SOUTHWEST AIRLINES COLUV
SOUTHWEST AIRLINES CO Fair Value Disclosure
FAIR VALUE MEASUREMENTS
Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of December 31, 2025, the Company held certain items that are required to be measured at fair value on a recurring basis. These consisted of cash equivalents, but at other times the Company also holds short-term investments and available-for-sale securities. The majority of the Company’s cash equivalents and short-term investments consist of instruments classified as Level 1. However, when the Company holds certificates of deposit and time deposits, they are classified as Level 2, due to the fact that the fair value for these instruments is determined utilizing observable inputs in non-active markets. Equity securities primarily consist of investments with readily determinable market values associated with the Company’s excess benefit plan and market-based cash balance plan.
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. The Company’s interest rate derivative instruments and prior period fuel derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. Fuel derivative instruments historically consisted solely of option contracts, whereas interest rate derivatives consist solely of swap agreements. See Note 10 for further information on the Company's derivative instruments and hedging activities. The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2. In prior periods, the Company determined the value of option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts. The option pricing model used by the Company is an industry standard model for valuing options and is a similar model used by the broker/dealer community (i.e., the Company’s counterparties). The inputs to this option pricing model are the option strike price, underlying price, risk free rate of interest, time to expiration, and volatility. Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company categorized these option contracts as Level 3. Volatility information was obtained from external sources, but was analyzed by the Company for reasonableness and compared to similar information received from other external sources. Holding other inputs constant, an increase (decrease) in implied volatility would have resulted in a higher (lower) fair value measurement, respectively, for the Company’s derivative option contracts. The fair value of option contracts considered both the intrinsic value and any remaining time value associated with those derivatives that had not yet settled. The Company also considered counterparty credit risk and its own credit risk in its determination of all estimated fair values. To validate the reasonableness of the Company’s option pricing model, on a monthly basis, the Company compared its option valuations to third party valuations. However, no significant differences were noted. The Company has consistently applied these valuation techniques in prior periods presented and believes it obtained the most accurate information available for the types of derivative contracts it previously held.
Included in Equity securities are the Company's investments primarily associated with its deferred compensation plans, which consist of mutual funds that are publicly traded and for which market prices are readily available. These plans are non-qualified deferred compensation plans designed to hold contributions in excess of limits established by the Internal Revenue Code of 1986, as amended. The distribution timing and payment amounts under these plans are made based on the participant's distribution election and plan balance. Assets related to the funded portions of the deferred compensation plans are held in a rabbi trust, and the Company remains liable to these participants for the unfunded portion of the plans. The Company records changes in the fair value of plan obligations and plan assets, which net to zero, within the Salaries, wages, and benefits line and Other (gains) losses, net line, respectively, of the Consolidated Statement of Income.
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2025, and December 31, 2024:
| Fair value measurements at reporting date using: | ||||||||||||||||||||
| Quoted prices in active markets for identical assets | Significant other observable inputs | |||||||||||||||||||
| Description | December 31, 2025 | (Level 1) | (Level 2) | |||||||||||||||||
| Assets | (in millions) | |||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||
| Cash equivalents (a) | $ | 2,831 | $ | 2,831 | $ | — | ||||||||||||||
| Time deposits | 400 | — | 400 | |||||||||||||||||
| Equity securities | 457 | 457 | — | |||||||||||||||||
| Total assets | $ | 3,688 | $ | 3,288 | $ | 400 | ||||||||||||||
| Liabilities | ||||||||||||||||||||
| Interest rate derivatives (see Note 10) | $ | (16) | $ | — | $ | (16) | ||||||||||||||
(a) Cash equivalents are primarily composed of money market investments.
| Fair value measurements at reporting date using: | ||||||||||||||||||||||||||
| Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||||||||||||
| Description | December 31, 2024 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||
| Assets | (in millions) | |||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||
| Cash equivalents (a) | $ | 7,209 | $ | 7,209 | $ | — | $ | — | ||||||||||||||||||
| Time deposits | 300 | — | 300 | — | ||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||
| Treasury bills | 1,094 | 1,094 | — | — | ||||||||||||||||||||||
| Certificates of deposit | 122 | — | 122 | — | ||||||||||||||||||||||
| Fuel derivatives: | ||||||||||||||||||||||||||
| Option contracts (b) | 130 | — | — | 130 | ||||||||||||||||||||||
| Equity securities | 367 | 367 | — | — | ||||||||||||||||||||||
| Total assets | $ | 9,222 | $ | 8,670 | $ | 422 | $ | 130 | ||||||||||||||||||
(a) Cash equivalents are primarily composed of money market investments and treasury bills.
(b) In the Consolidated Balance Sheet amounts are presented as an asset. See Note 10.
The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2025 or 2024. The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for 2025 and 2024:
| Fair value measurements using significant unobservable inputs (Level 3) | ||||||||
| (in millions) | Fuel derivatives | |||||||
| Balance as of December 31, 2024 | $ | 130 | ||||||
| Total loss for the period | ||||||||
| Included in other comprehensive income | (90) | |||||||
| Proceeds from portfolio termination | (40) | |||||||
| Balance as of December 31, 2025 | $ | — | ||||||
| Fair value measurements using significant unobservable inputs (Level 3) | ||||||||
| (in millions) | Fuel derivatives | |||||||
| Balance as of December 31, 2023 | $ | 223 | ||||||
| Total gains (losses) for the period | ||||||||
| (34) | (a) | |||||||
| Included in other comprehensive income | (130) | |||||||
| Purchases | 123 | (b) | ||||||
| Settlements | (52) | |||||||
| Balance as of December 31, 2024 | $ | 130 | ||||||
| The amount of total losses for the period included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held as of December 31, 2024 | $ | 131 | ||||||
(a) Included in Other (gains) losses, net, within the Consolidated Statement of Income.
(b) The purchase of fuel derivatives is recorded on a gross basis based on the structure of the derivative instrument and whether a contract with multiple derivatives was purchased as a single instrument or separate instruments.
The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, as of December 31, 2025, are presented in the table below. The fair values of the Company’s publicly held debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these agreements as Level 2. All privately held debt agreements are categorized as Level 3. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.
| (in millions) | Maturity date | Carrying value | Estimated fair value | Fair value level hierarchy | |||||||||||||||||||
3.00% Notes | 2026 | $ | 300 | $ | 297 | Level 2 | |||||||||||||||||
7.375% Debentures | 2027 | 104 | 108 | Level 2 | |||||||||||||||||||
3.450% Notes | 2027 | 300 | 296 | Level 2 | |||||||||||||||||||
5.125% Notes | 2027 | 1,727 | 1,749 | Level 2 | |||||||||||||||||||
4.375% Notes | 2028 | 750 | 752 | Level 2 | |||||||||||||||||||
2.625% Notes | 2030 | 500 | 465 | Level 2 | |||||||||||||||||||
5.250% Notes | 2035 | 734 | 719 | Level 2 | |||||||||||||||||||
1.000% Payroll Support Program Loan (a) | 2031 | 426 | 433 | Level 3 | |||||||||||||||||||
(a) The interest rate will change to Secured Overnight Financing Rate plus two percent in April 2026. See Note 6 for further information.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 5, 2026 | Showing above |
| 2024 | Feb 7, 2025 | |
| 2023 | Feb 6, 2024 | |
| 2022 | Feb 7, 2023 | |
| 2021 | Feb 7, 2022 | |
| 2020 | Feb 8, 2021 | |
| 2019 | Feb 4, 2020 | |
| 2018 | Feb 5, 2019 | |
| 2017 | Feb 7, 2018 | |
| 2016 | Feb 7, 2017 | |
| 2015 | Feb 3, 2016 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.