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2020 Financial Results

We entered 2020 positioned for a strong year. We were well-prepared with significant financial strength, and we started the year strong with solid net income growth, year-over-year, in January and February 2020, combined. We also began 2020 with outstanding operational performance, exceptional ontime performance, the highest level of baggage reliability in our history, and industry-leading Customer Service.2525) The Department of Transportation (DOT) ranks all U.S. carriers based on the lowest ratio of complaints per 100,000 passengers enplaned, as published in the DOT Air Travel Consumer Report (ATCR). Southwest earned the best Customer Satisfaction ranking among U.S. Marketing Carriers with the lowest ratio of complaints to the DOT per 100,000 enplaned passengers for January and February 2020. A Marketing Carrier is an airline that advertises under a common brand name, sells reservations, manages frequent flyer programs, and is ultimately responsible for the airline’s consumer policies. Operating Carriers only handle the flight operations, passenger check-in/boarding, and baggage handling for the respective Marketing Carriers they serve—Operating Carriers are not responsible for DOT complaints related to policies, procedures, and advertising associated with the Marketing Carrier’s brand.

In late February 2020, we began to experience a precipitous drop in travel demand and bookings due to the COVID-19 pandemic. The situation escalated dramatically, and by mid-March 2020, trip cancellations began to exceed new bookings. We experienced our largest monthly decline in operating revenues in April 2020, down 92%, year-over-year, when the pandemic spread and shelter-in-place orders and similar restrictions were implemented throughout the country.

We took swift action to address the unprecedented decline in travel and revenue by significantly reducing available seat miles (ASMs, or capacity)2626) An available seat mile (ASM) is one seat (empty or full) flown one mile. Also referred to as “capacity,” which is a measure of the space available to carry Passengers in a given period., costs, and cash spending. Annual 2020 capacity decreased approximately 34%, year-over-year. We suspended substantially all hiring; canceled or deferred hundreds of capital spending projects; modified vendor and supplier payment terms; and aggressively evaluated all non-essential spending. We implemented voluntary separation and extended leave programs to better align staffing levels and overhead costs to reduced flight schedules. Approximately 15,000 Southwest Warriors, or 25% of our workforce, participated in one of these voluntary programs, which reduced our annual 2020 salaries, wages, and benefits expense by approximately $565 million. In total, we reduced annual 2020 cash outlays by approximately $8 billion, compared with original plans.

We quickly bolstered liquidity, raising approximately $18.9 billion in capital, net of transaction fees, in 2020, including $13.4 billion in debt issuances and sale-leaseback transactions, $2.2 billion through a common stock offering, and $3.4 billion of Payroll Support Program (PSP) proceeds under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). We ended 2020 with total liquidity of $14.3 billion, consisting of cash and short-term investments of $13.3 billion and a fully available secured revolving credit facility of $1 billion. As of Dec. 31, 2020, our unencumbered assets were worth approximately $12 billion, including $10 billion in aircraft and $2 billion in non-aircraft assets such as spare engines, ground equipment, and real estate. In addition, we have significant value from our Rapid Rewards® loyalty program.

Our Founder and Chairman Emeritus, Herb Kelleher, always reminded us: we manage, in good times, so that all of us will be protected from bad times; that is why keeping costs low and spirits high, at all times, is so very important.

One key milestone in 2020 was the launch of our global distribution system (GDS) initiative. We are now at industry-standard processes with Amadeus’ GDS platform and Travelport’s GDS platforms: Apollo, Worldspan, and Galileo, allowing corporate travel managers the ability to book, change, cancel, and modify reservations. This industry-standard process enables the Airline Reporting Corporation to handle the reporting and settlement of tickets booked through the GDS platforms. In December 2020, we reached a full-participation GDS agreement with Sabre, planned to launch in 2021. The enhancement of our GDS channel strategy complements our expansion of direct connect via Airline Tariff Publishing Company’s (ATPCO) New Distribution Capability (NDC) Exchange and existing SWABIZ options, with the goal of distributing our everyday low fares to more corporate travelers through their preferred channel.

Our Founder and Chairman Emeritus, Herb Kelleher, always reminded us: we manage, in good times, so that all of us will be protected from bad times; that is why keeping costs low and spirits high, at all times, is so very important. By living Herb’s basic credo, we came into 2020 well-prepared with the U.S. airline industry’s strongest balance sheet and most successful business model—with low costs that enabled low fares across a robust network of point-to-point service with a strong presence in top leisure and business markets. Even with our preparedness and swift response to the pandemic in 2020, we are not standing still. In addition to launching our participation in GDS, we are aggressively pursuing new revenue streams by adding new airports to our route network. We remain steadfast in managing costs and cash spending, and we are focused on maintaining significant liquidity. Our primary financial goals for 2021 are to preserve the strength of our balance sheet and investment-grade credit rating; arrest cash operating losses; and achieve and sustain break-even, or better, cash flow and earnings as the airline business recovers. The pandemic persists and travel demand remains depressed, but we celebrate our 50th year of service in 2021 with renewed hope and optimism about the future of Southwest.2727) The 2020 Southwest Airlines One Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Specific forward-looking statements include, without limitation, statements related to (i) the Company’s environmental sustainability beliefs, plans, and expectations; (ii) the Company’s plans, goals, objectives, and initiatives related to diversity, equity, and inclusion; (iii) the Company’s plans and expectations with respect to Employee training, development, benefits, (including post-retirement benefits) pay, and staffing (including with respect to avoiding furloughs or pay cuts); (iv) the Company’s Vision; (v) the Company’s network plans, expectations, and opportunities, including factors and assumptions underlying the Company’s plans and expectations; (vi) the Company’s initiatives and related goals with respect to global distribution system access and related alliances and capabilities; (vii) the Company’s financial position, outlook, plans, strategies, goals, targets, and projected results of operations; (viii) the Company’s fleet plans and expectations; and (ix) the Company’s initiatives and expectations with respect to fuel efficiency and emissions. These statements involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them. Factors include, among others, (i) the extent of the COVID-19 pandemic, including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, including through any new variant strains of the underlying virus; the effectiveness and availability of vaccines; the duration and scope of related government orders and restrictions; the duration and scope of the Company’s actions to address Customer and Employee health concerns; the extent of the impact of the COVID-19 pandemic on overall demand for air travel and the Company’s related business plans and decisions; and any negative impact of the COVID-19 pandemic on the Company’s access to capital; (ii) the impact of fears or actual outbreaks of other diseases, economic conditions, fuel prices, extreme or severe weather and natural disasters, fears of terrorism or war, actions of competitors, consumer perception, 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; (iii) the impact of governmental actions and governmental regulations on the Company’s plans, strategies, and operations; (iv) the Company's dependence on Boeing with respect to the Company's fleet order book and delivery schedule; (v) the Company’s dependence on other third parties for products and services, in particular with respect to global distributions systems and related alliances and capabilities, and the impact on the Company’s operations and results of operations of any third party delays or non-performance; (vi) the Company’s ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; (vii) the impact of labor matters on the Company’s result of operations, business decisions, plans, and strategies; and (viii) other factors, as described in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2020.

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