risks, and protect the confidentiality, integrity, and availability of its information systems, including the information residing on such systems. The National Institute of Standards and Technology Cybersecurity Framework helps the Company inform its cybersecurity agenda and prioritize its cybersecurity activities. The Company takes a risk-based, threat-informed approach to cybersecurity, which begins with the identification and evaluation of cybersecurity risks or threats that could affect the Company’s operations, finances, legal or regulatory compliance, or reputation.

STOCK PLANSShare-based CompensationThe Company accounts for share-based compensation utilizing fair value, which is determined on the date of grant for all instruments. The Consolidated Statement of Income for the years ended December 31, 2025, 2024, and 2023, reflects share-based compensation expense of $99 million, $45 million, and $86 million, respectively. The total tax impact recognized in earnings from share-based compensation arrangements for the years ended December 31, 2025, 2024, and 2023, was not material. As of December 31, 2025, there was $100 million of total unrecognized compensation cost related to share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.9 years. The Company expects substantially all unvested shares associated with time-based restricted stock unit awards to vest.Restricted Stock Units and Stock GrantsUnder the Company’s Amended and Restated 2007 Equity Incentive Plan ("2007 Equity Plan"), which was approved by Shareholders, the Company granted restricted stock units ("RSUs") and performance-based restricted stock units ("PBRSUs") to certain Employees during 2025, 2024, and 2023.The RSUs are scheduled to vest with respect to one-third of the shares covered thereby annually. Other than in connection with death or disability, vesting is subject to the individual’s continued service as an Employee, Board member, or advisor through the vesting date. However, with respect to the RSUs granted in 2023, 2024, and 2025, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” any outstanding unvested RSUs will remain outstanding as if the individual’s service has not terminated and will continue to vest in accordance with the schedule set forth in the notice of the grant. An individual's termination of service will be considered a "qualified retirement" if (a) the individual has completed at least 10 years of continuous service; (b) the individual’s age plus completed years of continuous service equal at least 65 at the time of the individual’s termination of service; and (c) the individual has not been terminated for cause.Under the 2023 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Adjusted ROIC performance, as defined, and ranges from zero to 200 percent of granted PBRSUs, only after a minimum performance level has been achieved.

COMMON STOCKThe Company has one class of capital stock, its common stock. Holders of shares of common stock are entitled to receive dividends when and if declared by the Board of Directors and are entitled to one vote per share on all matters submitted to a vote of the Shareholders. As of December 31, 2025, the Company had 80 million shares of common stock reserved for issuance pursuant to Employee equity plans (of which 21 million shares had not been granted) through various share-based compensation arrangements. See Note 9 for information regarding the Company's equity plans.Repurchase of Common Stock Under an accelerated share repurchase program entered into by the Company with third-party financial institutions in first quarter 2025 (the “First Quarter 2025 ASR Program”), the Company paid $750 million and received an initial delivery of 19,867,550 shares during February 2025, representing an estimated 80 percent of the shares to be purchased by the Company under the First Quarter 2025 ASR Program. This share amount was based on the $30.20 closing price of the Company’s common stock on February 19, 2025. Final settlement of the First Quarter 2025 ASR Program occurred in April 2025 and was based on a discount to the volume-weighted average price per share of the Company’s common stock during a calculation period completed in April 2025. Upon settlement, the third-party financial institutions delivered 4,242,267 additional shares of the Company’s common stock to the Company. Upon completion of the First Quarter 2025 ASR Program in April 2025, the average purchase price per share for the 24,109,817 shares repurchased was $31.11.Under an accelerated share repurchase program entered into by the Company with third-party financial institutions in second quarter 2025 (the “Second Quarter 2025 ASR Program”), the Company paid $1.5 billion and received an initial delivery of 45,300,111 shares during April 2025, representing an estimated 80 percent of the shares to be purchased by the Company under the Second Quarter 2025 ASR Program. This share amount was based on the $26.49 closing price of the Company’s common stock on April 25, 2025. Final settlement of the Second Quarter 2025 ASR Program occurred in August 2025 and was based on a discount to the volume-weighted average price per share of the Company’s common stock during a calculation period completed in July 2025.

RESTRUCTURINGIn February 2025, the Company implemented a reduction in its workforce designed to reduce operating costs, increase efficiency, and create a leaner and more agile organization as part of its transformational plan. The workforce reduction of approximately 1,750 Employee roles was focused almost entirely on corporate overhead and leadership positions and represented approximately 15 percent of corporate positions, including senior leadership. Separations were substantially completed by the end of second quarter 2025. As a result of this workforce reduction, the Company recorded a one-time expense of $62 million in first quarter 2025, which is included on the Consolidated Statement of Income as part of Salaries, wages, and benefits and Other operating expenses. Substantially all of the expense is due to Employee severance payments and related professional fees and was substantially paid in first and second quarter 2025, with no amounts remaining on the Consolidated Balance Sheet as of December 31, 2025. The Company does not expect to incur any material additional costs in connection with this reduction in workforce.