Leases and Aircraft Maintenance Deposits

12 Months Ended

Dec. 31, 2019

Leases [Abstract]

Leases and Prepaid Maintenance Deposits

Leases and Aircraft Maintenance Deposits

The Company leases aircraft, engines, airport terminals, maintenance and training facilities, aircraft hangars, commercial real estate and office and computer equipment, among other items. Certain of these leases include provisions for variable lease payments which are based on several factors, including, but not limited to, relative leases square footage, enplaned passengers, and airports' annual operating budgets. Due to the variable nature of the rates, these leases are not recorded on the Company's balance sheets as a right-of-use asset and lease liability. Lease terms are generally 8 to 18 years for aircraft and up to 99 years for other leased equipment and property.

As of December 31, 2019, the Company had a fleet consisting of 145 A320 family aircraft. As of December 31, 2019, the Company had 52 aircraft financed under operating leases and 2 aircraft financed under finance leases with lease term expirations between 2020 and 2037. In addition, the Company owned 91 aircraft of which 27 were purchased off lease and are currently unencumbered. As of December 31, 2019, the Company also had 9 spare engines financed under operating leases with lease term expiration dates ranging from 2020 to 2027 and owned 14 spare engines of which 3 were purchased off lease and all 14 are currently unencumbered.

The Company adopted Topic 842 utilizing the modified retrospective adoption method with an effective date of January 1, 2019. Prior to the adoption of Topic 842, the Company had entered into sale leaseback transactions with third-party aircraft lessors for the majority of its aircraft and engine leases. Upon adoption of Topic 842, the Company recognized a $5.5 million cumulative effect adjustment, net of tax, to retained earnings driven by the recognition of unamortized deferred gains and losses related to aircraft sale-leaseback transactions entered into in prior periods. Prior to the adoption of Topic 842, gains and losses on sale-leaseback transactions were generally deferred and recognized in income over the lease term. Under Topic 842, gains and losses on sale-leaseback transactions, subject to adjustment for off-market terms, are recognized immediately and recorded within loss on disposal of assets on the Company's statements of operations.

Total rent expense for all leases charged to operations for the years ended 2019, 2018 and 2017 was $345.0 million, $312.0 million and $309.8 million, respectively. Total rental expense charged to operations for aircraft and engine operating leases for the years ended December 31, 2019, 2018 and 2017 was $182.6 million, $177.6 million and $205.9 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. Maintenance reserve payments that are substantively and contractually related to the maintenance of the leased asset are accounted for as aircraft maintenance deposits to the extent they are expected to be recoverable. 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 that are not probable of being recovered are considered lease payments and are included in the right-of-use asset and lease liability. Maintenance reserve payments that are based on a utilization measure and are not probable of being recovered are considered variable lease payments that are recognized when they are probable of being incurred and are not included in the right-of-use asset and lease liability.

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, 2019, 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.

Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under the majority of 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. These return provisions are evaluated at inception of the lease and throughout the lease terms and are accounted for as either fixed or variable lease payments (depending on the nature of the lease return condition) when it is probable that such amounts will be incurred. Management assesses the need to accrue lease return costs throughout the lease as facts and circumstances warrant an assessment. The Company expects lease return costs and unrecoverable maintenance deposits will increase as individual aircraft lease agreements approach their respective termination dates and the Company begins to accrue the estimated cost of return conditions for the corresponding aircraft. 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.

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 $4.8 million, $3.4 million and $8.4 million of supplemental rent recorded within aircraft rent during 2019, 2018 and 2017, respectively. These amounts include $0.5 million, $1.3 million and $0.4 million of paid maintenance reserves expensed as supplemental rent during 2019, 2018 and 2017, respectively. As of December 31, 2019, the Company had $170.6 million of aircraft maintenance deposits ($102.9 million in aircraft maintenance deposits and $67.7 million in long-term aircraft maintenance deposits) on the Company's balance sheets.

During the twelve months ended December 31, 2019, the Company took delivery of 4 aircraft under secured debt arrangements, 6 aircraft under sale-leaseback transactions and 7 aircraft under direct operating leases. In addition, the Company purchased 5 previously leased aircraft. The Company also purchased 4 new engines and purchased 2 previously leased engines.

In June 2019, the Company entered into an aircraft sale agreement to acquire four A320 aircraft previously operated by the Company under operating leases. The contract was deemed a lease modification, which resulted in a change of classification from operating leases to finance leases for the four aircraft. During the third quarter of 2019, the purchase of the four aircraft was completed for an aggregate purchase price of $141.3 million and the related interest in the amount of $0.3 million was recognized within interest expense on the Company's statement of operations for the year ended December 31, 2019. These aircraft were recorded within flight equipment on the Company's balance sheets.

On December 31, 2019, the Company entered into an aircraft sale agreement to acquire two A319 aircraft previously operated by the Company under operating leases. The contract was deemed a lease modification, which resulted in a change of classification from operating leases to finance leases for the two aircraft. The Company recorded a finance lease obligation of $44.1 million calculated as the present value of the remaining lease payments, including the final payment to purchase the aircraft and included within current maturities of long-term debt and finance leases on the Company's balance sheets as of December 31, 2019. In addition, the Company recorded finance lease assets of $48.4 million which include related amounts previously recorded as maintenance reserves and security deposits and included within flight equipment on the Company's balance sheets as of December 31, 2019. In January 2020, the purchase of the two aircraft was completed and the aircraft were recorded within flight equipment on the Company's balance sheets.

The remainder of the Company's finance lease obligations relate to the lease of computer equipment used by the Company's flight crew and office equipment. Payments under these finance lease agreements are fixed for terms ranging from 3 to 5 years. Accounting for finance leases is substantially unchanged under Topic 842. Finance lease assets are recorded within property and equipment and the related liabilities are recorded within current maturities of long-term debt and finance leases leases and long-term debt and finance leases, less current maturities on the Company's balance sheets.

On December 18, 2019, the Company purchased an 8.5-acre parcel of land for $41.0 million and entered into a 99-year lease agreement for the lease of a 2.6-acre parcel of land, in Dania Beach, Florida, where the Company intends to build a new headquarters campus. In connection with the lease agreement, the Company is expected to build a 200-unit residential building. The 8.5-acre parcel of land is capitalized within ground property and equipment on the Company's balance sheet as of December 31, 2019. The 99-year lease was determined to be an operating lease. As of December 31, 2019, the Company recorded an operating lease right-of-use asset of $14.6 million and related operating lease liability of $9.3 million for this lease. Construction of the headquarters campus is expected to commence mid-year 2020 and take approximately two years to complete. As of December 31, 2019, the Company estimates the total construction related outlay for the project will be approximately $200 million to $250 million. Operating lease commitments related to this lease are included in the table below within property facility leases.

The following table provides details of the Company's future minimum lease payments under finance lease liabilities and operating lease liabilities recorded on the Company's balance sheets as of December 31, 2019. The table does not include commitments that are contingent on events or other factors that are currently uncertain and unknown.

	Finance Leases		Operating Leases						Total Operating and Finance Lease Obligations
			Aircraft and Spare Engine Leases		Property Facility Leases		Other
	(in thousands)
2020	$	44,980	$	192,937	$	3,544	$	517	$	241,978
2021	606		192,539		3,532		—		196,677
2022	578		193,616		3,221		—		197,415
2023	202		181,667		2,570		—		184,439
2024	—		159,668		2,046		—		161,714
2025 and thereafter	—		921,721		138,696		—		1,060,417
Total minimum lease payments	$	46,366	$	1,842,148	$	153,609	$	517	$	2,042,640
Less amount representing interest	285		526,760		130,825		13		657,883
Present value of minimum lease payments	$	46,081	$	1,315,388	$	22,784	$	504	$	1,384,757
Less current portion	44,796		117,861		2,297		504		165,458
Long-term portion	$	1,285	$	1,197,527	$	20,487	$	—	$	1,219,299

Commitments related to the Company's noncancellable short-term operating leases not recorded on the Company's balance sheets are expected to be $0.6 million for 2020 and none for 2021 and beyond.

The table below presents information for lease costs related to the Company's finance and operating leases:

	Year ended December 31. 2019
	(in thousands)
Finance lease cost
Amortization of leased assets	$	998
Interest of lease liabilities	674
Operating lease cost
Operating lease cost (1)	179,959
Short-term lease cost (1)	5,144
Variable lease cost (1)	140,417
Total lease cost	$	327,192

(1) Expenses are classified within aircraft rent and landing fees and other rents on the Company's statements of operations.

The table below presents lease-related terms and discount rates as of December 31, 2019:

	December 31, 2019
Weighted-average remaining lease term
Operating leases	13.0 years
Finance leases	0.1 years
Weighted-average discount rate
Operating leases	5.86	%
Finance leases	2.46	%

Leases and Prepaid Mainenance Deposits

Leases and Aircraft Maintenance Deposits

The Company leases aircraft, engines, airport terminals, maintenance and training facilities, aircraft hangars, commercial real estate and office and computer equipment, among other items. Certain of these leases include provisions for variable lease payments which are based on several factors, including, but not limited to, relative leases square footage, enplaned passengers, and airports' annual operating budgets. Due to the variable nature of the rates, these leases are not recorded on the Company's balance sheets as a right-of-use asset and lease liability. Lease terms are generally 8 to 18 years for aircraft and up to 99 years for other leased equipment and property.

As of December 31, 2019, the Company had a fleet consisting of 145 A320 family aircraft. As of December 31, 2019, the Company had 52 aircraft financed under operating leases and 2 aircraft financed under finance leases with lease term expirations between 2020 and 2037. In addition, the Company owned 91 aircraft of which 27 were purchased off lease and are currently unencumbered. As of December 31, 2019, the Company also had 9 spare engines financed under operating leases with lease term expiration dates ranging from 2020 to 2027 and owned 14 spare engines of which 3 were purchased off lease and all 14 are currently unencumbered.

The Company adopted Topic 842 utilizing the modified retrospective adoption method with an effective date of January 1, 2019. Prior to the adoption of Topic 842, the Company had entered into sale leaseback transactions with third-party aircraft lessors for the majority of its aircraft and engine leases. Upon adoption of Topic 842, the Company recognized a $5.5 million cumulative effect adjustment, net of tax, to retained earnings driven by the recognition of unamortized deferred gains and losses related to aircraft sale-leaseback transactions entered into in prior periods. Prior to the adoption of Topic 842, gains and losses on sale-leaseback transactions were generally deferred and recognized in income over the lease term. Under Topic 842, gains and losses on sale-leaseback transactions, subject to adjustment for off-market terms, are recognized immediately and recorded within loss on disposal of assets on the Company's statements of operations.

Total rent expense for all leases charged to operations for the years ended 2019, 2018 and 2017 was $345.0 million, $312.0 million and $309.8 million, respectively. Total rental expense charged to operations for aircraft and engine operating leases for the years ended December 31, 2019, 2018 and 2017 was $182.6 million, $177.6 million and $205.9 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. Maintenance reserve payments that are substantively and contractually related to the maintenance of the leased asset are accounted for as aircraft maintenance deposits to the extent they are expected to be recoverable. 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 that are not probable of being recovered are considered lease payments and are included in the right-of-use asset and lease liability. Maintenance reserve payments that are based on a utilization measure and are not probable of being recovered are considered variable lease payments that are recognized when they are probable of being incurred and are not included in the right-of-use asset and lease liability.

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, 2019, 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.

Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under the majority of 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. These return provisions are evaluated at inception of the lease and throughout the lease terms and are accounted for as either fixed or variable lease payments (depending on the nature of the lease return condition) when it is probable that such amounts will be incurred. Management assesses the need to accrue lease return costs throughout the lease as facts and circumstances warrant an assessment. The Company expects lease return costs and unrecoverable maintenance deposits will increase as individual aircraft lease agreements approach their respective termination dates and the Company begins to accrue the estimated cost of return conditions for the corresponding aircraft. 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.

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 $4.8 million, $3.4 million and $8.4 million of supplemental rent recorded within aircraft rent during 2019, 2018 and 2017, respectively. These amounts include $0.5 million, $1.3 million and $0.4 million of paid maintenance reserves expensed as supplemental rent during 2019, 2018 and 2017, respectively. As of December 31, 2019, the Company had $170.6 million of aircraft maintenance deposits ($102.9 million in aircraft maintenance deposits and $67.7 million in long-term aircraft maintenance deposits) on the Company's balance sheets.

During the twelve months ended December 31, 2019, the Company took delivery of 4 aircraft under secured debt arrangements, 6 aircraft under sale-leaseback transactions and 7 aircraft under direct operating leases. In addition, the Company purchased 5 previously leased aircraft. The Company also purchased 4 new engines and purchased 2 previously leased engines.

In June 2019, the Company entered into an aircraft sale agreement to acquire four A320 aircraft previously operated by the Company under operating leases. The contract was deemed a lease modification, which resulted in a change of classification from operating leases to finance leases for the four aircraft. During the third quarter of 2019, the purchase of the four aircraft was completed for an aggregate purchase price of $141.3 million and the related interest in the amount of $0.3 million was recognized within interest expense on the Company's statement of operations for the year ended December 31, 2019. These aircraft were recorded within flight equipment on the Company's balance sheets.

On December 31, 2019, the Company entered into an aircraft sale agreement to acquire two A319 aircraft previously operated by the Company under operating leases. The contract was deemed a lease modification, which resulted in a change of classification from operating leases to finance leases for the two aircraft. The Company recorded a finance lease obligation of $44.1 million calculated as the present value of the remaining lease payments, including the final payment to purchase the aircraft and included within current maturities of long-term debt and finance leases on the Company's balance sheets as of December 31, 2019. In addition, the Company recorded finance lease assets of $48.4 million which include related amounts previously recorded as maintenance reserves and security deposits and included within flight equipment on the Company's balance sheets as of December 31, 2019. In January 2020, the purchase of the two aircraft was completed and the aircraft were recorded within flight equipment on the Company's balance sheets.

The remainder of the Company's finance lease obligations relate to the lease of computer equipment used by the Company's flight crew and office equipment. Payments under these finance lease agreements are fixed for terms ranging from 3 to 5 years. Accounting for finance leases is substantially unchanged under Topic 842. Finance lease assets are recorded within property and equipment and the related liabilities are recorded within current maturities of long-term debt and finance leases leases and long-term debt and finance leases, less current maturities on the Company's balance sheets.

On December 18, 2019, the Company purchased an 8.5-acre parcel of land for $41.0 million and entered into a 99-year lease agreement for the lease of a 2.6-acre parcel of land, in Dania Beach, Florida, where the Company intends to build a new headquarters campus. In connection with the lease agreement, the Company is expected to build a 200-unit residential building. The 8.5-acre parcel of land is capitalized within ground property and equipment on the Company's balance sheet as of December 31, 2019. The 99-year lease was determined to be an operating lease. As of December 31, 2019, the Company recorded an operating lease right-of-use asset of $14.6 million and related operating lease liability of $9.3 million for this lease. Construction of the headquarters campus is expected to commence mid-year 2020 and take approximately two years to complete. As of December 31, 2019, the Company estimates the total construction related outlay for the project will be approximately $200 million to $250 million. Operating lease commitments related to this lease are included in the table below within property facility leases.

The following table provides details of the Company's future minimum lease payments under finance lease liabilities and operating lease liabilities recorded on the Company's balance sheets as of December 31, 2019. The table does not include commitments that are contingent on events or other factors that are currently uncertain and unknown.

	Finance Leases		Operating Leases						Total Operating and Finance Lease Obligations
			Aircraft and Spare Engine Leases		Property Facility Leases		Other
	(in thousands)
2020	$	44,980	$	192,937	$	3,544	$	517	$	241,978
2021	606		192,539		3,532		—		196,677
2022	578		193,616		3,221		—		197,415
2023	202		181,667		2,570		—		184,439
2024	—		159,668		2,046		—		161,714
2025 and thereafter	—		921,721		138,696		—		1,060,417
Total minimum lease payments	$	46,366	$	1,842,148	$	153,609	$	517	$	2,042,640
Less amount representing interest	285		526,760		130,825		13		657,883
Present value of minimum lease payments	$	46,081	$	1,315,388	$	22,784	$	504	$	1,384,757
Less current portion	44,796		117,861		2,297		504		165,458
Long-term portion	$	1,285	$	1,197,527	$	20,487	$	—	$	1,219,299

Commitments related to the Company's noncancellable short-term operating leases not recorded on the Company's balance sheets are expected to be $0.6 million for 2020 and none for 2021 and beyond.

The table below presents information for lease costs related to the Company's finance and operating leases:

	Year ended December 31. 2019
	(in thousands)
Finance lease cost
Amortization of leased assets	$	998
Interest of lease liabilities	674
Operating lease cost
Operating lease cost (1)	179,959
Short-term lease cost (1)	5,144
Variable lease cost (1)	140,417
Total lease cost	$	327,192

(1) Expenses are classified within aircraft rent and landing fees and other rents on the Company's statements of operations.

The table below presents lease-related terms and discount rates as of December 31, 2019:

	December 31, 2019
Weighted-average remaining lease term
Operating leases	13.0 years
Finance leases	0.1 years
Weighted-average discount rate
Operating leases	5.86	%
Finance leases	2.46	%