Leases, Codification Topic 842

12 Months Ended

Dec. 31, 2021

LEASES

The Company leases property and equipment through operating leases and categorizes these leases into five asset classes: aircraft, capacity purchase arrangements for aircraft operated by third-party carriers (CPA aircraft), airport and terminal facilities, corporate real estate and other equipment. All capitalized lease assets have been recorded on the consolidated balance sheet as of December 31, 2021 as Operating lease assets, with the corresponding liabilities recorded as Operating lease liabilities. Operating rent expense is recognized on a straight-line basis over the term of the lease.

The Company has elected the practical expedient under ASC 842 - Leases, allowing a policy election to exclude from recognition short-term lease assets and lease liabilities for leases with an initial term of twelve months or less. Such expense was not material for the twelve months ended December 31, 2021, 2020, and 2019.

Operating lease assets balance by asset class was as follows (in millions):


	December 31, 2021		December 31, 2020
Aircraft	$	782	$	750
CPA Aircraft	600		579
Airport and terminal facilities	16		16
Corporate real estate and other	55		55
Total Operating lease assets	$	1,453	$	1,400

Aircraft

At December 31, 2021, Alaska had operating leases for ten Boeing 737-800, five Boeing 737-9, and 61 Airbus aircraft, and Horizon had operating leases for seven Bombardier Q400 aircraft. Remaining lease terms for these aircraft extend up to 12 years, some with options to extend, subject to negotiation at the end of the term. As extension is not certain, and rates are highly likely to be renegotiated, the extended term is only capitalized when it is reasonably determinable. While aircraft rent is primarily fixed, certain leases contain rental adjustments throughout the lease term which would be recognized as variable expense as incurred. Variable lease expense for aircraft for the twelve months ended December 31, 2021, 2020, and 2019 was $5 million, $1 million, and $4 million.

Capacity purchase agreements with aircraft (CPA aircraft)

At December 31, 2021, Alaska had CPAs with two carriers, including the Company’s wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity under a CPA with Alaska. Alaska also has a CPA with SkyWest covering 32 E175 aircraft to fly certain routes in the Lower 48 and Canada. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services. As Horizon is a wholly-owned subsidiary, intercompany leases between Alaska and Horizon have not been recognized under the standard.

Remaining lease terms for CPA aircraft extend up to nine years. Financial arrangements of the CPAs include a fixed component, representing the costs to operate each aircraft which is capitalized. CPAs also include variable rent based on actual levels of flying, which is expensed as incurred. Variable lease expense for CPA aircraft for the twelve months ended December 31, 2021, 2020, and 2019 was not material.

Airport and terminal facilities

The Company leases ticket counters, gates, cargo and baggage space, office space and other support areas at numerous airports. For this asset class, the Company has elected to combine lease and non-lease components. The majority of airport and terminal facility leases are not capitalized because they do not meet the definition of controlled assets under the standard, or because the lease payments are entirely variable. For airports where leased assets are identified, and where the contract includes fixed lease payments, operating lease assets and lease liabilities have been recorded. The Company is also commonly responsible for maintenance, insurance and other facility-related expenses and services under these agreements. These costs are recognized as variable expense in the period incurred. Airport and terminal facilities variable lease expense for the twelve months ended December 31, 2021, 2020, and 2019 was $377 million, $286 million, and $322 million.

Starting in 2018, the Company leased twelve airport slots at LaGuardia Airport and eight airport slots at Reagan National Airport to a third party. For these leases, the Company recorded $16 million, $14 million, and $13 million of lease income during the twelve months ended December 31, 2021, 2020, and 2019.

Corporate real estate and other leases

Leased corporate real estate is primarily for office space in hub cities, data centers, land leases, and reservation centers. For this asset class, the Company has elected to combine lease and non-lease components under the standard. Other leased assets are comprised of other ancillary contracts and items including leased flight simulators, ground equipment, and spare engines. Variable lease expense related to corporate real estate and other leases for the twelve months ended December 31, 2021, 2020, and 2019 was $17 million, $12 million, and $10 million.

Sale-leaseback transaction

In 2020, Alaska entered into a transaction to sell ten owned Airbus A320 aircraft and replace those aircraft with 13 new leased Boeing 737-9 aircraft. Also included in the transaction is the leaseback of all ten Airbus aircraft in the interim period between the sale of those aircraft and delivery of the first ten 737-9 aircraft. Of these deliveries, five were received in 2021, with the remaining eight scheduled in 2022.

Components of Lease Expense

The impact of leases, including variable lease cost, was as follows (in millions):


	Classification	2021		2020		2019
Expense
Aircraft	Aircraft rent	$	174	$	215	$	246
CPA Aircraft	Aircraft rent	80		80		79
Airport and terminal facilities	Landing fees and other rentals	379		288		324
Corporate real estate and other	Landing fees and other rentals	21		19		19
Total lease expense		$	654	$	602	$	668
Revenue
Lease income	Cargo and other revenues	(16)		(14)		(13)
Net lease impact		$	638	$	588	$	655

Supplemental Cash Flow Information

During the year ended December 31, 2021, the Company paid $359 million for capitalized operating leases. The Company also acquired $273 million of operating lease assets in exchange for assumption of the same total of operating lease liabilities, inclusive of lease extensions.

Lease Term and Discount Rate

As most leases do not provide an implicit interest rate, the Company generally utilizes the incremental borrowing rate (IBR) based on information available at the commencement date of the lease to determine the present value of lease payments. The weighted average IBR and weighted average remaining lease term (in years) for all asset classes were as follows at December 31, 2021.


	Weighted Average IBR		Weighted Average Remaining Lease term
Aircraft	3.9	%	7.2
CPA Aircraft	3.3	%	8.6
Airports and terminal facilities	4.1	%	8.6
Corporate real estate and other	4.1	%	29.6

Maturities of Lease Liabilities

Future minimum lease payments under non-cancellable leases as of December 31, 2021 (in millions):


	Aircraft(a)		CPA Aircraft		Airport and Terminal Facilities		Corporate Real Estate and Other
2022	$	221	$	84	$	3	$	11
2023	158		84		2		9
2024	101		84		2		7
2025	95		84		2		4
2026	89		84		2		4
Thereafter	311		291		8		75
Total Lease Payments	$	975	$	711	$	19	$	110
Less: Imputed interest	(127)		(91)		(3)		(52)
Total	$	848	$	620	$	16	$	58

(a) - Future minimum lease payments for aircraft includes commitments for aircraft which have been removed from operating service as the Company remains obligated under existing terms.

(b) - Future minimum lease payments in the table above are inclusive of incentive credits related to leased Boeing 737-9 aircraft. As a result, the operating lease liabilities presented on the consolidated balance sheet exceed total future payments. This difference will exist until all leased 737-9 aircraft are delivered.

As of December 31, 2021, we have entered into but not yet commenced leases for Boeing 737-9 and E175 aircraft, as well as other non-aircraft equipment. The liabilities associated with these leases are expected to be approximately $730 million. These leases will commence in 2022 and 2023 with lease terms ranging from 2023 to 2035.