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<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>64
<PERIOD>20190630
<FILING-DATE>20190724
<DATE-OF-FILING-DATE-CHANGE>20190724
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<CONFORMED-NAME>Spirit Airlines, Inc.
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<FILE-NUMBER>001-35186
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<STREET1>2800 EXECUTIVE WAY
<CITY>MIRAMAR
<STATE>FL
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Section 1: 10-Q (10-Q)

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________

Form 10-Q

_______________________________________________________________________

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35186

_______________________________________________________________________

SPIRIT AIRLINES, INC.

(Exact name of registrant as specified in its charter)

_______________________________________________________________________



Delaware			38-1747023
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

2800 Executive Way	Miramar	Florida	33025
(Address of principal executive offices)			(Zip Code)

(954) 447-7920

(Registrant’s telephone number, including area code)

_______________________________________________________________________



Title of each class	Name of exchange on which registered	Trading Symbol
Common Stock, $0.0001 par value	New York Stock Exchange	SAVE

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
(Do not check if a smaller reporting company)		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the close of business on July 18, 2019:



Class		Number of Shares
Common Stock, $0.0001 par value		68,440,856

Table of Contents

INDEX



			Page No.
Part I. Financial Information
	Item 1.	Condensed Financial Statements (unaudited)	1
		Condensed Statements of Operations - Three and Six Months Ended June 30, 2019 and 2018	1
		Condensed Statements of Comprehensive Income (Loss) - Three and Six Months Ended June 30, 2019 and 2018	2
		Condensed Balance Sheets – June 30, 2019 and December 31, 2018	3
		Condensed Statements of Cash Flows – Six Months Ended June 30, 2019 and 2018	4
		Condensed Statements of Shareholders' Equity - Three and Six Months Ended June 30, 2019 and 2018	5
		Notes to Condensed Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
		Glossary of Airline Terms	33
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
	Item 4.	Controls and Procedures	36
Part II. Other Information
	Item 1.	Legal Proceedings	37
	Item 1A.	Risk Factors	38
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
	Item 3.	Defaults Upon Senior Securities	39
	Item 4.	Mine Safety Disclosures	39
	Item 5.	Other Information	39
	Item 6.	Exhibits	40
Signature			41

PART I. Financial Information


ITEM 1.	UNAUDITED CONDENSED FINANCIAL STATEMENTS

Spirit Airlines, Inc.

Condensed Statements of Operations

(unaudited, in thousands, except per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Operating revenues:
Passenger	$	994,430		$	836,350		$	1,832,495		$	1,525,491
Other	18,526			15,421			36,257			30,418
Total operating revenues	1,012,956			851,771			1,868,752			1,555,909

Operating expenses:
Aircraft fuel	265,006			246,180			494,642			450,826
Salaries, wages and benefits	216,375			187,756			420,276			342,852
Landing fees and other rents	64,711			58,602			124,360			108,232
Aircraft rent	46,522			41,745			92,304			91,936
Depreciation and amortization	54,913			45,618			105,639			84,991
Distribution	40,602			34,997			76,321			65,628
Maintenance, materials and repairs	34,688			31,653			66,292			61,363
Special charges	—			174			—			89,342
Loss on disposal of assets	1,550			4,644			3,463			5,492
Other operating	124,651			91,881			233,713			185,523
Total operating expenses	849,018			743,250			1,617,010			1,486,185

Operating income (loss)	163,938			108,521			251,742			69,724

Other (income) expense:
Interest expense	25,266			20,498			50,237			38,347
Capitalized interest	(2,975		)	(2,296		)	(5,532		)	(4,548		)
Interest income	(7,066		)	(4,430		)	(13,990		)	(8,496		)
Other expense	144			188			377			321
Special charges, non-operating	—			79,412			—			88,613
Total other (income) expense	15,369			93,372			31,092			114,237

Income (loss) before income taxes	148,569			15,149			220,650			(44,513		)
Provision (benefit) for income taxes	34,068			3,895			50,073			(10,845		)

Net income (loss)	$	114,501		$	11,254		$	170,577		$	(33,668	)
Basic earnings (loss) per share	$	1.67		$	0.16		$	2.49		$	(0.49	)
Diluted earnings (loss) per share	$	1.67		$	0.16		$	2.49		$	(0.49	)

The accompanying Notes are an integral part of these Condensed Financial Statements.

Spirit Airlines, Inc.

Condensed Statements of Comprehensive Income (Loss)

(unaudited, in thousands)



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Net income (loss)	$	114,501	$	11,254	$	170,577	$	(33,668	)
Unrealized gain on short-term investment securities, net of deferred taxes of $29, $33, $67 and $26	98		101		228		78
Interest rate derivative loss reclassified into earnings, net of taxes of $19, $18, $46, and $39	54		61		101		120
Other comprehensive income	$	152	$	162	$	329	$	198
Comprehensive income (loss)	$	114,653	$	11,416	$	170,906	$	(33,470	)

The accompanying Notes are an integral part of these Condensed Financial Statements.

Spirit Airlines, Inc.

Condensed Balance Sheets

(unaudited, in thousands)



	June 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	1,110,797		$	1,004,733
Short-term investment securities	104,228			102,789
Accounts receivable, net	78,125			47,660
Aircraft maintenance deposits, net	124,585			106,901
Prepaid expenses and other current assets	102,952			83,383
Total current assets	1,520,687			1,345,466

Property and equipment:
Flight equipment	3,514,104			3,257,215
Ground property and equipment	215,774			191,661
Less accumulated depreciation	(367,712		)	(332,864		)
	3,362,166			3,116,012
Operating lease right-of-use assets	1,057,846			—
Pre-delivery deposits on flight equipment	289,902			236,775
Long-term aircraft maintenance deposits	84,507			138,738
Deferred heavy maintenance, net	309,555			249,010
Other long-term assets	38,118			79,456
Total assets	$	6,662,781		$	5,165,457

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	43,848		$	39,320
Air traffic liability	402,990			291,981
Current maturities of long-term debt and finance leases	270,407			163,557
Current maturities of operating leases	114,877			—
Other current liabilities	379,041			339,677
Total current liabilities	1,211,163			834,535

Long-term debt and finance leases, less current maturities	2,025,183			2,024,774
Operating leases, less current maturities	915,288			—
Deferred income taxes	399,765			355,141
Deferred gains and other long-term liabilities	16,355			22,503
Shareholders’ equity:
Common stock	7			7
Additional paid-in-capital	377,639			371,225
Treasury stock, at cost	(72,264		)	(67,016		)
Retained earnings	1,790,509			1,625,481
Accumulated other comprehensive income (loss)	(864		)	(1,193		)
Total shareholders’ equity	2,095,027			1,928,504
Total liabilities and shareholders’ equity	$	6,662,781		$	5,165,457

The accompanying Notes are an integral part of these Condensed Financial Statements.

Spirit Airlines, Inc.

Condensed Statements of Cash Flows

(unaudited, in thousands)



	Six Months Ended June 30,
	2019			2018
Operating activities:
Net income (loss)	$	170,577		$	(33,668	)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Losses reclassified from other comprehensive income	148			159
Share-based compensation	6,413			5,381
Allowance for doubtful accounts (recoveries)	—			(12		)
Amortization of deferred gains and losses and debt issuance costs	4,365			4,552
Depreciation and amortization	105,639			84,991
Deferred income tax expense (benefit)	44,511			(17,604		)
Loss on disposal of assets	3,463			5,492
Special charges, non-operating	—			88,613
Changes in operating assets and liabilities:
Accounts receivable, net	(30,465		)	(9,212		)
Aircraft maintenance deposits, net	(6,214		)	11,222
Prepaid income taxes	1,962			—
Other assets	10,212			3,003
Deferred heavy maintenance, net	(88,350		)	(94,267		)
Income tax receivable	—			(828		)
Accounts payable	2,024			25,413
Air traffic liability	111,009			93,936
Other liabilities	6,154			83,809
Other	(424		)	8
Net cash provided by operating activities	341,024			250,988
Investing activities:
Purchase of available-for-sale investment securities	(57,355		)	(73,687		)
Proceeds from the maturity of available-for-sale investment securities	56,595			72,964
Proceeds from sale of property and equipment	—			9,500
Pre-delivery deposits on flight equipment, net of refunds	(75,826		)	(92,205		)
Capitalized interest	(4,936		)	(4,178		)
Assets under construction for others	(2,235		)	—
Purchase of property and equipment	(154,702		)	(323,229		)
Net cash used in investing activities	(238,459		)	(410,835		)
Financing activities:
Proceeds from issuance of long-term debt	94,706			440,340
Proceeds from stock options exercised	1			2
Payments on debt obligations	(85,785		)	(60,649		)
Payments on finance lease obligations	(1,796		)	(205,403		)
Reimbursement for assets under construction for others	2,235			—
Repurchase of common stock	(5,248		)	(986		)
Debt issuance costs	(614		)	(1,944		)
Net cash provided by financing activities	3,499			171,360
Net increase in cash and cash equivalents	106,064			11,513
Cash and cash equivalents at beginning of period	1,004,733			800,849
Cash and cash equivalents at end of period	$	1,110,797		$	812,362
Supplemental disclosures
Cash payments for:
Interest, net of capitalized interest	$	41,279		$	16,769
Income taxes paid, net of refunds	$	7,394		$	3,270
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	95,643		$	—
Operating cash flows for finance leases	$	1,457		$	—
Financing cash flows for finance leases	$	339		$	—
Non-cash transactions:
Capital expenditures funded by finance lease borrowings	$	96,371		$	315
Capital expenditures funded by operating lease borrowings	$	159,548		$	—

The accompanying Notes are an integral part of these Condensed Financial Statements.

Spirit Airlines, Inc.

Condensed Statements of Shareholders’ Equity

(In thousands)



	Three and Six Months Ended June 30, 2018
	Common Stock		Additional Paid-In-Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2017	$	7	$	360,153	$	(65,854	)	$	1,469,732		$	(1,464	)	$	1,762,574
Share-based compensation	—		3,075		—			—			—			3,075
Repurchase of common stock	—		—		(959		)	—			—			(959		)
Proceeds from options exercised	—		2		—			—			—			2
Changes in comprehensive income	—		—		—			—			35			35
Net loss	—		—		—			(44,922		)	—			(44,922		)
Balance at March 31, 2018	$	7	$	363,230	$	(66,813	)	$	1,424,810		$	(1,429	)	$	1,719,805
Share-based compensation	—		2,306		—			—			—			2,306
Repurchase of common stock	—		—		(27		)	—			—			(27		)
Proceeds from options exercised	—		—		—			—			—			—
Changes in comprehensive income	—		—		—			—			162			162
Net income	—		—		—			11,254			—			11,254
Balance at June 30, 2018	$	7	$	365,536	$	(66,840	)	$	1,436,064		$	(1,267	)	$	1,733,500



	Three and Six Months Ended June 30, 2019
	Common Stock		Additional Paid-In-Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2018	$	7	$	371,225	$	(67,016	)	$	1,625,481		$	(1,193	)	$	1,928,504
Effect of ASU No. 2016-02 implementation (refer to Note 2)	—		—		—			(5,549		)	—			(5,549		)
Share-based compensation	—		3,671		—			—			—			3,671
Repurchase of common stock	—		—		(5,223		)	—			—			(5,223		)
Proceeds from options exercised	—		—		—			—			—			—
Changes in comprehensive income	—		—		—			—			177			177
Net income	—		—		—			56,076			—			56,076
Balance at March 31, 2019	$	7	$	374,896	$	(72,239	)	$	1,676,008		$	(1,016	)	$	1,977,656
Share-based compensation	—		2,742		—			—			—			2,742
Repurchase of common stock	—		—		(25		)	—			—			(25		)
Proceeds from options exercised	—		1		—			—			—			1
Changes in comprehensive income	—		—		—			—			152			152
Net income	—		—		—			114,501						114,501
Balance at June 30, 2019	$	7	$	377,639	$	(72,264	)	$	1,790,509		$	(864	)	$	2,095,027

The accompanying Notes are an integral part of these Condensed Financial Statements.

Notes to Condensed Financial Statements

(unaudited)


1.	Basis of Presentation

The accompanying unaudited condensed financial statements include the accounts of Spirit Airlines, Inc. (the "Company"). These unaudited condensed financial statements reflect all normal recurring adjustments which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the audited annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements of the Company and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on February 13, 2019.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect both the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

The interim results reflected in the unaudited condensed financial statements are not necessarily indicative of the results that may be expected for other interim periods or for the full year. The air transportation business is subject to significant seasonal fluctuations as demand is generally greater in the second and third quarters of each year. The air transportation business is also volatile and highly affected by economic cycles and trends.


2.	Recent Accounting Developments

Recently Adopted Accounting Pronouncements

Leases

The Company adopted ASU No. 2016-02, "Leases (Topic 842)," effective January 1, 2019. The Company adopted Topic 842 utilizing the modified retrospective adoption method with an effective date of January 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of the Company's contracts are or contain leases, (2) lease classification and (3) initial direct costs. Therefore, the condensed financial statements for 2019 are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company's historical accounting policy. This standard requires all lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, for all leases with a term greater than 12 months. The adoption of the new lease standard had a significant impact on the Company's condensed balance sheets due to the recognition of $1.0 billion of right-of-use assets for operating leases, $128.1 million of current maturities of operating leases and $895.1 million of operating leases, less current maturities. In addition, the Company recognized a $5.5 million cumulative effect adjustment, net of tax, to retained earnings. This adjustment was 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. The accounting for finance leases is substantially unchanged. The adoption of Topic 842 did not have a significant impact on the Company's lease classification or a material impact on its statements of operations and liquidity. Additionally, the adoption of Topic 842 did not have a material impact on the Company’s debt-covenant compliance under its current agreements. Refer to Note 9, Leases for information regarding the Company's adoption of Topic 842 and the Company's undiscounted future lease payments and the timing of those payments.

Recently Issued Accounting Pronouncements Not Yet Adopted

Cloud Computing Arrangements

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software." This new standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification ("ASC") 350-40, "Accounting for Internal-Use Software," to determine which implementation costs to capitalize as assets and amortize over the term of the hosting arrangement or expense as incurred. This standard is effective for the Company for fiscal years, and interim periods within those years, beginning

January 1, 2020. Early adoption is permitted, including during an interim period. Entities have the option to apply this standard prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company is evaluating this new standard, but does not expect it to have a significant impact on its financial statement presentation or results.

Accounting for Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses." The standard requires the use of an "expected loss" model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale securities and requires estimated credit losses to be recorded as allowances rather than as reductions to the amortized cost of the securities. This standard is effective for the Company for fiscal years, and interim periods within those years, beginning January 1, 2020, with early adoption permitted. The Company is evaluating the new guidance, but does not expect it to have a material impact on its financial statement presentation or results.


3.	Revenue

Operating revenues is comprised of passenger revenues, which includes fare and non-fare revenues, and other revenues. The following table shows disaggregated operating revenues for the three and six months ended June 30, 2019 and June 30, 2018.



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands)
Operating revenues:
Fare	$	515,696	$	439,549	$	932,041	$	782,244
Non-fare	478,734		396,801		900,454		743,247
Total passenger revenues	994,430		836,350		1,832,495		1,525,491
Other	18,526		15,421		36,257		30,418
Total operating revenues	$	1,012,956	$	851,771	$	1,868,752	$	1,555,909

The Company is managed as a single business unit that provides air transportation for passengers. Operating revenues by geographic region as defined by the Department of Transportation ("DOT") area are summarized below:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands)
DOT—Domestic	$	890,388	$	768,297	$	1,644,502	$	1,417,433
DOT—Latin America	122,568		83,474		224,250		138,476
Total	$	1,012,956	$	851,771	$	1,868,752	$	1,555,909

The Company defers the amount for award travel obligation as part of loyalty deferred revenue within air traffic liability ("ATL") on the Company's condensed balance sheets and recognizes loyalty travel awards in passenger revenues as the mileage credits are used for travel or expire unused. As of June 30, 2019 and December 31, 2018, the Company had ATL balances of $403.0 million and $292.0 million, respectively. The balance of the Company's ATL is expected to be recognized within 12 months of the respective balance sheet date.


4.	Special Charges

Special Charges, Operating

During the six months ended June 30, 2019, the Company had no special charges within operating expenses in the statement of operations.

During the first quarter of 2018, the Company negotiated and amended the collective bargaining agreement with the Air Line Pilots Association, International ("ALPA"), under the guidance of the National Mediation Board ("NMB"). In connection with the amended agreement, the Company recorded a one-time ratification incentive of $80.7 million, including payroll taxes, and an $8.5 million adjustment related to other contractual provisions. These amounts totaling $89.2 million were recorded in special charges within operating expenses in the condensed statement of operations for the six months ended June 30, 2018.

Special Charges, Non-Operating

During the six months ended June 30, 2019, the Company had no special charges, non-operating within other (income) expense in the statement of operations.

During the three and six months ended June 30, 2018, the Company recorded $79.4 million and $88.6 million, respectively, in special charges, non-operating within other (income) expense in the statement of operations. During the first quarter of 2018, the Company entered into an aircraft purchase agreement for the purchase of 14 A319 aircraft previously operated under operating leases by the Company. The aggregate gross purchase price for the 14 aircraft was $285.0 million, and the price for each aircraft at the time of the sale was comprised of a cash payment net of the amount of maintenance reserves and security deposits for such aircraft held by the applicable lessor pursuant to the lease for such aircraft. The contract was deemed a lease modification, which resulted in a change of classification from operating leases to finance leases for the 14 aircraft. During the first quarter of 2018, the finance lease assets were recorded at the lower of cost or fair value of the aircraft within flight equipment on the condensed balance sheets. During the second quarter of 2018, the purchase of the 14 aircraft was completed and the obligation was accreted up to the net cash payment price with interest charges recognized in special charges, non-operating in the statement of operations. The Company determined the valuation of the aircraft based on third-party appraisals considering the condition of the aircraft (a Level 3 measurement).


5.	Earnings (Loss) per Share

The following table sets forth the computation of basic and diluted earnings (loss) per common share:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands, except per share amounts)
Numerator
Net income (loss)	$	114,501	$	11,254	$	170,577	$	(33,668	)
Denominator
Weighted-average shares outstanding, basic	68,439		68,251		68,410		68,237
Effect of dilutive stock awards	181		59		158		—
Adjusted weighted-average shares outstanding, diluted	68,620		68,310		68,568		68,237
Earnings (loss) per share
Basic earnings (loss) per common share	$	1.67	$	0.16	$	2.49	$	(0.49	)
Diluted earnings (loss) per common share	$	1.67	$	0.16	$	2.49	$	(0.49	)

Anti-dilutive weighted-average shares	127		248		143		264


6.	Short-term Investment Securities

The Company's short-term investment securities are classified as available-for-sale and generally consist of U.S. Treasury and U.S. government agency securities with contractual maturities of 12 months or less. These securities are stated at fair value within current assets on the Company's condensed balance sheets. Realized gains and losses on sales of investments, if any, are reflected in non-operating income (expense) in the condensed statements of operations.

As of June 30, 2019 and December 31, 2018, the Company had $104.2 million and $102.8 million in short-term available-for-sale investment securities, respectively. During the six months ended June 30, 2019, these investments earned interest income at a weighted-average fixed rate of approximately 2.4%. For the three and six months ended June 30, 2019, an unrealized gain of $98 thousand and $228 thousand, net of deferred taxes of $29 thousand and $67 thousand, respectively, was recorded within accumulated other comprehensive income ("AOCI") related to these investment securities. For the three and six months ended June 30, 2018, an unrealized gain of $101 thousand and $78 thousand, net of deferred taxes of $33 thousand and $26 thousand, respectively, was recorded within AOCI related to these investment securities. The Company has not recognized any realized gains or losses related to these securities as the Company has not sold any of these securities. As of June 30, 2019 and December 31, 2018, $154 thousand and $74 thousand, net of tax, respectively, remained in AOCI, related to these instruments.


7.	Accrued Liabilities

Other current liabilities as of June 30, 2019 and December 31, 2018 consist of the following:



	June 30, 2019		December 31, 2018
	(in thousands)
Federal excise and other passenger taxes and fees payable	$	97,375	$	60,604
Salaries and wages	83,379		82,900
Airport obligations	64,065		52,029
Aircraft maintenance	41,563		59,805
Fuel	27,204		25,368
Aircraft and facility lease obligations	20,277		15,149
Interest payable	17,558		18,086
Other	27,620		25,736
Other current liabilities	$	379,041	$	339,677


8.	Financial Instruments and Risk Management

As part of the Company’s risk management program, the Company from time to time uses a variety of financial instruments to reduce its exposure to fluctuations in the price of jet fuel and in interest rates. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company may be exposed to credit losses in the event of nonperformance by counterparties to these financial instruments. The Company periodically reviews and seeks to mitigate exposure to the financial deterioration and nonperformance of any counterparty by monitoring the absolute exposure levels, each counterparty's credit ratings and the historical performance of the counterparties relating to hedge transactions. The credit exposure related to these financial instruments is limited to the fair value of contracts in a net receivable position at the reporting date. The Company also maintains security agreements that require the Company to post collateral if the value of selected instruments falls below specified mark-to-market thresholds. The Company records financial derivative instruments at fair value, which includes an evaluation of each counterparty's credit risk. As of June 30, 2019, the Company did not hold any derivatives with requirements to post collateral.

Fuel Derivative Instruments

From time to time, the Company may enter into fuel derivative contracts in order to mitigate the risk of future volatility in fuel prices. The Company's fuel derivative contracts, if any, generally consist of United States Gulf Coast jet fuel swaps ("jet fuel swaps") and United States Gulf Coast jet fuel options ("jet fuel options"). Both jet fuel swaps and jet fuel options are used

at times to protect the refining price risk between the price of crude oil and the price of refined jet fuel, and to manage the risk of increasing fuel prices. Fair value of the instruments is determined using standard option valuation models.

The Company accounts for any fuel derivative contracts at fair value and recognizes them in the condensed balance sheets in prepaid expenses and other current assets or other current liabilities. The Company did not enter into any fuel derivative instruments during the six months ended June 30, 2019 and 2018, and did not have any outstanding fuel derivatives as of June 30, 2019 and December 31, 2018. Historically, the Company has not elected hedge accounting on any fuel derivative instruments entered into and, as a result, changes in the fair value of fuel derivative contracts, if any, were recorded in aircraft fuel expense.

Interest Rate Swaps

From time to time, the Company may enter into interest rate swaps to fix the benchmark interest rate component of interest payments or for other reasons. These instruments limit the Company's exposure to changes in the benchmark interest rate in the period from the trade date through the date of maturity. Interest rate swaps may be designated as cash flow hedges. The Company generally accounts for interest rate swaps at fair value and recognizes them in the balance sheet in prepaid expenses and other current assets or other current liabilities with changes in fair value recorded within AOCI. As of June 30, 2019 and December 31, 2018, the Company did not have any outstanding interest rate swaps.

Realized gains and losses from cash flow hedges are recorded in the condensed statements of cash flows as a component of cash flows from operating activities. Subsequent to the issuance of each debt instrument, amounts remaining in AOCI are amortized over the life of the fixed-rate debt instrument. During the six months ended June 30, 2019 and 2018, there were no unrealized gains or losses recorded within AOCI related to these instruments as they settled in 2015. For the three and six months ended June 30, 2019, the Company reclassified interest rate swap losses of $54 thousand and $101 thousand, net of tax of $19 thousand and $46 thousand, respectively, into earnings. For the three and six months ended June 30, 2018, the Company reclassified interest rate swap losses of $61 thousand and $120 thousand, net of tax of $18 thousand and $39 thousand, respectively, into earnings. As of June 30, 2019 and December 31, 2018, $1.0 million and $1.1 million, net of tax, respectively, remained in AOCI, related to these instruments.


9.	Leases

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 leased 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 condensed balance sheets as a right-of-use asset and lease liability. Lease terms are generally 8 years to 18 years for aircraft and up to 30 years for other leased equipment and property.

The Company adopted Topic 842 utilizing the modified retrospective adoption method with an effective date of January 1, 2019. The Company elected not to apply the recognition requirements in Topic 842 to short-term leases (i.e., leases of 12 months or less). Instead, a lessee may recognize the lease payments in profit or loss on a straight-line basis over the lease term. The Company elected this accounting policy for all classes of underlying assets. In addition, in accordance with Topic 842, variable lease payments in the period in which the obligation for those payments is incurred are not included in the recognition of a lease liability or right-of-use asset.

Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. When available, the Company uses the rate implicit in the lease to discount lease payments to present value. However, the Company's leases generally do not provide a readily determinable implicit rate. Therefore, the Company estimates the incremental borrowing rate to discount lease payments based on information available at lease commencement. The Company uses publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates. The Company has options to extend certain of its operating leases for an additional period of time and options to early terminate several of its operating leases. The lease term consists of the noncancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option and periods covered by an option to extend or not terminate the lease in which the exercise of the option is controlled by the lessor. The Company's lease agreements do not contain any residual value guarantees. The Company has elected to not separate non-lease components from the associated lease component for all underlying classes of assets with lease and non-lease components.

As of June 30, 2019, the Company had 46 aircraft financed under operating leases, with lease term expirations between 2022 and 2034. In addition, as of June 30, 2019, the Company had 11 spare engines financed under operating leases with lease term expiration dates ranging from 2019 to 2027. One of the Company's leased aircraft has variable rent payments, which fluctuate based on changes in London Interbank Offered Rate ("LIBOR").

During the six months ended June 30, 2019, the Company took delivery of two aircraft under secured debt arrangements, purchased one previously leased aircraft, and took delivery of five aircraft under operating leases. The Company also purchased two engines and purchased one previously leased engine. Upon purchase off lease, the assets previously recorded in our operating lease right-of-use asset (in accordance with the adoption of Topic 842) were recorded within flight equipment on our condensed balance sheets.

The Company entered into sale leaseback transactions with third-party aircraft lessors for some of its leased aircraft and engines. 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.

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. Maintenance reserve payments that are probable of being recovered when the Company performs qualifying maintenance are recorded in aircraft maintenance deposits on the Company's condensed balance sheets. 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.

Fixed maintenance reserve payments for the Company's aircraft and related flight equipment, including estimated amounts for contractual price escalations, are expected to be $1.4 million for the remainder of 2019, $2.6 million in 2020, $2.6 million in 2021, $2.7 million in 2022, $2.5 million in 2023, and $0.5 million in 2024 and beyond. 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 June 30, 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. When determining probability and estimated cost of lease return obligations, there are various other factors that need to be considered such as the contractual terms of the lease, the ability to swap engines or other aircraft components, current condition of the aircraft, the age of the aircraft at lease expiration, utilization of engines and other components, the extent of repairs needed at return, return locations, current configuration of the aircraft and cost of repairs and materials at the time of return. As a result of the different factors listed above, 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.

Aircraft rent expense consists of monthly lease rents for aircraft and spare engines under the terms of the Company's aircraft and spare engine lease agreements recognized on a straight-line basis. Aircraft rent expense also includes maintenance reserves paid to aircraft lessors in advance of the performance of major maintenance activities that are not probable of being reimbursed and probable lease return condition obligations.

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 condensed balance sheets as of June 30, 2019. The table does not include commitments that are contingent on events or other factors that are currently uncertain or unknown.



		Finance Leases		Operating Leases
		Finance Leases		Aircraft and Spare Engine Leases		Property Facility Leases		Other		Total Operating and Finance Lease Obligations
	(in thousands)
Remainder of 2019		$	94,751	$	88,536	$	1,396	$	290	$	184,973
2020		780		172,409		2,417		517		176,123
2021		606		171,168		1,909		—		173,683
2022		578		172,951		1,080		—		174,609
2023		202		155,076		1,055		—		156,333
2024 and thereafter		—		592,704		4,938		—		597,642
Total minimum lease payments		$	96,917	$	1,352,844	$	12,795	$	807	$	1,463,363
Less amount representing interest		535		332,667		3,583		31		336,816
Present value of minimum lease payments		$	96,382	$	1,020,177	$	9,212	$	776	$	1,126,547
Less current portion		94,834		112,189		2,137		551		209,711
Long-term portion		$	1,548	$	907,988	$	7,075	$	225	$	916,836

Commitments related to the Company's noncancellable short-term operating leases not recorded on the Company's condensed balance sheets are expected to be $0.5 million for the remainder of 2019 and none in 2020 and beyond.

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 agreement provides for the purchase by the Company of each aircraft to occur during the third quarter of 2019. The aggregate gross purchase price for the 4 aircraft was $141.3 million, and the payment of the price for each aircraft at the time of the sale will be comprised of a cash payment net of the amount of maintenance reserves and security deposits for such aircraft held by the applicable lessor pursuant to the lease for such aircraft. The contract was deemed a lease modification, which resulted in a change of classification from operating leases to finance leases for the four aircraft. The Company recorded a finance lease obligation of $94.9 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 condensed balance sheets. In addition, the Company recorded finance lease assets of $140.5 million, which include related amounts previously recorded as maintenance reserves and security deposits and included within flight equipment on the Company's condensed balance sheets.

The remainder of the Company's finance lease obligations relate to leased computer 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 and long-term debt and finance leases, less current maturities in the Company's condensed balance sheets.

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



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
	(in thousands)
Finance lease cost
Amortization of leased assets	$	519	$	728
Interest of lease liabilities	309		339
Operating lease cost
Operating lease cost (1)	48,639		98,353
Short-term lease cost (1)	3,509		6,958
Variable lease cost (1)	31,653		59,770
Total lease cost	$	84,629	$	166,148

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

The table below presents lease-related terms and discount rates as of June 30, 2019:



	June 30, 2019
Weighted-average remaining lease term
Operating leases	9.8 years
Finance leases	0.8 years
Weighted-average discount rate
Operating leases	6.52	%
Finance leases	3.93	%


10.	Commitments and Contingencies

Aircraft-Related Commitments and Financing Arrangements

The Company’s contractual purchase commitments consist primarily of aircraft and engine acquisitions through manufacturers. As of June 30, 2019, the Company's aircraft orders consisted of the following:



		Airbus
		A320neo
Remainder of 2019		8
2020		17
2021		18
		43

As of June 30, 2019, the Company has no contractual aircraft purchase commitments beyond 2021. The Company also has one spare engine order for a V2500 SelectTwo engine with International Aero Engines ("IAE") and six spare engine orders for PurePower PW1100G-JM engines with Pratt & Whitney. Spare engines are scheduled for delivery from 2020 through 2023. Purchase commitments for these aircraft and engines, including estimated amounts for contractual price escalations and pre-delivery payments, are expected to be $388.5 million for the remainder of 2019, $858.0 million in 2020, $776.1 million in 2021, $17.6 million in 2022, $8.3 million in 2023, and none in 2024 and beyond. As of June 30, 2019, the Company has secured sale-leaseback financing commitments for six aircraft being delivered in the remainder of 2019. As of June 30, 2019, the Company does not have financing commitments in place for the remaining 37 Airbus aircraft on firm order, which are scheduled for delivery in the remainder of 2019 through 2021.

Interest commitments related to the secured debt financing of 62 delivered aircraft as of June 30, 2019 are $42.6 million for the remainder of 2019, $78.5 million in 2020, $71.3 million in 2021, $64.3 million in 2022, $54.1 million in 2023, and

$157.9 million in 2024 and beyond. For principal commitments related to these financed aircraft, refer to Note 12, Debt and Other Obligations.

The Company is contractually obligated to pay the following minimum guaranteed payments for its reservation system and other miscellaneous subscriptions and services as of June 30, 2019: $6.9 million for the remainder of 2019, $17.4 million in 2020, $14.7 million in 2021, $13.9 million in 2022, $12.7 million in 2023, and $60.0 million thereafter. During the first quarter of 2018, the Company entered into a contract renewal with its reservation system provider which expires in 2028.

Litigation

The Company is subject to commercial litigation claims and to administrative and regulatory proceedings and reviews that may be asserted or maintained from time to time. The Company believes the ultimate outcome of such lawsuits, proceedings and reviews will not, individually or in the aggregate, have a material adverse effect on its financial position, liquidity or results of operations.

Credit Card Processing Arrangements

The Company has agreements with organizations that process credit card transactions arising from the purchase of air travel, baggage charges, and other ancillary services by customers. As is standard in the airline industry, the Company's contractual arrangements with credit card processors permit them, under certain circumstances, to retain a holdback or other collateral, which the Company records as restricted cash, when future air travel and other future services are purchased via credit card transactions. The required holdback is the percentage of the Company's overall credit card sales that its credit card processors hold to cover refunds to customers if the Company fails to fulfill its flight obligations.

The Company's credit card processors do not require the Company to maintain cash collateral provided that the Company satisfies certain liquidity and other financial covenants. Failure to meet these covenants would provide the processors the right to place a holdback resulting in a commensurate reduction of unrestricted cash. As of June 30, 2019 and December 31, 2018, the Company was in compliance with such liquidity and other financial covenants in its credit card processing agreements and the processors were holding back no remittances.

The maximum potential exposure to cash holdbacks by the Company's credit card processors, based upon advance ticket sales and $9 Fare Club memberships as of June 30, 2019 and December 31, 2018, was $450.1 million and $321.0 million, respectively.

Employees

The Company has 5 union-represented employee groups that together represented approximately 80% of all employees at June 30, 2019. The table below sets forth the Company's employee groups and status of the collective bargaining agreements as of June 30, 2019.



Employee Groups	Representative	Amendable Date	Percentage of Workforce
Pilots	Air Line Pilots Association, International ("ALPA")	February 2023	26%
Flight Attendants	Association of Flight Attendants ("AFA-CWA")	May 2021	46%
Dispatchers	Professional Airline Flight Control Association ("PAFCA")	October 2023	1%
Ramp Service Agents	International Association of Machinists and Aerospace Workers ("IAMAW")	June 2020	4%
Passenger Service Agents	Transport Workers Union of America ("TWU")	NA	3%

In August 2015, the Company's collective bargaining agreement with its pilots, represented by ALPA, became amendable. In February 2018, the pilot group voted to approve a new five-year agreement with the Company. In connection with the new agreement, the Company recorded a one-time ratification incentive of $80.7 million, including payroll taxes, and an $8.5 million adjustment related to other contractual provisions. These amounts totaling $89.2 million were recorded in special charges within operating expenses in the condensed statements of operations for the six months ended June 30, 2018. For additional information, refer to Note 4, Special Charges.

In June 2018, the NMB notified the Company that the TWU filed an application seeking a representation election for the Company's passenger service agents. The NMB determined that a representation election would be held and the voting period

for the election took place through September 4, 2018. The Company’s passenger service agents voted to be represented by the TWU, but the representation applies only to the Company’s Fort Lauderdale station where the Company has direct employees in the passenger service classification. The Company and the TWU began meeting in late October 2018 to negotiate an initial collective bargaining agreement. As of June 30, 2019, the Company continued to negotiate with the TWU.

The Company is self-insured for healthcare claims, up to a stop-loss amount for eligible participating employees and qualified dependent medical claims, subject to deductibles and limitations. The Company’s liabilities for claims incurred but not reported are determined based on an estimate of the ultimate aggregate liability for claims incurred. The estimate is calculated from actual claim rates and adjusted periodically as necessary. The Company has accrued $5.0 million and $4.4 million in health care claims as of June 30, 2019 and December 31, 2018, respectively.


11.	Fair Value Measurements

Under ASC 820, "Fair Value Measurements and Disclosures," disclosures relating to how fair value is determined for assets and liabilities are required, and a hierarchy for which these assets and liabilities must be grouped is established, based on significant levels of inputs, as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes several valuation techniques in order to assess the fair value of the Company’s financial assets and liabilities.

Fuel Derivative Instruments

From time to time, the Company may enter into fuel derivative contracts in order to mitigate the risk of future volatility in fuel prices. The Company’s fuel derivative contracts generally consist of jet fuel swaps and jet fuel options. These instruments are valued using energy and commodity market data, which is derived by combining raw inputs with quantitative models and processes to generate forward curves and volatilities.

The Company utilizes the market approach to measure fair value for its fuel derivative instruments, if any. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The Company has not historically elected hedge accounting on its fuel derivative instruments, if any. As a result, the Company would record the fair value adjustment of any fuel derivatives in the accompanying condensed statements of operations within aircraft fuel and on the condensed balance sheets within prepaid expenses and other current assets or other current liabilities, depending on whether the net fair value of the derivatives is in an asset or liability position as of the respective date. Fair values of any fuel derivative instruments are determined using standard option valuation models. The Company also considers counterparty risk and its own credit risk in its determination of all estimated fair values. The Company offsets fair value amounts recognized for any derivative instruments executed with the same counterparty under a master netting arrangement. The Company determines fair value of any jet fuel options utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it may hold.

The fair value of the Company's jet fuel swaps, if any, are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company categorizes these instruments as Level 2. Due to the fact that certain inputs utilized to determine the fair value of jet fuel options are unobservable (principally implied volatility), the Company categorizes these derivatives as Level 3. Implied volatility of a jet fuel option is the volatility of the price of the underlying commodity that is implied by the market price of the option based on an option pricing model. Thus, it is the volatility that when used in a particular pricing model yields a theoretical value for the

option equal to the current market price of that option. Implied volatility, a forward-looking measure, differs from historical volatility because the latter is calculated from known past returns. At each balance sheet date, the Company substantiates and adjusts unobservable inputs. The Company routinely assesses the valuation model's sensitivity to changes in implied volatility. As of June 30, 2019 and December 31, 2018, the Company had no outstanding jet fuel derivatives.

Long-Term Debt

The estimated fair value of the Company's term loan debt agreements and revolving credit facility have been determined to be Level 3 as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes a discounted cash flow method to estimate the fair value of the Level 3 long-term debt. The estimated fair value of the Company's publicly and non-publicly held EETC debt agreements has been determined to be Level 2 as the Company utilizes quoted market prices in markets with low trading volumes to estimate the fair value of its Level 2 long-term debt.

The carrying amounts and estimated fair values of the Company's long-term debt at June 30, 2019 and December 31, 2018 were as follows:

June 30, 2019

December 31, 2018

Fair Value Level Hierarchy

Carrying Value

Estimated Fair Value

Carrying Value

Estimated Fair Value

(in millions)