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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     For the quarterly period ended September 30, 2020
  or
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
LUV-20200930_G1.JPG

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 Trading Symbol Name of each exchange on which registered
Common Stock ($1.00 par value) LUV New York Stock Exchange
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 x  No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
x
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 Exchange Act).Yes  No x
    Number of shares of Common Stock outstanding as of the close of business on October 23, 2020: 590,273,067



TABLE OF CONTENTS TO FORM 10-Q


2


SOUTHWEST AIRLINES CO.
FORM 10-Q
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements
Southwest Airlines Co.
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
September 30, 2020 December 31, 2019
ASSETS    
Current assets:  
Cash and cash equivalents $ 12,109  $ 2,548 
Short-term investments 2,453  1,524 
Accounts and other receivables 897  1,086 
Inventories of parts and supplies, at cost 426  529 
Prepaid expenses and other current assets 248  287 
Total current assets 16,133  5,974 
Property and equipment, at cost:
Flight equipment 20,909  21,629 
Ground property and equipment 6,005  5,672 
Deposits on flight equipment purchase contracts 311  248 
Assets constructed for others 274  164 
27,499  27,713 
Less allowance for depreciation and amortization 11,443  10,688 
  16,056  17,025 
Goodwill 970  970 
Operating lease right-of-use assets 1,767  1,349 
Other assets 679  577 
  $ 35,605  $ 25,895 
LIABILITIES AND STOCKHOLDERS' EQUITY    
Current liabilities:    
Accounts payable $ 980  $ 1,574 
Accrued liabilities 1,836  1,749 
Current operating lease liabilities 316  353 
Air traffic liability 3,952  4,457 
Current maturities of long-term debt 720  819 
Total current liabilities 7,804  8,952 
Long-term debt less current maturities 10,135  1,846 
Air traffic liability - noncurrent 3,142  1,053 
Deferred income taxes 1,824  2,364 
Construction obligation 274  164 
Noncurrent operating lease liabilities 1,424  978 
Other noncurrent liabilities 1,233  706 
Stockholders' equity:    
Common stock 888  808 
Capital in excess of par value 4,175  1,581 
Retained earnings 15,685  17,945 
Accumulated other comprehensive loss (102) (61)
Treasury stock, at cost (10,877) (10,441)
Total stockholders' equity 9,769  9,832 
  $ 35,605  $ 25,895 
See accompanying notes.
3


Southwest Airlines Co.
Condensed Consolidated Statement of Comprehensive Income (Loss)
(in millions, except per share amounts)
(unaudited)
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
OPERATING REVENUES:        
Passenger $ 1,454  $ 5,230  $ 6,003  $ 15,462 
Freight 41  42  118  129 
Other 298  367  914  1,107 
Total operating revenues 1,793  5,639  7,035  16,698 
OPERATING EXPENSES:        
Salaries, wages, and benefits 1,678  2,002  5,245  6,046 
Payroll support and voluntary Employee programs, net (149) —  (933) — 
Fuel and oil 379  1,090  1,507  3,242 
Maintenance materials and repairs 185  313  597  916 
Landing fees and airport rentals 308  345  922  1,036 
Depreciation and amortization 315  308  940  906 
Other operating expenses, net 488  762  1,405  2,260 
Total operating expenses 3,204  4,820  9,683  14,406 
OPERATING INCOME (LOSS) (1,411) 819  (2,648) 2,292 
OTHER EXPENSES (INCOME):    
Interest expense 111  30  235  90 
Capitalized interest (11) (10) (23) (27)
Interest income (4) (23) (30) (70)
Other (gains) losses, net 35  95 
Total other expenses (income) 131  —  277 
INCOME (LOSS) BEFORE INCOME TAXES (1,542) 819  (2,925) 2,291 
PROVISION FOR INCOME TAXES (385) 160  (759) 504 
NET INCOME (LOSS) $ (1,157) $ 659  $ (2,166) $ 1,787 
NET INCOME (LOSS) PER SHARE, BASIC $ (1.96) $ 1.24  $ (3.89) $ 3.30 
NET INCOME (LOSS) PER SHARE, DILUTED $ (1.96) $ 1.23  $ (3.89) $ 3.29 
COMPREHENSIVE INCOME (LOSS) $ (1,129) $ 566  $ (2,207) $ 1,704 
WEIGHTED AVERAGE SHARES OUTSTANDING      
Basic 590  533  556  542 
Diluted 590  534  556  543 
See accompanying notes.
4


Southwest Airlines Co.
Condensed Consolidated Statement of Stockholders' Equity
(in millions, except per share amounts)
(unaudited)
  
Common Stock Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total
Balance at December 31, 2019 $ 808  $ 1,581  $ 17,945  $ (61) $ (10,441) $ 9,832 
Repurchase of common stock —  —  —  —  (451) (451)
Issuance of common and treasury stock pursuant to Employee stock plans —  (8) —  —  (2)
Share-based compensation —  —  —  — 
Cash dividends, $0.180 per share
—  —  (94) —  —  (94)
Comprehensive loss —  —  (94) (125) —  (219)
Balance at March 31, 2020 $ 808  $ 1,582  $ 17,757  $ (186) $ (10,886) $ 9,075 
Issuance of common stock, net of issuance costs 80  2,144  —  —  —  2,224 
Issuance of common and treasury stock pursuant to Employee stock plans —  —  —  13 
Share-based compensation —  (2) —  —  —  (2)
Stock warrants —  35  —  —  —  35 
Equity feature of convertible notes, net of issuance costs —  392  —  —  —  392 
Comprehensive loss —  —  (915) 56  —  (859)
Balance at June 30, 2020 $ 888  $ 4,159  $ 16,842  $ (130) $ (10,881) $ 10,878 
Issuance of common and treasury stock pursuant to Employee stock plans —  —  —  13 
Share-based compensation —  —  —  — 
Stock warrants —  —  —  — 
Comprehensive loss —  —  (1,157) 28  —  (1,129)
Balance at September 30, 2020 $ 888  $ 4,175  $ 15,685  $ (102) $ (10,877) $ 9,769 



5


  
Common Stock Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total
Balance at December 31, 2018 $ 808  $ 1,510  $ 15,967  $ 20  $ (8,452) $ 9,853 
Cumulative effect of adopting Accounting Standards Update No. 2016-12, Leases, codified in Accounting Standards Codification 842 —  —  55  —  —  55 
Balance after adjustment for the new accounting standard $ 808  $ 1,510  $ 16,022  $ 20  $ (8,452) $ 9,908 
Repurchase of common stock —  —  —  —  (500) (500)
Issuance of common and treasury stock pursuant to Employee stock plans —  (10) —  —  (4)
Share-based compensation —  13  —  —  —  13 
Cash dividends, $0.160 per share
—  —  (89) —  —  (89)
Comprehensive income —  —  387  76  —  463 
Balance at March 31, 2019 $ 808  $ 1,513  $ 16,320  $ 96  $ (8,946) $ 9,791 
Repurchase of common stock —  —  —  —  (450) (450)
Issuance of common and treasury stock pursuant to Employee stock plans —  —  10 
Share-based compensation —  13  —  —  —  13 
Cash dividends, $0.180 per share
—  —  (99) —  —  (99)
Comprehensive income —  —  741  (66) —  675 
Balance at June 30, 2019 $ 808  $ 1,534  $ 16,962  $ 30  $ (9,394) $ 9,940 
Repurchase of common stock —  —  —  —  (500) (500)
Issuance of common and treasury stock pursuant to Employee stock plans —  —  — 
Share-based compensation —  12  —  —  —  12 
Cash dividends, $0.180 per share
—  —  (96) —  —  (96)
Comprehensive income —  —  659  (93) —  566 
Balance at September 30, 2019 $ 808  $ 1,554  $ 17,525  $ (63) $ (9,893) $ 9,931 
    See accompanying notes.
6


Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)

Three months ended Nine months ended
September 30, September 30,
  2020 2019 2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income (loss) $ (1,157) $ 659  $ (2,166) $ 1,787 
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:        
Depreciation and amortization 315  308  940  906 
Unrealized/realized loss on fuel derivative instruments 17  —  25  — 
Deferred income taxes (298) 174  (528) 224 
Gain on sale-leaseback transactions —  —  (222) — 
Changes in certain assets and liabilities:        
Accounts and other receivables (123) (88) (60) (292)
Other assets 84  79  366  195 
Accounts payable and accrued liabilities 26  106  (65) (240)
Air traffic liability 216  (17) 1,584  897 
Other liabilities (106) (87) (312) (210)
Cash collateral received from (provided to) derivative counterparties (5) —  — 
Other, net (19) (43) (95) (104)
Net cash provided by (used in) operating activities (1,050) 1,091  (531) 3,163 
CASH FLOWS FROM INVESTING ACTIVITIES:        
Capital expenditures (89) (375) (425) (766)
Supplier proceeds —  —  428 — 
Proceeds from sale-leaseback transactions —  —  815  — 
Purchases of short-term investments (1,536) (529) (3,881) (1,329)
Proceeds from sales of short-term and other investments 1,191  545  2,956  1,648 
Net cash used in investing activities (434) (359) (107) (447)
CASH FLOWS FROM FINANCING ACTIVITIES:        
Issuance of common stock —  —  2,294  — 
Proceeds from issuance of long-term debt 1,125  —  5,622  — 
Proceeds from term loan credit facility —  —  3,683  — 
Proceeds from revolving credit facility —  —  1,000  — 
Proceeds from convertible notes —  —  2,300  — 
Proceeds from Payroll Support Program loan and warrants 130  —  1,016  — 
Proceeds from Employee stock plans 13  36  29 
Repurchase of common stock —  (500) (451) (1,450)
Payments of long-term debt and finance lease obligations (59) (70) (295) (245)
Payments of term loan credit facility —  —  (3,683) — 
Payments of revolving credit facility —  —  (1,000) — 
Payments of cash dividends —  (96) (188) (372)
Payments of terminated interest rate derivative instruments (31) —  (31) — 
Capitalized financing items 44  —  (133) — 
Other, net 20  (33) 29  (44)
Net cash provided by (used in) financing activities 1,242  (690) 10,199  (2,082)
NET CHANGE IN CASH AND CASH EQUIVALENTS (242) 42  9,561  634 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,351  2,446  2,548  1,854 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,109  $ 2,488  $ 12,109  $ 2,488 




7




Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
CASH PAYMENTS FOR:
Interest, net of amount capitalized $ $ 11  $ 61  $ 59 
Income taxes $ $ 169  $ 17  $ 487 
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Right-of-use assets acquired under operating leases $ $ —  $ 692  $ — 
Assets constructed for others $ 35  $ 28  $ 110  $ 73 

See accompanying notes.
8


Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1.    BASIS OF PRESENTATION

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

The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States ("GAAP") for complete financial statements. The unaudited Condensed Consolidated Financial Statements for the interim periods ended September 30, 2020 and 2019 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. This includes all normal and recurring adjustments and elimination of significant intercompany transactions. Financial results for the Company and airlines in general can be seasonal in nature. In many years, the Company's revenues, as well as its Operating income and Net income, have been better in its second and third fiscal quarters than in its first and fourth fiscal quarters. However, in 2020, as a result of the COVID-19 pandemic, the Company's results were not in line with such historical trends. See Note 2 for further information. Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers, unemployment levels, corporate travel budgets, extreme or severe weather and natural disasters, fears of terrorism or war, and other factors beyond the Company's control. These and other factors, such as the price of jet fuel in some periods, the nature of the Company's fuel hedging program, and the periodic volatility of commodities used by the Company for hedging jet fuel, have created, and may continue to create, significant volatility in the Company's financial results. See Note 4 for further information on fuel and the Company's hedging program. Operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2020. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

9

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

2.    WORLDWIDE PANDEMIC

As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization classified the virus as a pandemic. The speed with which the effects of the COVID-19 pandemic have changed the U.S. economic landscape, outlook, and in particular the travel industry, has been swift and unexpected. The Company began to see a negative impact on bookings for future travel in late February 2020, which quickly accelerated during the remainder of first quarter and into second quarter, when trip cancellations outpaced new passenger bookings during the majority of March and April 2020. The Company began proactively canceling a significant portion of its scheduled flights in March, and continued making cancellations throughout second and third quarters, as the Company grounded a significant portion of its fleet and operated a significantly reduced portion of its previously scheduled capacity. The Company continued to experience significant negative impacts to passenger demand and bookings in third quarter 2020 due to the pandemic.

Based on these events and the uncertainty they created, the Company immediately began to focus on its liquidity, including quickly and substantially enhancing its cash holdings. Since the beginning of 2020, the Company has raised a total of $18.9 billion, net of fees.

On April 20, 2020, the Company entered into definitive documentation with the United States Department of Treasury (the "Treasury") with respect to funding support pursuant to the Payroll Support Program ("Payroll Support") under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Payroll Support funds had to be used to pay employee wages and benefits through at least September 30, 2020. As of September 30, 2020, the Company has received five installments of Payroll Support from the CARES Act. The cumulative amounts received totaled $3.4 billion, including $1.6 billion received in April, $652 million received in both May and June, $326 million received in July 2020, and $94 million received in September 2020. As consideration for the Payroll Support, the Company issued a promissory note (the "Note") in favor of the Treasury and entered into a warrant agreement with the Treasury (the "Warrant Agreement"), pursuant to which the Company agreed to issue warrants (each, a "Warrant") to purchase common stock of the Company to the Treasury. As of September 30, 2020, the Company has provided a Note in the aggregate amount of $976 million and issued Warrants valued at a total of $40 million to purchase up to an aggregate of 2.7 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the Warrants. Pursuant to the terms of the Payroll Support Program agreement and the CARES Act, the Payroll Support funds could only be utilized to pay qualifying salaries, wages, and benefits, as defined in the CARES Act. As of September 30, 2020, excluding the $976 million Note and value allocated to the Warrants, all Payroll Support funds received have been allocated to reduce eligible costs in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the nine months ended September 30, 2020.

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

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

10

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

In addition to obtaining financing under the CARES Act and accessing the capital markets, the Company believes it has made significant progress on bolstering its liquidity through efforts including aggressively evaluating all capital spending, discretionary spending, and non-essential costs for near-term cost reductions or deferrals; reducing the Company's published flight schedule; placing a significant number of aircraft in storage; implementing voluntary separation and time-off programs for Employees; suspending all hiring and non-contract salary increases; reducing named executive officer salaries and Board of Director cash retainer fees by 20 percent; and modifying vendor and supplier payment terms. The Company will continue evaluating the need for further flight schedule adjustments. To support physical-distancing, the Company is currently limiting the number of seats sold on each flight to allow for middle seats to remain open for Customers who are not traveling together through November 2020.

On June 1, 2020, the Company announced Voluntary Separation Program 2020, 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. Virtually all of the Company’s Employees hired before June 1, 2020 were eligible to participate in Voluntary Separation Program 2020. Employees electing to participate in Voluntary Separation Program 2020 were required to notify the Company of their election no later than July 15, 2020--with the stipulation that all Employees electing to participate had a total of seven days from their date of initial election to rescind their election and remain employed by the Company. As determined after the deadline to rescind such election, a total of over 4,200 Employees elected to participate in Voluntary Separation Program 2020, consisting of the following breakdown among workgroups: 1,060 from Ground Operations and Provisioning, 725 Flight Attendants, 630 Pilots, 390 from Customer Support and Services, 185 from Maintenance, 90 from other Contract groups, and 1,140 Managerial and Administrative Employees. Voluntary Separation Program 2020 participants’ last day of work primarily fell between August 15, 2020 and September 30, 2020, as assigned by the Company based on the operational needs of particular work locations and departments, determined on an individual-by-individual basis.

In conjunction with Voluntary Separation Program 2020, the Company also offered certain contract Employees the option to take voluntary Extended Emergency Time Off ("Extended ETO"), for periods between six and 18 months, with the exception of Pilots, who could elect to take Extended ETO for periods up to five years. Employees taking Extended ETO do not perform any work for the Company and are considered inactive while on leave, but do get paid a portion of their wages and continue to receive all associated benefits, as well as accrue service credit for all benefits. Contract employees who elected to take Extended ETO for periods between 12 and 18 months and had 10 or more years of service have been given the opportunity to convert to the Voluntary Separation Program 2020 beginning on September 1, 2020, until up to 90 days before the end of their respective Extended ETO term.

The purpose of Voluntary Separation Program 2020 and Extended ETO is to maintain a suitable sized workforce to operate at reduced capacity relative to the Company's operations prior to the COVID-19 pandemic. In accordance with the accounting guidance in ASC Topic 712 (Compensation — Nonretirement Postemployment Benefits), the Company accrued charges related to the special termination benefits described above upon Employees accepting Voluntary Separation Program 2020 or Extended ETO offers, which will be reduced as program benefits are paid. Costs incurred for Voluntary Separation Program 2020 and Extended ETO, which totaled $1.1 billion during third quarter 2020, are recorded as a component of Payroll support and voluntary Employee programs, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss). Within that line item, these charges are netted against the allocation of the remainder of the Payroll Support Program funds utilized to fund salaries, wages, and benefits, which totaled $1.2 billion during third quarter 2020.

The Company accrued expenses totaling $613 million for its Extended ETO program during third quarter 2020, consisting of future wages and benefits for the Employees that will not be working. The Company has accrued amounts up to 18 months for all Employees that elected Extended ETO, but did not include amounts related to Pilots for periods beyond February 2022, based on the uncertainty of its future capacity levels, and because it is not currently probable that such Employees will not be recalled to work beyond that timeframe. Therefore, future adjustments to the amounts accrued as of September 30, 2020, may become necessary at a later date. Refer to the
11

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

following table for amounts accrued and amounts reduced related to Voluntary Separation Program 2020 and Extended ETO as of September 30, 2020.

(in millions) Voluntary Separation Program 2020 Extended ETO Total
Amounts accrued $ 307  $ —  $ 307 
Balance at June 30, 2020 307  —  307 
Amounts accrued 485  613  1,098 
Amounts reduced (173) (25) (198)
Balance at September 30, 2020 (a) $ 619  $ 588  $ 1,207 
(a) See Note 10 for the location of the Voluntary Separation Program 2020 and Extended ETO balances within the unaudited Condensed Consolidated Balance Sheet.

In response to flight schedule adjustments due to the effects of the COVID-19 pandemic, a number of aircraft were taken out of the Company’s schedule beginning in late March, and placed in short-term storage, as well as some in a longer term storage program. As of September 30, 2020, 104 aircraft remained in long-term storage, including 34 Boeing MAX 737 aircraft. Given the current expectation that these aircraft have been placed in storage temporarily, the Company has continued to record depreciation expense associated with them.

As a result of the events and impacts surrounding the COVID-19 pandemic, including the Company's net loss incurred during the nine months ended September 30, 2020, and the significant number of aircraft that have been placed in storage, the Company considered whether these conditions indicated that it was more likely than not that the Company’s $970 million in Goodwill and its $295 million in indefinite-lived intangible assets were impaired. Upon review, the Company determined that, based on the facts and circumstances in existence as of September 30, 2020, the fair values more likely than not exceeded book values of both its reporting unit and its indefinite-lived intangible assets and therefore, no quantitative test was required.

In addition, the Company has assessed whether any impairment of its amortizable assets existed, and has determined that no charges were deemed necessary under applicable accounting standards as of September 30, 2020.

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

The Company's income tax benefit recorded for the first nine months of 2020 was at a rate of 25.9 percent, which is higher than the first nine months of 2019 tax rate of 22.0 percent. The higher effective tax rate in 2020 reflects the anticipated benefit of carrying back full year 2020 projected net losses to claim tax refunds against previous cash taxes paid relating to tax years 2015 through 2019, some of which were at higher rates than the current year.

3.    NEW ACCOUNTING PRONOUNCEMENTS

On August 5, 2020, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This new standard reduces the number of accounting models for convertible debt instruments and convertible preferred stock, enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. This standard is effective for fiscal years beginning after December 15, 2021.
12

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Companies may elect early adoption for periods beginning no earlier than December 15, 2020, including interim periods within those fiscal years. The FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Company is evaluating this new standard and plans to provide additional information about its expected impact on the Company's financial statements and disclosures at a future date.

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

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

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

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

On June 16, 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The new standard requires the use of an “expected loss” model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and the standard was adopted and applied prospectively by the Company as of January 1, 2020, but it did not have a significant impact on the Company's financial statements and disclosures.

4.    FINANCIAL DERIVATIVE INSTRUMENTS

Fuel Contracts
Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Furthermore, jet fuel and oil typically represents one of the largest operating expenses for airlines. The
13

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program. Although the Company may periodically enter into jet fuel derivatives for short-term timeframes, because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately 24 months into the future. However, the Company has found that financial derivative instruments in other commodities, such as West Texas Intermediate ("WTI") crude oil, Brent crude oil, and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility. The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.

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

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

For the three and nine months ended September 30, 2020, the Company had fuel derivative instruments in place for up to 42 percent and 67 percent, respectively, of its fuel consumption. As of September 30, 2020, the Company also had fuel derivative instruments in place to provide coverage at varying price levels. The following table provides information about the Company’s volume of fuel hedging on an economic basis:

Maximum fuel hedged as of
September 30, 2020 Derivative underlying commodity type as of
Period (by year) (gallons in millions) (a) September 30, 2020
Remainder of 2020 325  WTI crude oil, Brent crude oil, and Heating oil
2021 1,283  WTI crude oil and Brent crude oil
2022 1,220  WTI crude oil and Brent crude oil
Beyond 2022 630  WTI crude oil and Brent crude oil
(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in place and may vary significantly as market prices and the Company's flight schedule fluctuates.

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. All periodic changes in fair value of the derivatives designated as hedges are recorded in Accumulated other comprehensive income (loss) ("AOCI") until the underlying jet fuel is consumed. See Note 5.
14

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The Company's results are subject to the possibility that the derivatives will no longer qualify for hedge accounting, in which case any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through earnings. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI will be required to be immediately reclassified into earnings. During the first nine months of 2020, as a result of the drastic drop in demand for air travel due to the COVID-19 pandemic, the Company's forecast for 2020 and 2021 fuel purchases and consumption was significantly reduced, causing the Company to be in an estimated "over–hedged" position for second, third, and fourth quarter 2020, and full year 2021. Therefore, the Company de–designated a portion of its fuel hedges related to these periods, and has reclassified approximately $22 million and $38 million in losses from AOCI into Other (gains) losses, net, during the three and nine months ended September 30, 2020, respectively. The Company did not have any such situations occur during 2019.

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


15

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

    Asset derivatives Liability derivatives
  Balance Sheet Fair value at Fair value at Fair value at Fair value at
(in millions) location 9/30/2020 12/31/2019 9/30/2020 12/31/2019
Derivatives designated as hedges (a)          
Fuel derivative contracts (gross) Prepaid expenses and other current assets $ $ 48  $ —  $ — 
Fuel derivative contracts (gross) Other assets 101  62  —  — 
Interest rate derivative contracts Other assets —  —  — 
Interest rate derivative contracts Accrued liabilities —  —  — 
Interest rate derivative contracts Other noncurrent liabilities —  —  11 
Total derivatives designated as hedges $ 105  $ 112  $ 11  $
Derivatives not designated as hedges (a)          
Fuel derivative contracts (gross) Prepaid expenses and other current assets $ $ —  $ —  $ — 
Fuel derivative contracts (gross) Other assets —  —  — 
Interest rate derivative contracts Accrued liabilities —  —  28  — 
Total derivatives not designated as hedges   $ $ —  $ 28  $ — 
Total derivatives   $ 109  $ 112  $ 39  $
(a) Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties. See discussion of credit risk and collateral following in this Note.

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

Balance Sheet location of hedged item Carrying amount of the hedged liabilities Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)
September 30, September 30,
(in millions) 2020 2019 2020 2019
Current maturities of long-term debt $ 500  $ 300  $ —  $
Long-term debt less current maturities —  501  18  18 
$ 500  $ 801  $ 18  $ 20 
(a) At September 30, 2020 and 2019, these amounts include the cumulative amount of fair value hedging adjustments remaining for which hedge accounting has been discontinued, of $18 million and $19 million, respectively.

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

  Balance Sheet September 30, December 31,
(in millions) location 2020 2019
Cash collateral deposits held from counterparties for fuel contracts - current Offset against Prepaid expenses and other current assets $ $ 10 
Cash collateral deposits held from counterparties for fuel contracts - noncurrent Offset against Other assets 26  15 
 
16

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty. The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current outstanding derivative asset amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments. As of September 30, 2020, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

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

Offsetting of derivative assets
(in millions)
(i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii)
September 30, 2020 December 31, 2019
Description Balance Sheet location Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amounts of assets presented in the Balance Sheet Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amounts of assets presented in the Balance Sheet
Fuel derivative contracts Prepaid expenses and other current assets $ $ (1) $ $ 48  $ (10) $ 38 
Fuel derivative contracts Other assets $ 103  $ (26) $ 77  (a) $ 62  $ (15) $ 47  (a)
Interest rate derivative contracts Other assets $ —  $ —  $ —  (a) $ $ —  $ (a)
(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 10.


17

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Offsetting of derivative liabilities
(in millions)
(i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii)
September 30, 2020 December 31, 2019
Description Balance Sheet location Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amounts of liabilities presented in the Balance Sheet Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amounts of liabilities presented in the Balance Sheet
Fuel derivative contracts Prepaid expenses and other current assets $ $ (1) $ —  $ 10  $ (10) $ — 
Fuel derivative contracts Other assets $ 26  $ (26) $ —  (a) $ 15  $ (15) $ —  (a)
Interest rate derivative contracts Accrued liabilities $ 28  $ —  $ 28  (a) $ $ —  $ (a)
Interest rate derivative contracts Other noncurrent liabilities $ 11  $ —  $ 11  $ $ —  $
(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 10.
The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019:

Location and amount recognized in income on cash flow and fair value hedging relationships
Three months ended September 30, 2020 Three months ended September 30, 2019
(in millions) Fuel and oil Other (gains)/losses, net Interest expense Fuel and oil Interest expense
Total $ 18  $ 22  $ $ 19  $
Loss on cash flow hedging relationships:
Commodity contracts:
Amount of loss reclassified from AOCI into income 18  22  —  19  — 
Interest contracts:
Amount of loss reclassified from AOCI into income —  —  —  — 
Impact of fair value hedging relationships:
Interest contracts:
Hedged items —  —  — 
Derivatives designated as hedging instruments —  —  (2) —  — 



18

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Location and amount recognized in income on cash flow and fair value hedging relationships
Nine months ended September 30, 2020 Nine months ended September 30, 2019
(in millions) Fuel and oil Other (gains)/losses, net Interest expense Fuel and oil Interest expense
Total $ 54  $ 38  $ $ 28  $ 21 
Loss on cash flow hedging relationships
Commodity contracts:
Amount of loss reclassified from AOCI into income 54  38  —  28  — 
Interest contracts:
Amount of loss reclassified from AOCI into income —  —  — 
Impact of fair value hedging relationships:
Interest contracts:
Hedged items —  —  11  —  17 
Derivatives designated as hedging instruments —  —  (6) — 

Derivatives designated and qualified in cash flow hedging relationships
  (Gain) loss recognized in AOCI on derivatives, net of tax
  Three months ended
  September 30,
(in millions) 2020 2019
Fuel derivative contracts $ 17  $ 95 
Interest rate derivatives (3) 17 
Total $ 14  $ 112 

Derivatives designated and qualified in cash flow hedging relationships
  Loss recognized in AOCI on derivatives, net of tax
  Nine months ended
  September 30,
(in millions) 2020   2019
Fuel derivative contracts $ 91  $ 83 
Interest rate derivatives 30  43 
Total $ 121    $ 126 

19

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Derivatives not designated as hedges
  (Gain) loss recognized in income on derivatives  
   
  Three months ended Location of (gain) loss recognized in income on derivatives
  September 30,
(in millions) 2020 2019
Fuel derivative contracts $ $ —  Other (gains) losses, net
Interest rate derivatives (1) —  Other (gains) losses, net
Total $ —  $ — 

Derivatives not designated as hedges
  Loss recognized in income on derivatives  
   
  Nine months ended Location of loss recognized in income on derivatives
  September 30,
(in millions) 2020 2019
Fuel derivative contracts $ $ —  Other (gains) losses, net
Interest rate derivatives 28  —  Other (gains) losses, net
Total $ 30  $ — 

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three and nine months ended September 30, 2020 and 2019. Fuel derivatives that qualify for hedge accounting are recorded to Fuel and oil expense. Fuel derivatives that do not qualify for hedge accounting are recorded to Other (gains) and losses, net. The following tables present the impact of premiums paid for fuel derivative contracts and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) during the period the contract settles:

  Premium expense recognized in income on derivatives  
   
  Three months ended Location of premium expense recognized in income on derivatives
  September 30,
(in millions) 2020 2019
Fuel derivative contracts designated as hedges $ 13  $ 20  Fuel and oil
Fuel derivative contracts not designated as hedges $ 11  $ —  Other (gains) losses, net

  Premium expense recognized in income on derivatives  
   
  Nine months ended Location of premium expense recognized in income on derivatives
  September 30,
(in millions) 2020 2019
Fuel derivative contracts designated as hedges $ 51  $ 75  Fuel and oil
Fuel derivative contracts not designated as hedges $ 22  $ —  Other (gains) losses, net

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company’s cumulative net unrealized losses from
20

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

fuel hedges as of September 30, 2020, recorded in AOCI, were approximately $53 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30, 2020.

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

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

During third quarter 2019, the Company entered into 12 separate forward-starting interest rate swap agreements, related to a series of 12 Boeing 737 MAX 8 aircraft leases. The third quarter 2019 swaps contain similar terms as the third quarter 2019 terminated swaps discussed above, except that the related 737 MAX 8 deliveries were scheduled to occur between June 2020 and September 2020. During the first nine months of 2020, all 12 of the aircraft leases became no longer probable to be received within the scheduled delivery range. Therefore, the 12 associated swap agreements were de-designated and $14 million and $31 million were "frozen" in AOCI during the three and nine months ended September 30, 2020, respectively. These amounts will be recognized in earnings when the original forecasted transaction occurs, which continues to be probable. The mark-to-market changes for these swap agreements are now being recorded in earnings, resulting in a $1 million unrealized gain and a $28 million unrealized loss to Other (gains) and losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020, respectively. In addition, 6 of the 12 swap agreements were terminated on June 30, 2020, resulting in $31 million paid to the counterparty. The remaining 6 swap agreements were terminated on September 30, 2020, resulting in $28 million owed to the counterparty, which was recorded as an Accrued liability within the unaudited Condensed Consolidated Balance Sheet as of September 30, 2020.

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

Credit Risk and Collateral
Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At September 30, 2020, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty credit rating. The Company also had agreements with counterparties in which cash deposits and letters of credit were required to be posted as collateral
21

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of September 30, 2020, at which such postings are triggered:

  Counterparty (CP)  
(in millions) A B C D E F Other (a) Total
Fair value of fuel derivatives $ 24  $ 14  $ 28  $ 12  $ 11  $ 10  $ 10  $ 109 
Cash collateral held from CP 27  —  —  —  —  —  —  27