Leases, Codification Topic 842

12 Months Ended

Dec. 31, 2022

LEASESThe 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, 2022 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, 2022, 2021, and 2020.

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


	December 31, 2022		December 31, 2021
Aircraft	$	701	$	782
CPA Aircraft	683		600
Airport and terminal facilities	21		16
Corporate real estate and other	66		55
Total Operating Lease Assets	$	1,471	$	1,453

Aircraft

At December 31, 2022, Alaska had operating leases for ten B737-800, ten B737-9, four A319, 32 A320, and ten A321neo aircraft. No A319 or A320 aircraft leases had remaining asset balances. Four A319 and 20 A320 aircraft, not operating at December 31, 2022, are still awaiting return to the lessor. Alaska is currently evaluating options for the A321neo leases. Remaining lease terms for B737 aircraft extend up to 12 years and remaining lease terms for A321neo aircraft extend up to nine years. Some leases have 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. Horizon had operating leases for six Q400 aircraft. Of these, five, which were not operating at December 31, 2022, are awaiting return to the lessor and had no remaining asset balance. 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, 2022, 2021, and 2020 was $10 million, $5 million, and $1 million.

Capacity purchase agreements with aircraft (CPA aircraft)

At December 31, 2022, 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 42 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 12 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, 2022, 2021, and 2020 was not material.

Airport and terminal facilities

The Company leases ticket counters, gates, cargo and baggage space, lounge 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, 2022, 2021, and 2020 was $381 million, $377 million, and $286 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. Starting in 2022, the Company leased one airport gate at Dallas Love Field Airport to a third party. For these leases, the Company recorded $15 million, $16 million, and $14 million of lease income during the twelve months ended December 31, 2022, 2021, and 2020.

Corporate real estate and other leases

Leased corporate real estate is primarily for office space in hub cities, training 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, 2022, 2021, and 2019 was $27 million, $17 million, and $12 million.

Sale-leaseback transaction

In 2020, Alaska entered into a transaction to sell ten owned A320 aircraft and replace those aircraft with 13 new leased B737-9 aircraft. Also included in the transaction was the leaseback of all ten A320 aircraft in the interim period between the sale of those aircraft and delivery of the first ten B737-9 aircraft. As of December 31, 2022, the leases for the ten A320 aircraft were terminated and the aircraft had no remaining asset balance.

In 2022, Alaska executed an agreement to sell two owned B737-800 aircraft to be converted into freighters and leased back to Alaska. The sale to the lessor, conversions, and subsequent delivery of these aircraft to Alaska are all expected to occur in 2023 and 2024, and as a result there were no amounts recorded related to this transaction for the twelve months ended December 31, 2022.

Components of Lease Expense

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


	Classification	2022		2021		2020
Expense
Aircraft(a)	Aircraft rent	$	191	$	174	$	215
CPA Aircraft	Aircraft rent	100		80		80
Airport and terminal facilities	Landing fees and other rentals	384		379		288
Corporate real estate and other	Landing fees and other rentals	33		21		19
Total lease expense		$	708	$	654	$	602
Revenue
Lease income	Cargo and other revenue	(15)		(16)		(14)
Net lease impact		$	693	$	638	$	588

(a)Aircraft lease expense for the year ended December 31, 2022 does not include the portion of aircraft rent that was accelerated due to the fleet transition decision and recorded within the Special items - fleet transition and other line within the consolidated statement of operations. Refer to Note 2 to the consolidated financial statements for additional information.

Supplemental Cash Flow Information

During the year ended December 31, 2022, the Company paid $354 million for capitalized operating leases. The Company also acquired $461 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, 2022.


	Weighted Average IBR		Weighted Average Remaining Lease term
Aircraft	4.4	%	7.9
CPA Aircraft	7.0	%	8.8
Airports and terminal facilities	4.4	%	7.9
Corporate real estate and other	4.7	%	27.5

Maturities of Lease Liabilities

Future minimum lease payments under non-cancellable leases as of December 31, 2022 (in millions):


	Aircraft(a)		CPA Aircraft		Airport and Terminal Facilities		Corporate Real Estate and Other
2023	$	173	$	112	$	3	$	17
2024	118		112		3		7
2025	113		112		3		6
2026	110		112		3		6
2027	106		112		3		5
Thereafter	356		385		10		88
Total Lease Payments(b)	$	976	$	945	$	25	$	129
Less: Imputed interest	(156)		(238)		(4)		(61)
Total	$	820	$	707	$	21	$	68

(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 B737-9 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 B737-9 aircraft are delivered.

As of December 31, 2022, we have entered into but not yet commenced leases for B737-9 aircraft, B737-800 freighter aircraft, E175 aircraft, as well as real estate. The liabilities associated with these leases are expected to be approximately $213 million. These leases will commence between 2023 and 2027 with lease terms ranging from 2028 to 2042.