Leases and Prepaid Maintenance Deposits

12 Months Ended

Dec. 31, 2017

Leases and Aircraft Maintenance Deposits

The Company leases various types of equipment and property, primarily aircraft, spare engines and airport facilities under leases, which expire in various years through 2047. Lease terms are generally 8 to 18 years for aircraft and up to 30 years for other leased equipment and property.

Total rental expense for all leases charged to operations for the years ended 2017, 2016 and 2015 was $309.8 million, $283.9 million and $282.7 million, respectively. Total rental expense charged to operations for aircraft and engine operating leases for the years ended December 31, 2017, 2016 and 2015 was $205.9 million, $201.7 million and $211.5 million, respectively.

Some of the Company’s aircraft and engine master lease agreements provide that the Company pays maintenance reserves to aircraft lessors to be held as collateral in advance of the Company’s required performance of major maintenance activities. A majority of these maintenance reserve payments are calculated based on a utilization measure, such as flight hours or cycles, while some maintenance reserve payments are fixed, time-based contractual amounts. Fixed maintenance reserve payments for these aircraft and related flight equipment, including estimated amounts for contractual price escalations, are expected to be $8.4 million in 2018, $5.9 million in 2019, $5.6 million in 2020, $5.7 million in 2021, $4.9 million in 2022, and $12.9 million in 2023 and beyond. These lease agreements generally provide that maintenance reserves are reimbursable to the Company upon completion of the maintenance event. Some of the master lease agreements do not require that the Company pay maintenance reserves so long as the Company's cash balance does not fall below a certain level. As of December 31, 2017, the Company is in full compliance with those requirements and does not anticipate having to pay reserves related to these master leases in the future.

At lease inception and at each balance sheet date, the Company assesses whether the maintenance reserve payments required by the master lease agreements are substantively and contractually related to the maintenance of the leased asset. Maintenance reserve payments that are substantively and contractually related to the maintenance of the leased asset are accounted for as maintenance deposits to the extent they are expected to be recoverable and are reflected as aircraft maintenance deposits in the accompanying balance sheets. The Company makes certain assumptions to determine the recoverability of maintenance deposits. These assumptions are based on various factors such as the estimated time between the maintenance events, the date the aircraft is due to be returned to the lessor, the cost of future maintenance events and the

utilization of the aircraft is estimated before it is returned to the lessor. When it is not probable the Company will recover amounts currently on deposit with a lessor, such amounts are expensed as supplemental rent.

Supplemental rent is made up of maintenance reserves paid to aircraft lessors that are not probable of being reimbursed and probable and estimable return condition obligations. The Company expensed $8.4 million, $9.0 million and $7.7 million of supplemental rent recorded within aircraft rent during 2017, 2016 and 2015, respectively. These amounts include $0.4 million, $2.2 million and $2.3 million of paid maintenance reserves expensed as supplemental rent during 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016, the Company had short-term and long-term aircraft maintenance deposits of $326.2 million and $286.4 million, respectively, on its balance sheets.

As of December 31, 2017, the Company had a fleet consisting of 112 A320 family aircraft. As of December 31, 2017, the Company had 58 aircraft financed under operating leases with lease term expirations between 2020 and 2029 and owned 54 aircraft of which 8 were purchased off lease and are currently unencumbered. In addition, as of December 31, 2017, the Company had 11 spare engines financed under operating leases with lease term expiration dates ranging from 2019 to 2027 and owned 4 spare engines of which 1 was purchased off lease and all 4 are currently unencumbered. One of the Company's leased aircraft have variable rent payments, which fluctuate based on changes in LIBOR (London Interbank Offered Rate). The Company entered into sale leaseback transactions with third-party aircraft lessors for the majority of these aircraft and engine leases. Deferred losses resulting from these sale leaseback transactions are included in other long-term assets on the accompanying balance sheet. Deferred losses are recognized as an increase to rent expense on a straight-line basis over the term of the respective operating leases. Deferred gains are included in deferred gains and other long-term liabilities on the accompanying balance sheet. Deferred gains are recognized as a decrease to rent expense on a straight-line basis over the term of the respective operating leases.

During the twelve months ended December 31, 2017, the Company took delivery of 17 aircraft under secured debt arrangements, purchased 1 previously leased aircraft, took delivery of 2 aircraft under operating leases and returned 2 aircraft to its lessors. In addition, the Company purchased two spare engines, purchased one previously leased engine and took delivery of one engine under an operating lease. All of the Company's aircraft and engine leases are accounted for as operating leases. Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under the lease agreements are fixed for the term of the lease. The lease agreements contain standard termination events, including termination upon a breach of the Company's obligations to make rental payments and upon any other material breach of the Company's obligations under the leases, and standard maintenance and return condition provisions. Upon a termination of the lease due to a breach by the Company, the Company would be liable for standard contractual damages, possibly including damages suffered by the lessor in connection with remarketing the aircraft or while the aircraft is not leased to another party.

The majority of the Company's capital lease obligations relate to the lease of computer equipment used by the Company's flight crew. Payments under this lease agreement are fixed for the 3-year term of the lease which commenced in the second quarter of 2017.

Future minimum lease payments under capital leases and noncancellable operating leases with initial or remaining terms in excess of one year at December 31, 2017 were as follows:



	Capital Leases		Operating Leases				Total Operating and Capital Lease Obligations
	Capital Leases		Aircraft and Spare Engine Leases		Property Facility Leases		Total Operating and Capital Lease Obligations
	(in thousands)
2018	$	537	$	204,292	$	45,737	$	250,566
2019	504		189,106		36,852		226,462
2020	188		180,842		25,870		206,900
2021	28		170,643		12,740		183,411
2022	—		150,212		11,931		162,143
2023 and thereafter	—		419,908		61,211		481,119
Total minimum lease payments	$	1,257	$	1,315,003	$	194,341	$	1,510,601
Less amount representing interest	94
Present value of minimum lease payments	$	1,163
Less current portion	476
Long-term portion	$	687