SOUTHWEST AIRLINES CO

Southwest Airlines Co. operates a major passenger airline providing scheduled air transportation in the United States and near-international markets. The airline industry is extremely volatile, cyclical, energy intensive, labor intensive, capital intensive, technology intensive, highly regulated, heavily taxed, and extremely competitive. The industry has been susceptible to detrimental events such as U.S. government shutdowns, economic recessions, jet fuel price volatility, unscheduled maintenance disruptions, outbreaks of disease, supply chain challenges, acts of terrorism or war, geopolitical unrest, severe weather, and natural disasters. In 2025, the U.S. airline industry continued to face challenges including the historically prolonged government shutdown from October 1, 2025 through November 12, 2025, inflationary cost pressures (particularly labor costs), delayed aircraft deliveries, shifting travel demand patterns, economic uncertainty, disruptive weather events, and natural disasters.

Southwest has historically competed with other airlines on virtually all of its scheduled routes. The majority of domestic airline service has been provided by Southwest and the other largest major U.S. airlines, including American Airlines, Delta Air Lines, and United Airlines. The DOT defines major U.S. airlines as those with annual revenues of at least $1 billion; there are currently 14 passenger airlines offering scheduled service, including Southwest, that meet this standard. Key competitive factors include pricing and cost structure; routes, loyalty programs, and schedules; customer service, operational reliability, product offerings, and amenities; and balance sheet health. Southwest has maintained its investment-grade rating by all three major credit agencies (Moody’s, S&P Global, and Fitch) and is one of only two major U.S. passenger airlines with an investment-grade rating by all three major credit agencies. The Company believes its cost structure has historically provided it with an advantage over many of its airline competitors by enabling it to charge competitive fares.

Southwest generates revenue primarily through passenger air transportation services. The Company’s fare structure features competitive fares and product benefits, including fares with different levels of restrictions. In 2025, Southwest introduced a new 'Basic' fare on its lowest priced tickets, replacing the 'Wanna Get Away' offering, and also introduced new fare products including 'Choice,' 'Choice Preferred,' and 'Choice Extra,' replacing previous offerings. For the years ended December 31, 2025, and December 31, 2024, approximately 78 percent and 81 percent, respectively, of the Company’s Passenger revenues originated from Southwest.com or the Southwest App (including revenues from SWABIZ). The year-over-year decrease primarily resulted from an increase in bookings through online travel agencies in 2025. The Company also generates revenue through ancillary services such as Priority Boarding, transportation of pets, and unaccompanied minors, as well as through its Rapid Rewards loyalty program, Getaways by Southwest vacation packages, and cargo and freight services.

Southwest’s Rapid Rewards loyalty program enables members to earn points for every dollar spent on Southwest base fares. In 2025, the Company better aligned earn rates to fare type and introduced variable redemption rates across higher-demand and lower-demand flights. For 2025, 2024, and 2023, Customer redemption of flight awards accounted for approximately 13.7 percent, 14.7 percent, and 16.3 percent of revenue passenger miles flown, respectively. The number of flight awards redeemed was 9.1 million ¹ in 2025, 10.1 million ² in 2024, and 10.9 million ³ in 2023. The Company offers four major fare product categories: Basic, Choice, Choice Preferred, and Choice Extra. Basic fares earn two Rapid Rewards points for each dollar spent on the base fare, Choice fares earn six points, Choice Preferred fares earn 10 points, and Choice Extra fares earn 14 points per dollar spent on the base fare, the highest loyalty point multiplier of all Southwest fare products. Choice Extra fares include two free checked bags, early boarding in groups 1 and 2, and one complimentary premium beverage coupon for the day of travel on flights 251 miles or more.

Southwest launched several significant initiatives in 2025. The Company launched its first partnerships with international carriers, including interline partnerships with Icelandair, China Airlines, EVA Air, Philippine Airlines, Condor, and Turkish Airlines. In August 2025, the Company launched Getaways by Southwest, a new in-house vacation package product, replacing the outsourced product historically offered. The Company introduced 24-hour operation capabilities in 2025 with the commencement of redeye flights and now offers over 50 peak-day redeye flights during peak periods. In 2025, the Company expanded its distribution channels through partnerships with online travel agencies Expedia and Priceline. The Company also introduced bag fees for most fare products for flights booked and ticketed or changed on or after May 28, 2025. In February 2025, the Company implemented a reduction in workforce, reducing approximately 1,750 Employee roles, or 15 percent of corporate positions. During second quarter 2025, the Company terminated its remaining portfolio of fuel hedging contracts, which were scheduled to settle through 2027, to effectively close its fuel hedging portfolio and program. In November 2025, the Company formed Southwest Airlines India Private Limited, a wholly-owned subsidiary, in Hyderabad, India. The Company also began offering the Southwest Airlines Rapid Rewards Debit Card, a Visa debit card issued by Sunrise Banks N.A., in November 2025. During 2025, the Company repurchased shares through multiple accelerated share repurchase programs: a first quarter 2025 ASR program, a second quarter 2025 ASR program, a third quarter 2025 ASR program, and a fourth quarter 2025 ASR program.

For the fiscal year ended December 31, 2025, Southwest reported total operating revenues of $27.484 billion ⁴, compared to $27.179 billion ⁵ in 2024 and $26.094 billion ⁶ in 2023. Net income for 2025 was $465 million ⁷, compared to $465 million ⁸ in 2024 and $498 million ⁹ in 2023. Diluted earnings per share was $0.76 ¹⁰ in 2025, compared to $0.76 ¹¹ in 2024 and $0.80 ¹² in 2023. Operating income was $1.194 billion ¹³ in 2025, compared to $1.196 billion ¹⁴ in 2024 and $1.340 billion ¹⁵ in 2023. Fuel and oil expense was $5.240 billion ¹⁶ in 2025, representing 19.0 percent ¹⁷ of operating expenses, compared to $5.812 billion ¹⁸ in 2024, representing 21.4 percent ¹⁹ of operating expenses. Salaries, wages, and benefits expense constituted approximately 46.9 percent ²⁰ of the Company's operating expenses in 2025 and was the Company's largest operating cost category.

Southwest is executing several transformational initiatives designed to elevate the Customer Experience, improve financial performance, and drive Shareholder value. On January 27, 2026, Southwest began operating assigned and extra legroom seating. Passengers can now choose between a standard seat, a preferred seat near the front of the cabin, or an extra legroom seat with additional pitch. The Company evolved its boarding process beginning January 27, 2026, by prioritizing Customers into boarding groups based on seat location, fare bundle, and loyalty program status, beginning with extra legroom seats in boarding groups 1 and 2. The Company intends to expand redeye flights to additional markets in 2026. During 2025, the Company announced service at five new locations beginning in 2026, including Cyril E. King International Airport in St. Thomas; McGhee Tyson Airport in Knoxville, Tennessee; Ted Stevens Anchorage International Airport in Alaska; Charles M. Schulz Sonoma County Airport in Santa Rosa, California; and Princess Juliana International Airport in St. Maarten. The Company is exploring opportunities to add additional gateways with its international partners in 2026 and intends to continue to pursue partnerships with other airlines, with a goal to add additional partners during 2026. The Company is exploring opportunities to introduce more hotel partnerships for Getaways in 2026. The Company expects Getaways to appeal directly to its broad existing Customer base with an enhanced offering that includes both lodging and excursions, designed to drive growth with leisure travelers and grow higher-margin revenues.

The Company is continuing to improve the connectivity and efficiency of its network through redesigns in smaller cities and the introduction of redeye flying. The Company plans to retrofit the remainder of its -8 and -800 fleets with larger overhead bins by the end of 2026. The Company has committed, and plans to continue to commit, significant resources to technology improvements in support of its ongoing operations and initiatives. The Company continues to invest significantly in technology resources including systems related to inflight Wi-Fi capabilities; digital Customer Service modernization; enhancing the Customer Experience and premium product offerings; industry standard interline and codeshare capabilities; further scaling 24-hour operations; flight schedule management designed to improve operating efficiency and fleet utilization; aircraft turn capabilities; crew mobility and scheduling capabilities; further enhancing the Company’s vacation packages with Getaways; modernization of the Company’s financial management systems; modernization of the Company's data and processing AI capabilities; and further modernization of technology infrastructure and cybersecurity.

For 2026, the Company plans to keep corporate headcount expense flat to 2025 levels and will focus on operational efficiencies within frontline teams. The Company plans to continue efforts to right-size staffing, with the goal of running a safe, reliable, and efficient operation. The Company continues to target other cost savings initiatives, including capitalizing on identified supply chain opportunities and improving its corporate efficiency through automation and better allocation of resources. The Company's focus on controlling costs also includes a continued commitment to pursuing, implementing, and enhancing initiatives to reduce fuel consumption and improve fuel efficiency. The Company’s fuel efficiency was aided in 2025, as compared with 2024, by the addition of 55 -8 aircraft to its fleet and by the retirement of 48 of its oldest, least fuel-efficient -700 aircraft and the retirement of seven -800 aircraft.

The Company expects to use the proceeds of its fleet transactions to support its capital allocation strategy. The Company's capital allocation framework supports its continued commitment to a strong and efficient investment-grade balance sheet. The Company intends to preserve the strength of its balance sheet through manageable debt maturities and a targeted liquidity balance, comprised of cash and cash equivalents, short-term investments, and a revolving credit line, with the goal of maintaining a targeted leverage ratio of adjusted debt to adjusted earnings before interest, taxes, depreciation, amortization, and rent. The Company also intends to continue returning value back to its Shareholders through dividends and opportunistic share repurchases. The Company plans to continually review its return of capital program, taking into account the Company’s free cash flow, leverage, and fleet monetization strategy.

The Company is currently dependent on Boeing as the sole manufacturer of the Company’s aircraft. The delivery schedule for the -7 is dependent on the FAA issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct. Boeing has in the past, and may continue to, experience delays in fulfilling its commitments with regards to delivery of the -8 to the Company as a result of manufacturing challenges. The Company retains significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts (e.g., through accelerated retirements of the Company's -700 aircraft) if growth opportunities do not materialize. The Company plans to continue to pursue opportunities to take advantage of favorable market conditions through the sale of certain aircraft, with the intention of replacing most, if not all, of such aircraft with new aircraft.

The Company faces structural headwinds from inflationary cost pressures, particularly labor costs. The Company’s unionized workforce makes up approximately 84 percent ²¹ of its Employees as of December 31, 2025, and many have had pay scale increases as a result of contractual rate increases, which has increased the Company’s labor costs. The Company’s ability to control labor costs is limited by the terms of its collective-bargaining agreements. The next of which becomes amendable in October 2026. The Company also faces risks from the termination of its fuel hedging program; purchasing jet fuel at prevailing market prices, which could change substantially over short periods of time, may make the Company’s earnings more vulnerable to volatile fuel prices. Fuel and oil expense remained the Company's second largest operating cost category for 2025. The Company also faces risks from airport capacity constraints and air traffic control inefficiencies, which have limited and could continue to limit the Company's growth. The FAA’s protracted transition to modernized air traffic control systems has and may continue to adversely impact airspace capacity and the overall efficiency of the system.

The Company is currently dependent on Boeing as the sole manufacturer of its aircraft, and if the MAX aircraft were to become unavailable for operations or if the Company were to continue to experience prolonged delivery delays, its business plans and results of operations could be materially and adversely affected. The Company operates the -8 out of the MAX family and is awaiting delivery of the -7, whose certification is dependent on the FAA. Fuel and oil expense represented approximately 19.0 percent ²² of operating expenses in 2025, and the Company terminated its remaining fuel hedging portfolio in second quarter 2025, making earnings more vulnerable to volatile fuel prices. Labor costs are a significant risk, with Salaries, wages, and benefits expense constituting approximately 46.9 percent ²³ of operating expenses in 2025 and approximately 84 percent ²⁴ of Employees represented by labor unions as of December 31, 2025. The Company is subject to extensive government regulation; for example, in November 2025 during the partial government shutdown, the FAA issued an emergency order mandating an industry-wide reduction in flights at 40 major U.S. airports. The Company is also exposed to cybersecurity risks, and while it has not experienced material cybersecurity incidents, the Company and its service providers have experienced cyber-attacks in the past.

Management’s message emphasizes the Company's ongoing modernization efforts and transformational initiatives designed to elevate the Customer Experience, improve financial performance, and drive Shareholder value. Key themes include the introduction of assigned and extra legroom seating beginning January 27, 2026, the launch of global airline partnerships in 2025, the introduction of Getaways by Southwest in August 2025, the addition of 24-hour operations with redeye flights, and the evolution of marketing and distribution channels including partnerships with Expedia, Priceline, Google Flights, Kayak, and Skyscanner. Management also highlights the Company's focus on cost discipline, operational efficiency, and maintaining a strong investment-grade balance sheet. The Company intends to preserve the strength of its balance sheet through manageable debt maturities and a targeted liquidity balance, with the goal of maintaining a targeted leverage ratio of adjusted debt to adjusted earnings before interest, taxes, depreciation, amortization, and rent. The Company also intends to continue returning value back to its Shareholders through dividends and opportunistic share repurchases.