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WORLDWIDE PANDEMIC | 6 Months Ended
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Jun. 30, 2021
Unusual or Infrequent Items, or Both [Abstract] |
WORLDWIDE PANDEMIC | 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 changed the U.S. economic landscape, outlook, and in particular the travel industry, was swift and unexpected. The Company saw a negative impact on bookings for future travel throughout 2020. The Company proactively canceled a significant portion of its scheduled flights in March 2020 and continued adjusting capacity throughout 2020, 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 negative impacts to passenger demand and bookings early in 2021 due to the pandemic, in particular with respect to business travel, although as a result of declining reported COVID-19 cases throughout the United States, easing travel restrictions, lifting of business restrictions, and an increase in the number of individuals vaccinated, domestic leisure travel demand and bookings improved during second quarter 2021. Since the start of the pandemic, the Company entered into definitive documentation with the United States Department of Treasury ("Treasury") with respect to payroll funding support ("Payroll Support") pursuant to three separate Payroll Support programs as described below. In April 2020, the Company entered into definitive documentation (the "PSP1 Payroll Support Program") with Treasury with respect to Payroll Support under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). During 2020, the Company received a total of $3.4 billion of relief funds under the CARES Act. As consideration for this Payroll Support, the Company issued a promissory note in favor of Treasury and entered into a warrant agreement with Treasury, pursuant to which the Company agreed to issue warrants to purchase common stock of the Company to Treasury. During 2020, the Company provided the promissory 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. In January 2021, the Company entered into definitive documentation (the "PSP2 Payroll Support Program") with Treasury with respect to Payroll Support under the Consolidated Appropriations Act, 2021 ("Consolidated Appropriations Act"). During the first six months of 2021, the Company received a total of $2.0 billion of relief funds under the Consolidated Appropriations Act. As consideration for this Payroll Support, the Company issued a promissory note ("PSP2 Note") in favor of Treasury and entered into a warrant agreement with Treasury, pursuant to which the Company agreed to issue warrants ("PSP2 Warrants") to purchase common stock of the Company to Treasury. Each PSP2 Warrant is exercisable at a strike price of $46.28 per share of common stock and will expire on the fifth anniversary of the issue date of such PSP2 Warrant. During 2021, the Company provided the promissory note in the aggregate amount of $566 million and issued warrants valued at a total of $27 million to purchase up to an aggregate of 1.2 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the warrants. The PSP2 Note matures in full on January 15, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. Amounts outstanding under the PSP2 Note bear interest at a rate of 1.00 percent before January 15, 2026, and, afterwards, at a rate equal to the Secured Overnight Financing Rate (SOFR) or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent. The PSP2 Note contains customary representations and warranties and events of default. In April 2021, the Company entered into definitive documentation (the "PSP3 Payroll Support Program") with Treasury with respect to Payroll Support under the American Rescue Plan Act of 2021 ("American Rescue Act"). During second quarter 2021, the Company received a total of $1.9 billion of relief funds under the American Rescue Act. As consideration for this Payroll Support, the Company issued a promissory note ("PSP3 Note") in favor of Treasury and entered into a warrant agreement with Treasury, pursuant to which the Company agreed to issue warrants ("PSP3 Warrants") to purchase common stock of the Company to Treasury. Each PSP3 Warrant is exercisable at a strike price of $58.51 per share of common stock and will expire on the fifth anniversary of the issue date of such PSP3 Warrant. During second quarter 2021, the Company provided the promissory note in the aggregate amount of $526 million and issued warrants valued at a total of $18 million to purchase up to an aggregate of 899 thousand shares of the Company's common stock, subject to adjustment pursuant to the terms of the warrants. The PSP3 Note matures in full on April 23, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. Amounts outstanding under the PSP3 Note bear interest at a rate of 1.00 percent before April 23, 2026, and, afterwards, at a rate equal to the Secured Overnight Financing Rate (SOFR) or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent. The PSP3 Note contains customary representations and warranties and events of default. Pursuant to the PSP3 Payroll Support Program, in connection with the receipt of Payroll Support, the Company is subject to certain restrictions, including prohibitions against involuntary furloughs and reductions in employee pay rates and benefits through the later of September 30, 2021, and the date the Company has expended all of the Payroll Support under the PSP3 Payroll Support Program; the elimination of share repurchases and dividends through September 30, 2022; and limits on executive compensation until April 1, 2023. Under each of the three Payroll Support programs, funds were received in multiple disbursements. Upon each initial disbursement of Payroll Support under each of the three Payroll Support programs, the Company provided a promissory note and issued warrants to Treasury. Upon each subsequent disbursement of Payroll Support under each of the three Payroll Support programs, (i) the principal amount of the applicable promissory note was increased and (ii) the Company issued additional warrants to Treasury. Under each of the three Payroll Support programs, funds received were used solely to pay qualifying employee salaries, wages, and benefits. The allocated to date grant portions of the Payroll Support received have been classified as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss). The Company currently expects the remaining unallocated grant portion of Payroll Support of $763 million will be classified as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) in third quarter 2021. The Company has an option to prepay the promissory notes at any time without premium or penalty. Warrants will be settled through net share settlement or net cash settlement, at the Company’s option. The Company has also granted Treasury certain demand underwritten offering and piggyback registration rights with respect to the warrants and the underlying common stock. The warrants do not have voting rights and include adjustments for below market issuances, payment of dividends, and other customary anti-dilution provisions. Refer to the table below for more detail.
(in millions, except shares in thousands) | Grant |  | Promissory Note |  | Warrants ($) |  | Total Payroll Support Proceeds |  | Warrants (shares)
PSP1 Payroll Support Program
April 21, 2020 | $ | 1,152 |  |  | $ | 459 |  |  | $ | 18 |  |  | $ | 1,630 |  |  | 1,258 |
May 29, 2020 | 448 |  |  | 196 |  |  | 8 |  |  | 652 |  |  | 536 |
June 30, 2020 | 448 |  |  | 196 |  |  | 9 |  |  | 652 |  |  | 536 |
July 30, 2020 | 225 |  |  | 97 |  |  | 3 |  |  | 326 |  |  | 268 |
September 30, 2020 | 64 |  |  | 28 |  |  | 2 |  |  | 94 |  |  | 78 |
| $ | 2,337 |  |  | $ | 976 |  |  | $ | 40 |  |  | $ | 3,354 |  |  | 2,676 |
PSP2 Payroll Support Program
January 15, 2021 | $ | 625 |  |  | $ | 229 |  |  | $ | 9 |  |  | $ | 864 |  |  | 495 |
March 5, 2021 | 591 |  |  | 259 |  |  | 14 |  |  | 864 |  |  | 560 |
April 23, 2021 | 177 |  |  | 78 |  |  | 4 |  |  | 259 |  |  | 168 |
| $ | 1,393 |  |  | $ | 566 |  |  | $ | 27 |  |  | $ | 1,987 |  |  | 1,223 |
PSP3 Payroll Support Program
April 23, 2021 | $ | 670 |  |  | $ | 248 |  |  | $ | 9 |  |  | $ | 926 |  |  | 424 |
June 3, 2021 | 640 |  |  | 278 |  |  | 9 |  |  | 926 |  |  | 475 |
| $ | 1,310 |  |  | $ | 526 |  |  | $ | 18 |  |  | $ | 1,852 |  |  | 899 |
Total | $ | 5,040 |  |  | $ | 2,068 |  |  | $ | 85 |  |  | $ | 7,193 |  |  | 4,798 |
On June 1, 2020, the Company announced Voluntary Separation Program 2020 ("Voluntary Separation Program"), 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. A total of over 4,200 Employees initially elected to participate in Voluntary Separation Program. In conjunction with Voluntary Separation Program, 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, all subject to early recalls. Approximately 11,000 Employees participated in the Extended ETO program. During second quarter 2021, approximately 7,000 Employees returned from the Extended ETO program and 1,466 Employees remained on Extended ETO leave as of June 30, 2021. 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 were given the opportunity to convert to the Voluntary Separation Program beginning on September 1, 2020, until up to 90 days before the end of their respective Extended ETO term. Approximately 300 Employees elected this conversion option during the first six months of 2021. The purpose of Voluntary Separation Program and Extended ETO was to maintain a reduced 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 or Extended ETO offers. The Company accrued expenses totaling $1.4 billion for its Voluntary Separation Program and Extended ETO program in 2020, which are being reduced as program benefits are paid. For both the Voluntary Separation Program and Extended ETO programs combined, approximately $348 million of the liability balances were relieved during first and second quarter 2021 through payments to Employees, leaving a balance of $436 million as of June 30, 2021. The balance consists of future wages and some benefits for the Employees that will not be working during their leave, or who have been permanently separated. The Company accrued amounts for up to the first 18 months from inception 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 the Company's future capacity levels, and because it is not currently probable that such Employees will not be recalled to work beyond that timeframe. During the first half of 2021, the Company determined that it was no longer probable that a portion of the Employees on Extended ETO would remain on such leave for their entire elected term. Therefore, a portion of the accruals previously recorded were reversed, resulting in a net $115 million and $15 million credit to expense in first and second quarter 2021, respectively. Future adjustments to the amounts accrued may become necessary at a later date. Both of these items are classified within Payroll support and voluntary Employee programs, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss), and are in addition to the allocation of the PSP2 Payroll Support Program and PSP3 Payroll Support Program funds utilized to fund salaries, wages, and benefits, which totaled $724 million and $1.9 billion for the three and six months ended June 30, 2021, respectively. 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 2020, and placed in short-term storage, as well as some in a longer term storage program. As of June 30, 2021, 39 aircraft remained in storage, all of which are expected to be placed back into service by December 31, 2021. Given the current expectation that these aircraft have been placed in storage temporarily, the Company has continued to record depreciation expense associated with them. BOEING 737 MAX AIRCRAFT GROUNDING AND RETURN TO SERVICE On March 13, 2019, the FAA issued an emergency order for all U.S. airlines to ground all Boeing MAX aircraft. The Company immediately complied with the order and grounded all 34 MAX aircraft in its fleet. On November 18, 2020, the FAA rescinded the emergency order and issued official requirements to enable U.S. airlines to return the Boeing 737 MAX to service. The Company returned the MAX to revenue service on March 11, 2021, after the Company met all FAA requirements and Pilots received updated, MAX-related training. The most significant financial impacts of the grounding resulting from the FAA's emergency order were the lost revenues, operating income, and operating cash flows, and delayed capital expenditures, directly associated with the Company's grounded MAX fleet and other new aircraft that were not able to be delivered. In July 2019, Boeing announced a $4.9 billion after-tax charge for "potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding." In January 2020, Boeing announced an additional pre-tax charge of $2.6 billion related to "estimated potential concessions and other considerations to customers related to the 737 MAX grounding." During 2019, the Company entered into a Memorandum of Understanding with Boeing to compensate Southwest for estimated financial damages incurred during 2019 related to the grounding of the MAX. The terms of the agreement are confidential, but were intended to provide for a substantial portion of the Company’s financial damages associated with both the 34 MAX aircraft that were grounded as of March 13, 2019, as well as the 41 additional MAX aircraft the Company was scheduled to receive (28 owned MAX from Boeing and 13 leased MAX from third parties) from March 13, 2019 through December 31, 2019. In accordance with applicable accounting principles, the Company will account for substantially all of the proceeds received from Boeing as a reduction in cost basis spread across both the existing 31 owned MAX in the Company’s fleet at the time, and the Company’s future firm aircraft deliveries as of the date of the agreement. No material financial impacts of the agreement were realized in the Company’s earnings during the years ended December 31, 2019 and 2020, or the three and six months ended June 30, 2021. During December 2020, the Company entered into an agreement with Boeing to compensate the Company for estimated financial damages incurred during 2020 related to the grounding of the MAX. The terms of the agreement are confidential, but the compensation is in the form of credit memos taken against future payments due to Boeing as aircraft have been and are delivered in accordance with the amended delivery schedule, or as future progress payments are due. In accordance with applicable accounting principles, the Company has accounted for substantially all of the compensation received from Boeing as a reduction in cost basis spread across both the existing owned MAX in the Company’s fleet, and the Company’s future firm aircraft deliveries from Boeing as of the date of the agreement. No material financial impacts of the agreement were realized in the Company’s earnings during the three and six months ended June 30, 2021.

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