Southwest Airlines · 10-Q · Item 2 MD&A

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

Relevant comparative operating statistics for the three and six months ended June 30, 2026 and 2025 are included below. The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company’s performance against its results for the prior year period, as well as against the performance of the Company’s peers.

Three months ended June 30,

Change

Revenue passengers carried (000s)

%

Enplaned passengers (000s)

%

Revenue passenger miles (RPMs) (in millions)(a)

%

Available seat miles (ASMs) (in millions)(b)

%

Load factor(c)

%

%

pts.

Average length of passenger haul (miles)

%

Average aircraft stage length (miles)

%

Trips flown

%

Seats flown (000s)(d)

%

Seats per trip(e)

%

Average passenger fare

$

$

%

Passenger revenue yield per RPM (cents)(f)

%

Operating revenues per ASM (cents)(g)

%

Operating revenues per ASM, excluding special items (cents)

%

Passenger revenue per ASM (cents)(h)

%

Operating expenses per ASM (cents)(i)

%

Operating expenses per ASM, excluding fuel (cents)

%

Operating expenses per ASM, excluding special items (cents)

%

Operating expenses per ASM, excluding fuel and special items (cents)

%

Operating expenses per ASM, excluding fuel, profitsharing, and special items (cents)

%

Fuel costs per gallon, including fuel tax (unhedged)

$

$

%

Fuel costs per gallon, including fuel tax

$

$

%

Fuel consumed, in gallons (millions)

%

Active full-time equivalent Employees

%

Aircraft at end of period

%

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Six months ended June 30,

Change

Revenue passengers carried (000s)

%

Enplaned passengers (000s)

%

Revenue passenger miles (RPMs) (in millions)(a)

%

Available seat miles (ASMs) (in millions)(b)

%

Load factor(c)

%

%

pts.

Average length of passenger haul (miles)

%

Average aircraft stage length (miles)

%

Trips flown

%

Seats flown (000s)(d)

%

Seats per trip(e)

%

Average passenger fare

$

$

%

Passenger revenue yield per RPM (cents)(f)

%

Operating revenues per ASM (cents)(g)

%

Operating revenues per ASM, excluding special items (cents)

%

Passenger revenue per ASM (cents)(h)

%

Operating expenses per ASM (cents)(i)

%

Operating expenses per ASM, excluding fuel (cents)

%

Operating expenses per ASM, excluding special items (cents)

%

Operating expenses per ASM, excluding fuel and special items (cents)

%

Operating expenses per ASM, excluding fuel, profitsharing, and special items (cents)

%

Fuel costs per gallon, including fuel tax (unhedged)

$

$

%

Fuel costs per gallon, including fuel tax

$

$

%

Fuel consumed, in gallons (millions)

%

Active full-time equivalent Employees

%

Aircraft at end of period

%

(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 supply or the space available to carry passengers in a given period.

(c)Revenue passenger miles divided by available seat miles.

(d)Seats flown is calculated using total number of seats available by aircraft type multiplied by the total trips flown by the same aircraft type during a particular period.

(e)Seats per trip is calculated by dividing seats flown by trips flown.

(f)Calculated as passenger revenue divided by revenue passenger miles. Also referred to as "yield," this is the average cost paid by a paying passenger to fly one mile, which is a measure of revenue production and fares.

(g)Calculated as operating revenues divided by available seat miles. Also referred to as "operating unit revenues" or "RASM," this is a measure of operating revenue production based on the total available seat miles flown during a particular period.

(h)Calculated as passenger revenue divided by available seat miles. Also referred to as "passenger unit revenues", this is a measure of passenger revenue production based on the total available seat miles flown during a particular period.

(i)Calculated as operating expenses divided by available seat miles. Also referred to as "unit costs" or "cost per available seat mile" or "CASM," this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiency.

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Financial Highlights

The Company reports its results in accordance with GAAP. The Company also provides certain non-GAAP financial measures which the Company's management also utilizes to evaluate its ongoing financial performance, and the Company believes provides additional insight to investors as supplemental information to its GAAP results, as noted in the following tables. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Three months ended June 30,

(in millions, except per share amounts)

GAAP

% Change

Operating income

$

$

%

Net income

$

$

%

Net income per share, diluted

$

$

%

Non-GAAP

Operating income

$

$

%

Net income

$

$

%

Net income per share, diluted

$

$

%

Six months ended June 30,

(in millions, except per share amounts)

GAAP

% Change

Operating income

$

$

2

n.m.

Net income

$

$

n.m.

Net income per share, diluted

$

$

n.m.

Non-GAAP

Operating income

$

$

n.m.

Net income

$

$

n.m.

Net income per share, diluted

$

$

n.m.

Despite a dynamic cost and fuel environment, the Company’s Operating income, Net income, and Net income per share, diluted, for the three and six months ended June 30, 2026, on a GAAP and non-GAAP basis, improved compared with the same prior year period, driven primarily by strong revenue performance, including an all-time quarterly record Operating revenue performance for the three months ended June 30, 2026, partially offset by higher Aircraft fuel and related taxes expense and Salaries, wages, and benefits expense. On a GAAP basis, the Company’s results for the three and six months ended June 30, 2026, included a reversal of $285 million of breakage revenue recorded in prior years related to a portion of flight credits issued to Customers between July 2022 and December 2025 that have either been redeemed or are expected to be redeemed in future periods.

This adjustment was treated as a special item and excluded from the Company’s presentation of non-GAAP results. See Note Regarding Use of Non-GAAP Financial Measures and Notes 1 and 5 to the unaudited Condensed Consolidated Financial Statements for further information. Operating expense for the six months ended June 30, 2025, on a non-GAAP basis, excluded pre-tax charges of $115 million, most notably $62 million related to severance and related professional fees associated with the Company's February 2025 T1reduction in workforce.

Company Overview

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The Company has substantially completed the implementation of its previously announced transformational initiatives, which were planned and designed to attract new Customers and improve both the Company's operational and financial performance. Since the introduction of assigned and extra legroom seating on January 27, 2026, the Company has successfully integrated these offerings into its operations, contributing to improved passenger yields and incremental revenue. Despite significantly higher fuel costs, results reflect record revenue performance, significant earnings growth and margin expansion, broad demand strength, continued cost discipline, and strong Customer engagement with the Company’s enhanced product offering.

The Company has also continued to enhance its onboard offerings, with improvements such as in-seat power, larger overhead bins, and upgraded WiFi, with the first Starlink-equipped aircraft entering service on June 22, 2026, marking the beginning of a new era of inflight connectivity at Southwest. Work is well underway on a refreshed cabin design, including new, more comfortable RECARO seats. As of July 22, 2026, 107 aircraft retrofitted with RECARO seats have been placed into service. In addition, the Company entered into new partnerships with Singapore Airlines, which will enable jointly operated itineraries connecting through the carriers' shared gateway airports in Los Angeles, Seattle-Tacoma, and San Francisco, and with Air Premia, which will enable travel across the Pacific with interline connections at the carriers' shared gateway airports in Honolulu, Los Angeles, and San Francisco.

Since February 13, 2025, the Company has implemented and/or announced strategic partnerships with a total of nine carriers, through which Customers can book itineraries that connect the Company's vast domestic network to destinations around the world.

The ongoing geopolitical developments in the Middle East continue to impact the market prices of products that are derived from crude oil, including jet fuel. The Company’s second quarter Aircraft fuel and related taxes expense was $2.2 billion, or $3.92 per gallon, compared with the first quarter Aircraft fuel and related taxes expense of $1.4 billion, or $2.73 per gallon. The forward curve on July 17, 2026 implied a third quarter 2026 fuel cost per gallon, including related taxes, between $3.70 and $3.75. The Company currently expects to utilize approximately 532 million gallons of jet fuel during third quarter 2026.

In second quarter 2026, the Company also paid $88 million to Shareholders through dividends. See "Liquidity and Capital Resources" below for further information.

To further improve its financial performance, the Company has also intensified its network optimization efforts. Effective June 4, 2026, the Company T2suspended operations at Chicago O'Hare International Airport and Washington Dulles International Airport and reduced staffing at Hartsfield-Jackson Atlanta International Airport, Fort Lauderdale-Hollywood International Airport, and Philadelphia International Airport. A majority of affected Employees were able to transfer to similar positions across the Company's network and remain employed by Southwest.

On April 7, 2026, the Company's 34 Network Operations Control Customer Planners represented by the International Association of Machinists and Aerospace Workers ("IAM") voted to ratify the tentative agreement reached on March 27, 2026, as part of the accretion process to join an existing IAM-represented collective bargaining unit. The newly ratified agreement becomes amendable in December 2027.

Material Changes in Results of Operations

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Three months ended June 30,

Increase (Decrease)

Percent change

(in millions)

Passenger

$

$

$

%

Freight

6

Other

Total operating revenues

$

$

$

%

Salaries, wages, and benefits

$

$

$

%

Aircraft fuel and related taxes

Maintenance materials and repairs

Landing fees and airport rentals

Depreciation and amortization

2

Other operating expenses

Total operating expenses

$

$

$

%

Operating Revenues

Total operating revenues for second quarter 2026 increased by $1.2 billion, or 16.4 percent, year-over-year, to T3achieve an all-time quarterly Company record of $8.4 billion, despite a $285 million decrease related to a breakage adjustment, which was treated as a special item and excluded from the Company's presentation of non-GAAP results. See Note Regarding Use of Non-GAAP Financial Measures and see Notes 1 and 5 to the unaudited Condensed Consolidated Financial Statements for further information. Passenger revenues for second quarter 2026 increased by $1.1 billion, or 16.9 percent, year-over-year, driven primarily by a higher percentage of Customers purchasing higher fare categories as a result of the enhanced fare structure, coupled with an increase in new ancillary products implemented by the Company, including bag fee revenues for first and second checked bags for tickets purchased on or after May 28, 2025, and operating assigned and extra legroom seating for travel beginning January 27, 2026, which includes the co-brand impact associated with those initiatives.

Other revenues for second quarter 2026 increased by $64 million, or 11.2 percent, year-over-year, driven primarily by improved retail spend on the Company's co-branded credit cards. Second quarter 2026 RASM was 17.91 cents, finishing 16.2 percent higher than second quarter 2025. The unit revenue increase was primarily due to a 15.4 percent increase in yield as a result of broad demand strength and strong Customer engagement with the Company's enhanced product offering, including an T4increase in ancillary revenues, along with a 0.8 point year-over-year increase in Load factor. Second quarter 2026 RASM, excluding special items, was 18.51 cents, finishing 20.1 percent higher than second quarter 2025. See Reconciliation of Reported Amounts to Non-GAAP Financial Measures and Note Regarding Use of Non-GAAP Financial Measures for further information.

Operating Expenses

Operating expenses for second quarter 2026 increased by $1.1 billion, or 16.1 percent, compared with second quarter 2025, and capacity increased 0.2 percent over the same prior year period. Operating expenses, excluding special items, increased $1.1 billion, or 16.2 percent, compared with second quarter 2025. The vast majority of the dollar increase was due to higher Aircraft fuel and related taxes expense and Salaries, wages, and benefits expense. The following table presents the Company's Operating expenses per ASM for the second quarter of 2026 and 2025, followed by explanations of these changes on both a dollar and unit basis.

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Three months ended June 30,

Per ASM

change

Percent

change

(in cents, except for percentages)

Salaries, wages, and benefits

¢

¢

¢

%

Aircraft fuel and related taxes

Maintenance materials and repairs

Landing fees and airport rentals

Depreciation and amortization

—

—

Other operating expenses

Total

¢

¢

¢

%

Operating expenses per ASM for second quarter 2026 increased by 15.8 percent compared with second quarter 2025, primarily due to an increase in Aircraft fuel and related taxes expense and Salaries, wages, and benefits expense. Operating expenses per ASM for second quarter 2026, excluding Aircraft fuel and related taxes expense, profit sharing, and special items (a non-GAAP financial measure), increased 3.4 percent, compared with second quarter 2025, primarily due to wage rate inflation in Salaries, wages, and benefits expense in 2026. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for second quarter 2026 increased by $237 million, or 7.3 percent, compared with second quarter 2025. On a per ASM basis, second quarter 2026 Salaries, wages, and benefits expense increased 7.2 percent, compared with second quarter 2025. On a dollar and per ASM basis, the majority of the increase was due to step/pay rate increases and related benefits for the Company's workforce.

Aircraft fuel and related taxes expense for second quarter 2026 increased by $889 million, or 67.0 percent, compared with second quarter 2025. On a per ASM basis, second quarter 2026 Aircraft fuel and related taxes expense increased 66.1 percent. On a dollar and per ASM basis, the T5increase was primarily attributable to increased jet fuel prices, particularly due to recent market disruptions and worldwide geopolitical events. The following table provides more information on the Company's fuel costs per gallon, including the impact of fuel hedging net premium expense associated with previously terminated fuel derivative contracts:

Three months ended June 30,

Fuel costs per gallon

$

$

Fuel hedging premium expense (in millions)

$

(a)

$

(a)

Fuel hedging premium expense per gallon

$

(a)

$

(a)

(a) Includes amounts reclassified from AOCI associated with hedges previously terminated. See Notes 3 and 4 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's derivative instruments and AOCI, respectively.

The Company's second quarter 2026 available seat miles per gallon ("fuel efficiency") increased 1.3 percent, year-over-year, with the improvement primarily due to operating more -8 aircraft, the Company's most fuel-efficient aircraft, as a percentage of its fleet. The T6continued deliveries of MAX aircraft are expected to remain critical to the Company's efforts to modernize its fleet.

Maintenance materials and repairs expense for second quarter 2026 decreased by $37 million, or 11.2 percent, compared with second quarter 2025. On a per ASM basis, Maintenance materials and repairs expense decreased 11.4 percent compared with second quarter 2025. On a dollar and per ASM basis, the decrease was primarily due to a decrease in -700 engine shop visits.

Landing fees and airport rentals expense for second quarter 2026 increased by $69 million, or 12.2 percent, compared with second quarter 2025. On a per ASM basis, Landing fees and airport rentals expense increased 11.6

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percent, compared with second quarter 2025. On a dollar and per ASM basis, approximately 50 percent of the increase was attributable to an increase in airport rental expense throughout the network driven by the higher rates charged by airports for leased space, approximately 25 percent of the increase was due to higher landing fees throughout the network driven by increased usage of the heavier -8 aircraft as well as higher rates, and the remaining increase was primarily due to receiving fewer favorable settlements and credits from various airports in 2026.

Depreciation and amortization expense for second quarter 2026 increased by $2 million, or 0.5 percent, compared with second quarter 2025. On a per ASM basis, Depreciation and amortization expense remained flat compared with second quarter 2025. On a dollar basis, this increase was primarily due to approximately $40 million in increased depreciation as a result of new assets acquired and placed into service, including aircraft, technology, and ground equipment, which was mostly offset by a $25 million decrease in depreciation as a result of a change in estimate for certain airframe and engine assets due to prevailing market conditions and a $16 million reduction due to aircraft and related assets that were retired and/or became fully depreciated since second quarter 2025.

Other operating expenses for second quarter 2026 decreased by $32 million, or 2.8 percent, compared with second quarter 2025. Included within this line item was aircraft rentals expense in the amounts of $75 million and $80 million for the three-month periods ended June 30, 2026 and 2025, respectively. On a per ASM basis, Other operating expenses decreased 2.9 percent, compared with second quarter 2025. On a dollar and per ASM basis, the decrease was primarily due to higher year-over-year gains on the disposition of assets, primarily previously retired engines and aircraft, partially offset by an increase in revenue-related expenses driven by increased credit card transactions, the Company's free inflight WiFi offering, and higher Employee-related expenses driven by redeye flying.

Non-Operating Expenses (Income)

Interest expense for second quarter 2026 increased by $25 million, or 64.1 percent, compared with second quarter 2025, primarily due to various debt financing transactions executed since second quarter 2025. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

Interest income for second quarter 2026 decreased by $21 million, or 38.9 percent, compared with second quarter 2025, primarily due to lower investment balances and a lower average interest rate in the Company's total investment portfolio.

Other (gains) losses, net, for second quarter 2026 increased by $13 million, or 48.1 percent, compared with second quarter 2025, primarily related to impacts from the Company's nonqualified benefit plan obligations driven by volatility in the stock market.

Income Taxes

The Company's effective tax rate was 23.8 percent in second quarter 2026, compared with 23.9 percent in second quarter 2025.

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Six months ended June 30,

Increase (Decrease)

Percent change

(in millions)

Passenger

$

$

$

%

Freight

7

Other

Total operating revenues

$

$

$

%

Salaries, wages, and benefits

$

$

$

%

Aircraft fuel and related taxes

Maintenance materials and repairs

Landing fees and airport rentals

Depreciation and amortization

5

Other operating expenses

Total operating expenses

$

$

$

%

Operating Revenues

Total operating revenues for the first six months of 2026 increased $2.0 billion, or 14.7 percent, year-over-year, despite a $285 million decrease related to a breakage adjustment, which was treated as a special item and excluded from the Company's presentation of non-GAAP results. See Note Regarding Use of Non-GAAP Financial Measures and see Note 1 to the unaudited Condensed Consolidated Financial Statements for further information. Passenger revenues for the six months ended June 30, 2026, increased by $1.9 billion, or 15.3 percent, compared with the first six months of 2025, primarily due to a higher percentage of Customers purchasing higher fare categories as a result of the enhanced fare structure, coupled with an increase in bag fee revenues for the first and second checked bags for tickets purchased on or after May 28, 2025, and operating assigned and extra legroom seating for travel beginning January 27, 2026, which includes the co-brand impact associated with those initiatives.

Other revenues for the first six months of 2026 increased by $104 million, or 9.1 percent, year-over-year, driven primarily by improved retail spend on the Company's co-branded credit cards. The first six months of 2026 RASM was $17.59 cents, finishing 13.8 percent higher than the first six months of 2025. The unit revenue increase was primarily due to a 13.6 percent increase in yield as a result of broad demand strength and strong Customer engagement with the Company's enhanced product offering, including an increase in ancillary revenues, along with a 0.5 point year-over-year increase in Load factor. The first six months of 2026 RASM, excluding special items was 17.91 cents, finishing 15.8 percent higher than the first six months of 2025. See Reconciliation of Reported Amounts to Non-GAAP Financial Measures and Note Regarding Use of Non-GAAP Financial Measures for further information.

Operating Expenses

Operating expenses for the first six months of 2026 increased $1.4 billion, or 10.2 percent, compared with the first six months of 2025, and capacity increased 0.8 percent over the same prior year period. The vast majority of the dollar increase was due to higher Aircraft fuel and related taxes expense, Salaries, wages, and benefits expense, and Landing fees and airport rentals expense. The following table presents the Company's Operating expenses per ASM for the first six months of 2026 and 2025, followed by explanations of these changes on a dollar and unit basis.

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Six months ended June 30,

Per ASM

Percent

(in cents, except for percentages)

change

change

Salaries, wages, and benefits

¢

¢

¢

%

Aircraft fuel and related taxes

Maintenance materials and repairs

Landing fees and airport rentals

Depreciation and amortization

—

—

Other operating expenses

Total

¢

¢

¢

%

Operating expenses per ASM for the first six months of 2026 increased 9.3 percent, compared with the first six months of 2025, primarily due to an increase in Aircraft fuel and related taxes expense, Salaries, wages, and benefits expense, and Landing fees and airport rentals expense. Operating expenses per ASM for the first six months of 2026, excluding Aircraft fuel and related taxes expense, profit sharing, and special items (a non-GAAP financial measure), increased 2.9 percent, year-over-year, primarily due to wage rate inflation in Salaries, wages, and benefits expense. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for the first six months of 2026 increased by $433 million, or 6.8 percent, compared with the first six months of 2025. On a per ASM basis, Salaries, wages, and benefits expense for the first six months of 2026 increased 5.7 percent, compared with the first six months of 2025. On a dollar and per ASM basis, the majority of the increase was due to step/pay rate increases and related benefits for the Company's workforce.

Aircraft fuel and related taxes expense for the first six months of 2026 increased $996 million, or 38.7 percent, compared with the first six months of 2025. On a per ASM basis, Aircraft fuel and related taxes expense for the first six months of 2026 increased 37.5 percent. On a dollar and per ASM basis, the increase was primarily attributable to higher jet fuel prices, particularly due to market disruptions and worldwide geopolitical events that began in March 2026. The following table provides more information on the Company's fuel cost per gallon, including the impact of fuel hedging net premium expense associated with previously terminated fuel derivative contracts:

Six months ended June 30,

Fuel costs per gallon

$

$

Fuel hedging premium expense (in millions)

$

(a)

$

(a)

Fuel hedging premium expense per gallon

$

(a)

$

(a)

(a) Includes amounts reclassified from Accumulated Other Comprehensive Income associated with hedges previously terminated. See Notes 3 and 4 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's derivative instruments and AOCI, respectively.

Maintenance materials and repairs expense for the first six months of 2026 decreased $71 million, or 11.4 percent, compared with the first six months of 2025. On a per ASM basis, Maintenance materials and repairs expense decreased 11.4 percent, compared with the first six months of 2025. On a dollar and per ASM basis, the decrease was primarily due to a decrease in -700 engine shop visits.

Landing fees and airport rentals expense for the first six months of 2026 increased $118 million, or 10.8 percent, compared with the first six months of 2025. On a per ASM basis, Landing fees and airport rentals expense increased 10.6 percent, compared with the first six months of 2025. On a dollar and per ASM basis, approximately 55 percent of the increase was attributable to an increase in airport rental expense throughout the network driven by the higher rates charged by airports for leased space, approximately 25 percent of the increase was due to higher

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landing fees throughout the network driven by increased usage of the heavier -8 aircraft as well as higher rates, and approximately 20 percent was due to receiving fewer favorable settlements and credits from various airports in 2026.

Depreciation and amortization expense for the first six months of 2026 increased $5 million, or 0.6 percent, compared with the first six months of 2025. On a per ASM basis, Depreciation and amortization expense remained flat compared with the first six months of 2025. On a dollar basis, this increase was primarily due to approximately $78 million in increased depreciation as a result of new assets acquired and placed into service, including aircraft, technology, and ground equipment, and various other individual increases that were not significant. These increases were mostly offset by a $53 million decrease in depreciation as a result of a change in estimate for certain airframe and engine assets due to prevailing market conditions and a $34 million reduction due to aircraft and related assets that were retired and/or became fully depreciated since second quarter 2025.

Other operating expenses for the first six months of 2026 decreased $84 million, or 3.8 percent, compared with the first six months of 2025. Included within this line item was aircraft rentals expense in the amount of $150 million and $167 million for the six months ended June 30, 2026 and 2025, respectively. On a per ASM basis, Other operating expenses decreased 4.4 percent, compared with the first six months of 2025. On a dollar and per ASM basis, the decrease was primarily due to higher year-over-year gains on the disposition of assets, primarily previously retired engines and aircraft, partially offset by an increase in revenue-related expenses driven by increased credit card transactions, the Company's free inflight WiFi offering, and higher Employee-related expenses driven by redeye flying.

Non-Operating Expenses (Income)

Interest expense for the first six months of 2026 increased $33 million, or 38.8 percent, compared with the first six months of 2025, primarily due to various debt financing transactions executed since second quarter 2025. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

Interest income for the first six months of 2026 decreased $81 million, or 58.7 percent, compared with the first six months of 2025, primarily due to lower investment balances and a lower average interest rate in the Company's total investment portfolio.

Other (gains) losses, net, for the first six months of 2026 increased $4 million, or 44.4 percent, compared with the first six months of 2025, primarily related to impacts from the Company's nonqualified benefit plan obligations driven by volatility in the stock market.

Income Taxes

The Company's effective tax rate was approximately 22.2 percent for the first six months of 2026, compared with 27.4 percent for the first six months of 2025. The first half 2025 tax rate was higher than first half 2026 due to certain discrete tax items and lower pre-tax book income in 2025, both of which had a disproportionate impact on first half 2025's tax rate.

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

(in millions, except per share amounts and per ASM amounts) (See Note Regarding Use of Non-GAAP Financial Measures for further information)

Three months ended June 30,

Percent

Six months ended June 30,

Percent

Change

Change

Operating revenues, as reported

$

$

$

$

(a)

Add: Breakage revenue adjustment

—

—

Operating revenues, excluding special items

$

$

$

$

Aircraft fuel and related taxes, unhedged

$

$

$

$

(b)

Add: Premium cost of fuel contracts designated as hedges

Aircraft fuel and related taxes, as reported

$

$

$

$

Total operating expenses, as reported

$

$

$

$

Deduct: Impairment of long-lived assets

—

(8)

—

(8)

Deduct: Litigation accruals

—

—

—

Deduct: Transformation costs

—

—

(c)

Deduct: Severance and related costs

—

Total operating expenses, excluding special items

$

$

$

$

Deduct: Aircraft fuel and related taxes expense, as reported

Operating expenses, excluding Aircraft fuel and related taxes expense and special items

$

$

$

$

Deduct: Profit-sharing expense

Operating expenses, excluding Aircraft fuel and related taxes expense, special items, and profit sharing

$

$

$

$

Operating income, as reported

$

$

$

$

2

(a)

Add: Breakage revenue adjustment

—

—

Add: Impairment of long-lived assets

—

8

—

8

Add: Litigation accruals

—

—

—

Add: Transformation costs

—

—

(c)

Add: Severance and related costs

—

Operating income, excluding special items

$

$

$

$

Total operating revenues, as reported

$

$

$

$

Operating margin, as reported

%

%

%

—

%

Add: Impact of special items

%

%

%

%

Operating margin, excluding special items

%

%

%

%

Income before income taxes, as reported

$

$

$

$

(a)

Add: Breakage revenue adjustment

—

—

Add: Impairment of long-lived assets

—

8

—

8

Add: Litigation accruals

—

—

—

Add: Transformation costs

—

—

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Three months ended June 30,

Percent

Six months ended June 30,

Percent

Change

Change

(c)

Add: Severance and related costs

—

Income before income taxes, excluding special items

$

$

$

$

Provision for income taxes, as reported

$

$

$

$

(d)

Add: Net income tax impact of fuel and special items

3

Provision for income taxes, net, excluding special items

$

$

$

$

Net income, as reported

$

$

$

$

(a)

Add: Breakage revenue adjustment

—

—

Add: Litigation accruals

—

—

—

Add: Transformation costs

—

—

(c)

Add: Severance and related costs

—

Add: Impairment of long-lived assets

—

8

—

8

(d)

Deduct: Net income tax impact of special items

(3)

Net income, excluding special items

$

$

$

$

Total operating revenues, as reported

$

$

$

$

Net margin, as reported

%

%

%

%

Add: Impact of special items

%

%

%

%

(d)

Deduct: Net income tax impact of special items

%

—

%

%

%

Net margin, excluding special items

%

%

%

%

Net income per share, diluted, as reported

$

$

$

$

Add: Impact of special items

(d)

Deduct: Net income tax impact of special items

Net income per share, diluted, excluding special items

$

$

$

$

Operating revenues per ASM (cents), as reported

¢

¢

¢

¢

Add: Impact of special items

—

—

Operating revenues per ASM, excluding special items (cents)

¢

¢

¢

¢

Operating expenses per ASM (cents)

¢

¢

¢

¢

Deduct: Impact of special items

Deduct: Aircraft fuel and related taxes expense divided by ASMs

Deduct: Profit-sharing expense divided by ASMs

Operating expenses per ASM, excluding Aircraft fuel and related taxes expense, special items, and profit sharing (cents)

¢

¢

¢

¢

(a) Represents a change in breakage revenue estimate related to non-expiring flight credits the Company issued to Passengers between July 2022 and December 2025. Due to higher-than-projected Customer redemptions of these non-expiring flight credits, along with updated projections of future redemptions, the Company has revised its estimates with regards to the

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remaining non-expiring flight credits that remain available for redemption. See Notes 1 and 5 to the unaudited Condensed Consolidated Financial Statements.

(b) Includes amounts reclassified from AOCI associated with hedges previously terminated. See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information.

(c) Represents Employee severance and other related payments resulting from corporate workforce reductions.

(d) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.

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

Twelve months ended

Twelve months ended

Operating income, as reported

$

$

Breakage revenue adjustment

Severance and related costs

Voluntary Employee programs

—

5

Net impact from fuel contracts

—

Professional advisory fees

—

Transformation costs

7

DOT settlement

—

Litigation accruals

—

Impairments

—

8

Operating income, non-GAAP

$

$

Net adjustment for aircraft leases (a)

Adjusted operating income, non-GAAP (A)

$

$

Non-GAAP tax rate (B)

%

(d)

%

(e)

Net operating profit after-tax, NOPAT (A* (1-B) = C)

$

$

Debt, including finance leases (b)

$

$

Equity (b)

Net present value of aircraft operating leases (b)

Average invested capital

$

$

Equity adjustment for hedge accounting (c)

8

Adjusted average invested capital (D)

$

$

Non-GAAP ROIC, pre-tax (A/D)

%

%

Non-GAAP ROIC, after-tax (C/D)

%

%

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

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

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

(d) The GAAP twelve month rolling tax rate as of June 30, 2026, was 21.5 percent, and the Non-GAAP twelve month rolling tax rate was 22.4 percent. See Note Regarding Use of Non-GAAP Financial Measures for additional information.

(e) The GAAP twelve month rolling tax rate as of June 30, 2025, was 22.3 percent, and the Non-GAAP twelve month rolling tax rate was 22.6 percent. See Note Regarding Use of Non-GAAP Financial Measures for additional information.

Note Regarding Use of Non-GAAP Financial Measures

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

Accordingly, the Company also provides financial information in this filing that was not prepared in accordance with GAAP and should not be considered as a substitute for the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"). Management believes special items can distort the trends associated with the Company’s ongoing performance. Therefore, management utilizes non-GAAP financial measures to evaluate the Company’s financial performance, anticipate future operating results, and assess trends without the impact of items that can vary significantly from period to period. The following measures are often provided, excluding special items, and are utilized by the Company’s management, analysts, and investors to enhance comparability of year-over-year results, as well as to industry trends: Operating revenues, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Aircraft fuel and related taxes expense; Operating expenses, non-GAAP excluding Aircraft fuel and related taxes expense and profit sharing; Operating income, non-GAAP; Adjusted Operating income, non-GAAP; Income before income taxes, non-GAAP; Provision for income taxes, net, non-GAAP; Net income, non-GAAP; Net income per share, diluted, non-GAAP; Operating revenues per ASM, non-GAAP (cents); Operating expenses per ASM, non-GAAP, excluding Aircraft fuel and related taxes expense and profit sharing (cents); Return on invested capital, non-GAAP; adjusted operating margin; and adjusted net margin.

For the periods presented, special items include:

1.Charges associated with tentative litigation settlements regarding paid short-term military leave to certain Employees;

2.Expenses associated with professional advisory fees related to the Company's implementation of its comprehensive transformational plan;

3.Charges associated with Employee severance and other related payments resulting from corporate workforce reductions;

4.Reversal of breakage revenue recorded in prior years related to a portion of non-expiring flight credits issued to Customers between July 2022 and December 2025 that have either been redeemed or are expected to be redeemed in future periods;

5.Non-cash impairment charges to remove certain assets from the unaudited Condensed Consolidated Balance Sheet that are no longer in use;

6.Expenses associated with incremental professional advisory fees related to activist investor activities, which were not budgeted by the Company or associated with the ongoing operation of the airline;

7.Incremental expense associated with a voluntary separation program that allowed eligible Employees the opportunity to voluntarily separate from the Company in exchange for severance, medical/dental coverage for a specified period of time, and travel privileges based on years of service; and

8.A charge associated with a settlement reached with the Department of Transportation ("DOT") as a result of the Company's December 2022 operational disruption.

The Company has also provided its calculation of return on invested capital ("ROIC"), which is a measure of financial performance used by management to evaluate its investment returns on capital. ROIC is not a substitute for financial results as reported in accordance with GAAP and should not be utilized in place of such GAAP results. Return on invested capital is not a measure defined by GAAP. It is calculated by the Company, in part, using non-GAAP financial measures, which include charges or benefits that are deemed "special items." As noted above, the Company believes "special items" make it difficult to compare to prior periods, anticipated future periods, or industry trends since these items cannot be reliably predicted or estimated.

The Company believes non-GAAP ROIC is a meaningful measure because it quantifies the Company's effectiveness in generating returns relative to the capital it has invested in its business. Although ROIC is commonly used as a measure of capital efficiency, definitions of return on invested capital differ; therefore, the Company is providing an explanation of its calculation

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for non-GAAP return on invested capital in the accompanying reconciliation in order to allow investors to compare and contrast its calculation to the calculations provided by other companies.

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Liquidity and Capital Resources

Net cash provided by operating activities was $530 million for the three months ended June 30, 2026, compared with $401 million provided by operating activities in the same prior year period. Net cash provided by operating activities was $1.9 billion for the six months ended June 30, 2026 compared with $1.3 billion provided by operating activities in the same prior year period. Historically, operating cash inflows are primarily derived from selling tickets for future flights and providing air transportation to Customers. The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date. Operating cash outflows are related to the recurring expenses of airline operations.

The operating cash flows for the six months ended June 30, 2026, were largely impacted by the Company's net results (as adjusted for noncash items), a $97 million profit-sharing contribution related to 2025 results pursuant to the Company's Retirement Savings Plan, and a $1.0 billion increase in Air traffic liability driven by seasonal bookings for future travel. The operating cash flows for the six months ended June 30, 2025, were largely impacted by the Company's net results (as adjusted for noncash items), a $103 million profit-sharing contribution related to 2024 results pursuant to the Company's Retirement Savings Plan, and a $55 million increase in Air traffic liability driven by higher ticket sales. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, provide Shareholder returns, and provide working capital.

Net cash used in investing activities totaled $560 million during the three months ended June 30, 2026, compared with $882 million used in investing activities in the same prior year period. Net cash used in investing activities totaled $1.0 billion during the six months ended June 30, 2026, compared with $259 million used in investing activities in the same prior year period. Investing activities in both years included Capital expenditures, as well as proceeds from the sale of various capital assets, and the prior year also included changes in the balance of the Company's short-term and noncurrent investments. During the six months ended June 30, 2026, gross Capital expenditures were $1.4 billion, and the Company had $450 million proceeds from sales of assets, compared with $1.2 billion gross Capital expenditures, and $51 million proceeds from sales of assets in the same prior year period.

Capital expenditures increased, year-over-year, largely due to an increase in average delivery payment balances for scheduled future aircraft deliveries during the six months ended June 30, 2026, compared with the same prior year period. Proceeds from sales increased, year-over-year, due to the timing and volume of various aircraft and engine sales in the six months ended June 30, 2026, compared with June 30, 2025.

The Company expects its 2026 net capital spending to be toward the low end of, or below, the $3.0 billion to $3.5 billion range based on its expectation of 64 -8 aircraft deliveries in 2026, with the remainder representing non-aircraft capital spending, partially offset by proceeds from sales of assets. The Company continues to plan for approximately 60 aircraft retirements in 2026.

Net cash provided by financing activities was $493 million during the three months ended June 30, 2026, compared with $4.2 billion used in financing activities for the same prior year period. Net cash used in financing activities was $383 million during the six months ended June 30, 2026, compared with $5.0 billion used in financing activities for the same prior year period. During the six months ended June 30, 2026, the Company paid $181 million in cash dividends to Shareholders related to the first quarter 2026 and fourth quarter 2025 declarations. The second quarter 2026 dividend declaration of $87 million was paid in July 2026. Additionally, the Company expended $1.25 billion to repurchase the Company's outstanding common stock through accelerated share repurchase programs (each, an "ASR") and open market share repurchases during the six months ended June 30, 2026.

The repurchases of common stock amounts in the unaudited Consolidated Statement of Cash Flows may differ from the unaudited Consolidated Statement of Stockholder's Equity due to the timing of excise taxes incurred and subsequent payment on share repurchases, net of issuances. During the six months ended June 30, 2026, the Company entered into the Term Loan Credit Agreement with a third-party bank, providing for the $500 million senior secured Term Loan Credit Facility that was drawn in full on March 11, 2026. On May 19, 2026, the Company executed an upsize of the Term Loan Facility for $1 billion of incremental term loan commitments. The Term Loan Facility matures in full on March 11, 2029.

Additionally, the Company prepaid the $426 million outstanding balance of the note associated with the PSP3 Payroll Support Program in April 2026. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information. The Company may engage in early debt repurchases from time to time at its discretion;

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however, no other potential early future repurchases are included in the Company's Current maturities of long-term debt unless otherwise disclosed as of June 30, 2026. During the six months ended June 30, 2025, the Company paid $210 million in cash dividends to Shareholders related to the first quarter 2025 and fourth quarter 2024 declarations. Additionally, the Company expended $2.25 billion to repurchase the Company's outstanding common stock through ASRs.

On July 23, 2025, the Board approved a $2.0 billion share repurchase authorization of the Company's common stock. During the six months ended June 30, 2026, the Company repurchased 28,429,822 shares of its common stock, all of which occurred during first quarter of 2026. The Company did not repurchase any shares during second quarter of 2026. As of June 30, 2026, approximately $450 million remained available under the Company’s share repurchase authorization. See Part II, Item 2 for further information on the Company's share repurchases. These purchases were recorded as treasury share repurchases for purposes of calculating earnings per share. Subject to certain conditions, repurchases may be made in accordance with applicable securities laws in open market or private, including accelerated repurchase transactions from time to time, depending on market conditions.

The Company is a "well-known seasoned issuer" and currently has an effective shelf registration statement registering an indeterminate amount of debt and equity securities for future sales. The Company intends to use the proceeds from any future securities sales off this shelf registration statement for general corporate purposes.

The Company has access to $1.5 billion under the Amended Credit Agreement, which expires in August 2028. For the six months ended June 30, 2026 and 2025 there were no amounts outstanding under the Amended Credit Agreement. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

As of June 30, 2026, the Company carried a working capital deficit of approximately $6.8 billion, in which its current liabilities exceed its current assets. This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused flight credits available to Customers, and loyalty deferred revenue, which are performance obligations for future Customer flights, do not require future settlement in cash, and are mostly nonrefundable. See Note 5 to the unaudited Condensed Consolidated Financial Statements for further information.

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash of $3.8 billion as of June 30, 2026, and anticipated future internally generated funds from operations. The Company continues to have a large base of unencumbered aircraft and other related assets with a net book value of approximately $15.7 billion. The Company regularly evaluates its capital structure to efficiently manage financial risks, liquidity access, and cost of capital. The Company may consider, from time to time, additional financing arrangements, including secured or unsecured debt, as appropriate. In March 2026, the Company entered into the Term Loan Facility and subsequently, in May 2026, executed an upsize for incremental loan commitments.

The commitments are secured by a grant of a security interest in certain aircraft and related assets with a minimum collateral coverage ratio requirement. In addition, the Company continues to maintain investment-grade credit ratings by all three major credit agencies (Moody's, S&P Global, and Fitch).

As of July 23, 2026, for the years 2026 through 2031, the Company has firm orders with Boeing for 479 MAX aircraft (264 -7s and 215 -8s), less 25 -8 aircraft received to date in 2026, and 138 MAX options (-7s or -8s). The contractual order book as of July 23, 2026, does not include the impact of delivery delays and is subject to change based on ongoing discussions with Boeing and their production capability. See Note 9 to the unaudited Condensed Consolidated Financial Statements for further information.

The following table details information on the aircraft in the Company's fleet as of June 30, 2026:

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Average

Age (Yrs)

Number

of Aircraft

Number

Owned

Number

Leased

Type

Seats

3

Totals

Critical Accounting Policies and Estimates

For information regarding the Company’s Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2025.

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). Forward-looking statements are based on, and include statements about, the Company's estimates, expectations, beliefs, intentions, and strategies for the future, and the assumptions underlying these forward-looking statements. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, statements related to the following:

•the Company’s estimated fuel costs and fuel efficiency and the assumptions underlying the Company’s fuel-related expectations and estimates;

•the Company's expectations with respect to fleet transactions;

•the Company's expectations with respect to share repurchases;

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

•the Company’s focus areas, goals, opportunities, and initiatives, including with respect to the Company's transformational initiatives and strong Customer engagement with the Company’s enhanced product offering;

•the Company’s plans and expectations with respect to the Company’s delivery of WiFi and Starlink-equipped aircraft, airline partnerships, cabin design and seating, and the Company’s Co-brand Agreement with Chase;

•the Company’s plans and expectations with respect to improving financial performance, Shareholder returns, capital structure, capital allocation, capital deployment, infrastructure investments, debt repurchases, and additional financing arrangements, including secured or unsecured debt;

•the Company’s fleet plans and expectations, including with respect to fleet modernization, fleet retrofits, fleet utilization, flexibility, fleet strategy and extracting value from the fleet and the fleet order book, and expected fleet deliveries and retirements, and underlying expectations and dependencies;

•the Company’s network plans and expectations;

•the Company’s labor plans and expectations;

•the Company’s financial expectations, targets and goals, including with respect to leverage, liquidity, balance sheet goals, and cost discipline;

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

•the Company’s cash flow expectations and capital spending guidance, in particular with respect to aircraft capital expenditures and underlying aircraft delivery expectations;

•the Company’s expectations with respect to its ability to meet its ongoing capital and operating commitments, including underlying assumptions and factors that could impact this ability;

•the Company's assessment of financial and market risks; and

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

While management believes these forward-looking statements are reasonable as and when made, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual results may differ materially from what is expressed in or indicated by the Company's forward-looking statements or from historical experience or the Company's present expectations. Factors that could cause these differences include, among others:

•the impact of fuel price changes, fuel price volatility, and fuel availability on the Company's business plans and results of operations, including with respect to fuel price increases and supply chain constraints related to geopolitical conflict;

•the impact of geopolitical conflict, consumer perception, consumer uncertainties with respect to government shutdowns or trade policies (including the imposition of tariffs), economic conditions, banking conditions, fears or actual outbreaks of diseases, extreme or severe weather and natural disasters, actions of competitors (including, without limitation, pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), socio-demographic trends, and other factors beyond the Company's control on consumer behavior and the Company's results of operations and business decisions, plans, strategies, and results;

•the Company's ability to timely and effectively implement, transition, operate, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives;

•the impact of governmental regulations and other governmental actions, including with respect to government shutdowns, as well as the Company's ability to obtain any required governmental approvals, on the Company's plans, strategies, financial results, and operations;

•the Company's dependence on Boeing, Boeing’s suppliers, and the FAA with respect to the Company's fleet plans and deliveries, capacity and operational plans, and other operational plans, strategies, and goals;

•consumer behavior and response with respect to the Company's commercial products and policies;

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

•the Company's dependence on other third parties, in particular with respect to its technology plans, its plans and expectations related to operational excellence and reliability, revenue management, online travel agencies, fuel supply, maintenance, environmental sustainability, Global Distribution Systems, and the impact on the Company's operations and results of operations of any third party delays or non-performance;

•the Company's ability to obtain and maintain adequate infrastructure and equipment to support its operations and initiatives;

•the Company's dependence on its workforce, including its ability to employ and retain sufficient numbers of qualified Employees to effectively and efficiently maintain its operations;

•the impact of fears or actual acts of terrorism or war, political instability, cyber-attacks, and other factors beyond the Company’s control on the Company’s plans, financial results, operations, and ability to adequately insure against risks;

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

•other factors as set forth in the Company's filings with the Securities and Exchange Commission (the "SEC"), including the detailed factors discussed under the heading “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2025.

Caution should be taken not to place undue reliance on the Company's forward-looking statements, which represent the Company's views only as of the date this report is filed. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.