Leases and Prepaid Maintenance Deposits

12 Months Ended

Dec. 31, 2018

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 2018, 2017 and 2016 was $312.0 million, $309.8 million and $283.9 million, respectively. Total rental expense charged to operations for aircraft and engine operating leases for the years ended December 31, 2018, 2017 and 2016 was $177.6 million, $205.9 million and $201.7 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 $5.8 million in 2019, $5.6 million in 2020, $5.7 million in 2021, $4.9 million in 2022, $4.1 million in 2023, and $8.8 million in 2024 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, 2018, 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 $3.4 million, $8.4 million and $9.0 million of supplemental rent recorded within aircraft rent during 2018, 2017 and 2016, respectively. These amounts include $1.3 million, $0.4 million and $2.2 million of paid maintenance reserves expensed as supplemental rent during 2018, 2017 and 2016, respectively. As of December 31, 2018, the Company had $245.6 million ($106.9 million in aircraft maintenance deposits and $138.7 million in long-term aircraft maintenance deposits) on the accompanying balance sheet.

As of December 31, 2018, the Company had a fleet consisting of 128 A320 family aircraft. As of December 31, 2018, the Company had 46 aircraft financed under operating leases with lease term expirations between 2021 and 2030 and owned 82 aircraft of which 22 were purchased off lease and are currently unencumbered. In addition, as of December 31, 2018, the Company had 12 spare engines financed under operating leases with lease term expiration dates ranging from 2019 to 2027 and owned 8 spare engines of which 1 was purchased off lease and all 8 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 its 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, 2018, the Company took delivery of 14 aircraft under secured debt arrangements, purchased 14 previously leased aircraft, and took delivery of 2 aircraft under operating leases. The Company also purchased 10 engines, and took delivery of 1 engine under an operating lease. In addition, during 2018, the Company sold 6 used engines for $11.4 million at a loss of $5.2 million which is recorded within loss on disposal of assets in the statement of operations.

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 Company's capital lease obligations relate to the lease of computer equipment used by the Company's flight crew and office equipment. Payments under the Company's capital lease agreements are fixed for terms ranging from 3 to 5 years.

Future minimum lease payments under capital leases and noncancellable operating leases with initial or remaining terms in excess of one year at December 31, 2018 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)
2019	$	810	$	176,256	$	52,627	$	229,693
2020	408		170,106		29,962		200,476
2021	186		168,416		17,004		185,606
2022	158		155,135		14,718		170,011
2023	145		133,915		13,787		147,847
2024 and thereafter	—		350,266		89,536		439,802
Total minimum lease payments	$	1,707	$	1,154,094	$	217,634	$	1,373,435
Less amount representing interest	152
Present value of minimum lease payments	$	1,555
Less current portion	721
Long-term portion	$	834