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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-02-27 · 159 added, 183 removed, 105 unchanged (77% of the section changed)

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The following discussion and analysis presents factors that had a material effect on our results of operations during the years ended December 31, 2020 and 2019.

Unless otherwise expressly stated, for discussion and analysis of 2018 and a comparison of our 2019 results to 2018 results, please refer to our Annual Report on Form 10-K for the year ended December 31, 2019, under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Also discussed is our financial position as of December 31, 2020 and 2019.

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2020 Highlights

Achieved improved operating performance both in industry leading controllable completion of over 99.9 percent, and on-time performance of 78.7 percent (a 1.8 percentage point improvement year over year) - with both contributing to a significant reduction in irregular operations costs;

achieved airline-only operating margin of 21.3 percent, a 5.9 percentage point increase year over year;

realized operating revenue growth of 10.4 percent, which outpaced our increase in capacity of 8.6 percent;

increased TRASM 1.6 percent year over year, despite the increase in capacity;

recognized ancillary air-related revenue per passenger exceeding $50 each quarter during the year, with an average of $51.96 for 2019 (a 13.7 percent increase year over year);

achieved a 3.3 percent decline in airline operating CASM-excluding fuel;

produced fixed fee contract revenue of $65.1 million during 2019, the highest annual total in Company history;

refinanced high-yield debt;

named Best Airline Co-Branded Credit Card by the USA Today 10Best Readers Choice Awards;

increased net promoter score (an indicator of customer satisfaction) by 32 points since 2016;

ranked as one of the Top 100 Best Places to Work according to Glassdoor's national survey;

began construction of, and obtained debt commitment for, Sunseeker Resort in Southwest Florida.

The 2020 year was dominated by the COVID-19 pandemic resulting in unprecedented flight cancellations, large capacity and load factor reductions across the industry and billions of dollars of losses for the industry.

– Our focus on health and safety measures ranked us as the #1 airline among North American carriers and among the top five worldwide for best COVID-19 Traveler Safety Measures by Safe Travel Barometer in August 2020;

– Total sources of liquidity received during full year 2020 were $724 million;

– Received $154 million in grants related to the CARES Act payroll support program and $94 million in tax refunds related to net operating loss carrybacks;

– Issued $150 million in senior secured notes, $115 million in secured financings backed by aircraft and engines, $100 million upsize of our Term Loan, $88 million in proceeds from sale leasebacks and $23 million in proceeds from notes related to the payroll support program;

– Total debt increased $237 million versus year end 2019 with debt, net of liquidity, as of December 31, 2020 at $974 million, roughly unchanged from December 31, 2019.

We repaid $182 million in net principal payments during 2020;

– Reported total revenue of $990 million, down 46 percent versus prior year, compared to reductions of between 53 percent and 70 percent for the other eight U.S.

publicly held airlines with whom we compare ourselves;

– Reduced full year capacity by 18.8 percent, compared to capacity reductions of between 34 percent and 63 percent for the other eight U.S.

publicly held airlines with whom we compare ourselves, with reported load factors of 59.5 percent;

– Average total ancillary revenue per passenger (includes air-related and third party products) increased 3 percent versus 2019 to $58.46;

– Cost cutting measures in response to the pandemic generated a decrease in operating expenses (excluding special charges and the effect of payroll support) of 24.4 percent;

– ASMs per gallon of 87.8 , up 7 percent in 2020 versus 2019 due to reduced load factor of 24.4 percentage points and less airport and air traffic congestion;

– Named #1 airline co-branded credit card for second year in a row by the USA Today;

– Made Forbes’ Best Mid-Size Employers 2021 list

Health and Safety

Amid various uncertainties and public concern during the COVID-19 pandemic, we have implemented the below measures to ensure health and safety for all traveling on our flights.

Due to our focus on these health and safety measures, we were ranked by Safe Travel Barometer in August 2020 as the #1 airline among North American carriers and among the top five worldwide for best COVID-19 Traveler Safety Measures, with results based on an independent audit of more than 150 airlines.

– Maintain a comprehensive cleaning program for all aircraft that includes a regular schedule of standard and deep-clean procedures in line with both CDC and Airbus guidance

– Aircraft receive regular treatment with an advanced antimicrobial protectant that kills viruses, germs and bacteria on contact for 14 days

– Utilize VOC (volatile organic compound) filters on board every aircraft, which remove additional organic compounds and ensure that cabin air is changed, on average, every three minutes, exceeding HEPA standards

– Require customers to wear face coverings through all phases of travel, including at the ticket counter, in the gate area and during flight

– Complimentary health and safety kits, which include a single-use face mask and cleaning wipes, provided to all of our customers

– Crew members required to wear face masks on board and during any interaction with customers

– Social distancing principles at check-in, boarding and on-board, including limiting adjacent row seating and allowing only customers on the same itinerary to utilize middle seats as practicable

– Treat hard surfaces in all office areas, including airport station offices, maintenance facilities, headquarters/administrative offices, with antimicrobial disinfectant/protectant, and utilize wall-mounted and handheld thermometers for employee and crew member temperature checks

– Partner with Quest Diagnostics to provide at home COVID-19 test kits to employees in the event local testing is not immediately available

Operating Fleet

The following table sets forth the number and type of aircraft in service and operated by us as of the dates indicated.

All of the aircraft are owned by us except as indicated in the footnotes to the table:

As of December 31,

(1) Does not include four aircraft of which we have taken delivery as of December 31, 2019 .

(2) Includes five aircraft under finance lease as of December 31, 2019 .

(3) Does not include one aircraft of which we have taken delivery as of December 31, 2019 .

As of February 14, 2020 , we are party to forward purchase agreements for nine Airbus A320 series aircraft.

We have taken delivery of two aircraft in 2020 as of the date of this filing, expect delivery of six additional aircraft throughout the remainder of 2020, two in 2021, and one in 2022.

In early February 2020, the Company also received two aircraft under operating leases.

Refer to Part I - Item 2 - Properties for further detail regarding our aircraft fleet.

2020 2019 2018

Total 95 91 76

(1) Does not include two aircraft of which we have taken delivery as of December 31, 2020.

(2) Includes six aircraft under finance lease and seven aircraft under operating lease as of December 31, 2020.

(3) Includes four aircraft under operating lease as of December 31, 2020.

As of December 31, 2020, we are party to forward purchase agreements for five aircraft.

We have taken delivery of one aircraft in 2021 as of the date of this filing and expect delivery of three additional aircraft throughout the remainder of 2021 and one in 2022.

Refer to Part I - Item 2.

Properties for further detail regarding our aircraft fleet.

We continuously consider aircraft acquisitions on an opportunistic basis.

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We continually adjust our network through the addition of new markets and routes, adjusting the frequencies into existing markets, and exiting under-performing markets, as we seek to achieve and maintain profitability on each route we serve.

As of February 14, 2020 and including recent service announcements, we were selling seats on 521 routes.

This includes our recent announcement in January 2020 of 44 new routes - the largest service expansion in company history, plus an additional nine routes announced in February 2020.

The recent announcements include the addition of three new leisure destinations:

and Houston, TX.

As of February 12, 2021, and including recent service announcements, we were selling seats on 577 routes serving 129 cities in 44 states.

This includes our recent announcements through February 12, 2021.

The following table shows the number of leisure destinations and cities served as of the dates indicated (includes cities served seasonally):

As of December 31,

2020 2019 2018

Leisure destinations 28 27 23

Origination cities 96 97 98

Our transition to an all-Airbus fleet has proven successful as evidenced by continued positive operating results.

This more efficient and reliable fleet has enabled us to increase capacity by 8.6 percent during the year, despite a 5.9 percent decrease in average number of operating aircraft.

Fuel efficiency (ASMs per gallon of fuel) increased by 5.8 percent compared to 2018, which, along with a 6.4 decrease in fuel cost per gallon, was the main driver of a 4.5 percent decrease in operating CASM.

Airline-only CASM, excluding fuel, decreased 3.3 percent due to continued operational improvement and Airbus fleet maintenance efficiencies.

Operating expenses on an ASM basis decreased on every operating expense line item except depreciation and amortization, for which the declines are largely attributable to our transition to an all-Airbus fleet.

Recent years have been capital and debt intensive for us due to the fleet transition.

Capital outlays for the airline are expected to return to a more normalized level in 2020.

During 2019 we achieved industry-leading controllable completion of over 99.9 percent, and on-time performance (A-14) of 78.7 percent, up 1.8 percentage points from 2018, despite growth in ASM production and a fewer average number of operating aircraft in service.

In March 2018, our maintenance technicians, who represent approximately 8.0 percent of our total employee base (approximately 350 employees), voted for union representation by the International Brotherhood of Teamsters ("IBT").

Negotiations for an agreement with this group began in January 2019 and are ongoing.

Any labor actions whether following an inability to reach a collective bargaining agreement with any employee group or otherwise could impact our operations during the continuance of any such activity.

Total cities 124 124 121

Total routes 497 466 417

The COVID-19 pandemic and shelter-in-place directives have greatly impacted our operating results for the year ended December 31, 2020 and will continue to do so into the future.

Air traffic demand is down substantially and base air fares are down as well.

We cannot predict when air travel will return to customary levels or at what pace.

In the meantime, our revenues will be adversely affected.

We believe that demand in the foreseeable future will continue to fluctuate in response to fluctuations in COVID-19 cases, new variations of the virus, hospitalizations, deaths, treatment efficacy and the availability and delivery of vaccines.

Despite the pandemic and airline industry challenges, since the beginning of 2021 and through February 12, 2021, we have announced service on 64 new routes and to three new cities, including seasonal and temporary routes.

We will continue to manage capacity to meet demand, which we believe is a core strength of our business model.

Our primary focus at the current time has been to conserve cash.

We have reduced management and support teams by roughly 300 positions.

We have suspended payment of cash dividends and stock buybacks.

We have suspended construction of the Sunseeker Resort in Southwest Florida and closed and disposed of our family entertainment centers.

We have eliminated other nonessential expenditures and have renegotiated arrangements with outside vendors, all in an effort to conserve cash until revenues more fully recover.

In March 2018, our maintenance technicians and related employees, who represent approximately 10 percent of our total employee base (approximately 413 employees), voted for union representation by the International Brotherhood of Teamsters ("IBT").

Negotiations for an initial collective bargaining agreement with this group began in January 2019 and are ongoing.

Any labor actions following an inability to reach a collective bargaining agreement with an employee group could impact our operations during the continuance of any such activity.

Any labor agreement reached following negotiations would also likely increase our operating costs.

The construction of our Sunseeker Resort is well underway, with a plan to open in the second quarter 2021.

To ready ourselves for opening, we have opened our Sunseeker Resort website for the sale of rooms for stays beginning in summer 2021.

We are in negotiations for the sale of Teesnap.

The collective bargaining agreement with our pilots becomes amendable in August 2021 and we expect to begin negotiations for a successor agreement with that labor group as the year progresses.

Due to the various impacts of COVID-19, we suspended construction of Sunseeker Resort and temporarily closed operation of Kingsway Golf Course.

At this time, it is uncertain when construction will resume and when the golf course will re-open.

Our Operating Expenses

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Salary and benefits expense includes wages, salaries, and employee bonuses, sales commissions for in-flight personnel, as well as expenses associated with employee benefit plans, stock compensation expense related to equity grants, and employer payroll taxes.

The CARES Act employee retention tax credit is recorded as an offset to salary and benefits expense.

Station operations expense includes the fees charged by airports for the use or lease of airport facilities and fees charged by third party vendors for ground handling services, commissary expenses and other related services.

Depreciation and amortization expense includes the depreciation of all owned fixed assets, including aircraft and engines.

Depreciation and amortization expense includes the depreciation of all owned fixed assets and the amortization of assets recorded in connection with a finance lease, including aircraft and engines.

Also included is the amortization of major maintenance expenses on our Airbus A320 series aircraft and engines, which are capitalized under the deferral method of accounting and amortized as a component of depreciation and amortization expense over the estimated period until the next scheduled major maintenance event.

Maintenance and repairs expense includes all parts, materials and spares required to maintain our aircraft as well as major maintenance costs for our MD-80 aircraft (which have all been retired as of the end of November 2018).

Maintenance and repairs expense includes all parts, materials and spares required to maintain our aircraft.

Also included are fees for repairs performed by third party vendors.

Sales and marketing expense includes all advertising, promotional expenses, sponsorships, travel agent commissions and debit and credit card processing fees associated with the sale of scheduled service and air-related ancillary charges.

Aircraft lease rentals expense consists of the cost for sub-service which may be contracted out in conjunction with operational disruptions.

Aircraft lease rentals expense consists of the cost of leasing aircraft under operating leases with third parties as well as the cost for sub-service which may be contracted out in conjunction with operational disruptions.

Other expense includes travel and training expenses for crews and ground personnel, facility lease expenses, professional fees, personal property taxes, information technology consulting, non-salary expenses for non-airline initiatives (including Teesnap, Sunseeker Resort - Charlotte Harbor, and our Allegiant Nonstop family entertainment centers), the cost of passenger liability insurance, aircraft hull insurance and all other insurance policies excluding employee welfare insurance.

Additionally, this expense includes loss on disposals of aircraft and other equipment disposals, and all other administrative and operational overhead expenses not included in other line items above.

Special charge includes the non-cash impairment charge taken in 2017 on our MD-80 series aircraft, engines and related assets.

CARES Act grant recognition includes the portion of government payroll support that represents a direct grant and is recognized as a credit to operating expense on the statement of income.

Special charges include non-cash impairment charges taken in 2020 on the long-lived assets of our subsidiaries including Sunseeker Resort, Allegiant Nonstop, Teesnap and on an investment in a third party as well as other charges specifically related to COVID-19 including the non-operating special charges related to the termination of the loan agreement with Sixth Street Partners (formerly TSSP) intended to finance the development of Sunseeker Resort Charlotte Harbor.

RESULTS OF OPERATIONS

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Passenger revenue.

Passenger revenue for 2019 increased 9.7 percent compared with 2018 .

The increase was driven primarily by a 9.5 percent increase in scheduled service departures which resulted in an 8.9 percent increase in scheduled service passengers.

Average total fare per passenger increased 1.1 percent over 2018 as a 13.7 percent increase in air-related ancillary revenue per passenger (due mostly to increases in our customer convenience fees and baggage fees) more than offset an 8.1 percent decrease in scheduled service average fare.

Passenger revenue for 2020 decreased 46.4 percent compared with 2019.

The decrease was driven by a 42.3 percent decrease in scheduled service passengers.

This decline was due to a dramatic decline in passenger demand, government travel restrictions, and quarantine requirements related to COVID-19.

We reduced our scheduled service capacity by 17.6 percent during 2020, in response to passenger demand trends.

Average total passenger fare (includes scheduled service and air ancillary) decreased 6.2 percent year over year, driven by a 14.8 percent decrease in scheduled service average base fare also due to lower passenger demand.

Third party products revenue.

Third party products revenue increased 20.6 percent in 2019 from 2018 , due primarily to an increase in revenue from our co-branded credit card program, with a 43.7 percent increase per passenger year over year.

Additionally, a 12.2 percent net revenue growth from hotel and rental car sales contributed to the increase.

Third party products revenue decreased 33.6 percent in 2020 from 2019.

This is primarily due to decreased net revenue from both rental cars and hotels, as a result of substantially fewer passengers and with respect to hotel room revenue, particularly reductions in those traveling to Las Vegas.

Fixed fee contract revenue.

Fixed fee contract revenue for 2019 increased 29.4 percent compared with 2018 primarily due to a 28.6 percent increase in related departures.

This was the result of greater availability of dedicated aircraft due to improved operations of an all-Airbus fleet, reduced sparing requirements for scheduled service flights, and focused efforts to pursue this revenue stream.

Fixed fee contract revenue for 2020 decreased 58.7 percent year over year due to a decrease in demand.

Departures decreased 45.7 percent resulting from a significant drop in ad hoc charter opportunities in 2020.

The decrease in fixed fee revenue is attributable to COVID-19.

Other revenue .

Other revenue for 2019 decreased $2.5 million , primarily due to a decrease in aircraft lease revenue, as we had ten aircraft on lease to a European carrier in 2018, of which we took redelivery throughout 2018.

The effects of this decrease were slightly offset by increases in revenue from our non-airline activities.

Other revenue decreased $8.4 million year over year.

The decrease was due to decreased activity in the non-airline segments.

Operating Expenses

The following table presents airline-only unit costs on a per ASM basis, defined as Operating CASM, for the indicated periods.

The following table presents operating unit costs on a per ASM basis, defined as Operating CASM, for the indicated periods.

Excluding fuel on a per ASM basis provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility.

Both the cost and availability of fuel are subject to many economic and political factors beyond our control.

For the Year Ended December 31,

Airline only unitized costs (in cents)

For the Year Ended December 31, Percent

Consolidated unitized costs (in cents) 2020 2019 Change

Salary and benefits 2.88 2.78 3.6 %

Station operations

Depreciation and amortization

Maintenance and repairs

Sales and marketing

Aircraft lease rentals

Airline only CASM, excluding fuel

Aircraft fuel 1.69 2.65 (36.2)

Airline only CASM

Consolidated CASM (in cents)

Airline only CASM

Non-airline operating CASM (1)

Operating CASM (consolidated) (1)

(1) Includes operating costs associated with Sunseeker Resort and other non-airline related activity which are accounted for in our income statement in salary and benefits, sales and marketing, depreciation and amortization, and other expense.

Various components of this measure do not have a direct correlation to ASMs but must be included to calculate total operating CASM.

Consolidated operating CASM is reported to facilitate comparison with airlines reporting total costs on a per ASM basis.

Salary and benefits expense.

Salary and benefits expense for 2019 increased $36.6 million , or 8.8 percent , compared with 2018 .

The increase was primarily the result of an 11.8 percent increase in the number of full-time equivalent employees supporting an 8.0 percent increase in system block hours, as well as increased activity in our non-airline subsidiaries.

A nearly 80 percent increase in our company-wide profit sharing payments (due to meeting company goals) also contributed to the increase.

Additionally, flight crew salaries and wages per ASM decreased for the year due to improved productivity efficiencies gained from our fleet transition.

Aircraft fuel expense.

System fuel gallons consumed increased only 2.6 percent despite an 8.6 percent increase in ASMs in 2019 compared with 2018.

ASM growth outpaced fuel consumption as fuel efficiency (measured as ASMs per gallon) increased 5.8 percent year over year.

In addition, the system average fuel cost per gallon decreased by 6.4 percent year over year.

As a result of the increased fuel efficiency and fuel cost decline, aircraft fuel expense for 2019 decreased $18.0 million , or 4.0 percent .

Station operations expense.

Station operations expense for 2019 increased $10.4 million , or 6.5 percent , on a 9.5 percent increase in scheduled service departures compared with 2018 .

Stations expense per departure decreased by 2.5 percent year over year due mostly to a decrease in irregular operations costs resulting from efficiencies realized from the Airbus fleet, as well as additional incentives realized and contractor efficiencies gained.

Depreciation and amortization expense.

Depreciation and amortization expense for 2019 increased $26.5 million , or 20.5 percent , compared with 2018 .

The average number of Airbus aircraft in service increased 30.7 percent year over year.

Amortization of major maintenance costs was $26.0 million in 2019 compared to $12.5 million in 2018, with increases expected to continue as our Airbus aircraft count and related deferred maintenance costs grow.

Maintenance and repairs expense.

Maintenance and repairs expense for 2019 decreased $7.3 million , or 7.4 percent , compared with 2018 , primarily due to a decrease in routine maintenance costs driven by our predictive maintenance efforts.

Additionally, the cost of major maintenance being capitalized in accordance with the deferral method of accounting.

Sales and marketing expense.

Sales and marketing expense for 2019 increased $5.4 million , or 7.3 percent , compared to 2018 , due to an increase in net credit card fees paid as a result of a 9.7 percent increase in passenger revenue year over year.

We have improved our utilization of customer data to optimize marketing efforts, allowing us to decrease advertising spend per passenger (excluding credit card fees) by 8.2 percent year over year, despite increased payments on more high-profile sponsorships.

Income Tax Expense

Our effective tax rate was 22.9 percent and 18.8 percent for 2019 and 2018 , respectively.

The components of the 2019 effective tax rate were primarily 21 percent federal income tax and 1.7 percent state income taxes.

The 2018 effective tax rate was lower due to one-time tax benefits resulting from the “Tax Cuts and Jobs Act” (the “Tax Act”) enacted in 2017 (which impacted the 2017 income tax returns filed in 2018), a one-time tax refund claim, and the dissolution of foreign entities.

We expect our effective tax rate to be between 23 percent and 24 percent in the near term.

2018 compared to 2017

Operating Revenue

Passenger revenue.

Passenger revenue for these years was recast to include both scheduled service revenue and ancillary air-related revenue, due to the adoption of the New Revenue Standard.

Passenger revenue for 2018 increased 11.8 percent compared with 2017.

The increase was driven primarily by a 9.2 percent increase in scheduled service departures and a 1.0 percentage point increase in load factor, which resulted in a 12.1 percent increase in scheduled service passengers.

The higher number of passengers resulted in a year-over-year increase in ancillary revenue from products such as baggage, seat and convenience fees.

Third party revenue.

Ancillary third party revenue increased 10.2 percent in 2018 from 2017, due primarily to an increase in net revenue from rental cars resulting from the increase in scheduled service passengers.

Our co-branded credit card program also contributed to the revenue increase.

Fixed fee contract revenue.

Fixed fee contract revenue for 2018 increased 3.2 percent compared with 2017 due to an increase in ad-hoc charter flying as well as continued fixed fee flying for Apple Vacations and the Department of Defense.

Other revenue .

Other revenue for 2018 decreased $12.4 million, primarily as 12 aircraft generating lease revenue from a European carrier during 2017 were redelivered to us throughout 2017 and 2018.

The effects of this decrease were partially offset by increases in revenue from our golf course management solution as well as revenue generated from the leasing of spare RB-211 engines.

Operating Expenses

The following table presents airline-only unit costs on a per ASM basis, defined as Operating CASM, for the indicated periods.

For the Year Ended December 31,

Airline only unitized costs (in cents)

Salary and benefits

Station operations

Depreciation and amortization 1.34 0.96 39.6

Station operations 1.10 1.06 3.8

Maintenance and repairs 0.49 0.57 (14.0)

Sales and marketing 0.33 0.49 (32.7)

Aircraft lease rentals

Special charge (1)

Airline only CASM, excluding fuel

Aircraft fuel

Airline only CASM

Consolidated CASM (in cents)

Airline only CASM

Non-airline operating CASM (2)

Operating CASM (consolidated) (2)

(1) $35.3 million impairment charge on MD-80 fleet in 2017.

(2) Includes operating costs associated with Sunseeker Resort and other non-airline related activity which are accounted for in our income statement in salary and benefits, sales and marketing, depreciation and amortization, and other expense.

Various components of this measure do not have a direct correlation to ASMs but must be included to calculate total operating CASM.

Consolidated operating CASM is reported to facilitate comparison with airlines reporting total costs on a per ASM basis.

Aircraft lease rentals 0.07 — NM

Other 0.61 0.62 (1.6)

CARES Act grant recognition (1.16) — NM

Operating Special charges 2.33 — NM

CASM 9.68 9.13 6.0 %

Operating CASM, excluding fuel 7.99 6.48 23.3

Salary and benefits expense.

Salary and benefits expense for 2018 increased $42.3 million, or 11.4 percent, compared with 2017.

The increase was primarily the result of a 4.0 percent increase in the number of full-time equivalent employees as well as an 8.3 percent increase in system block hours.

Salary and benefits expense for 2020 decreased $72.6 million, or 16.1 percent, compared with 2019.

Although the average number of full-time equivalent employees was relatively flat year over year, overall expense decreased due to temporary voluntary leave programs offered to employees, voluntary pay reductions, suspension of the bonus accrual during the year, and recognition of the $13.0 million CARES Act employee retention tax credit .The number of full-time equivalent employees as of December 31, 2020 was down 11.5 percent from December 31, 2019 as a result of staff reductions in the fourth quarter.

Aircraft fuel expense.

Aircraft fuel expense for 2018 increased $102.5 million, or 29.8 percent, compared with 2017 as the system average fuel cost per gallon increased by 26.6 percent, coupled with a 2.6 percent increase in system fuel gallons consumed on a 9.5 percent increase in system ASMs.

ASM growth outpaced fuel consumption as fuel efficiency (measured as ASMs per gallon) increased 6.7 percent year over year due to increased flying on our Airbus aircraft which are more fuel efficient than our MD-80 aircraft.

Aircraft fuel expense decreased $206.0 million, or 48.2 percent in 2020 compared to 2019, largely due to a decrease in system average fuel cost per gallon of 32.1 percent year over year as fuel prices declined due to lower worldwide demand caused by the pandemic.

System fuel gallons consumed decreased by 23.9 percent on a 18.8 percent decrease in ASMs as we reduced capacity in light of the pandemic.

Fuel efficiency (measured as ASMs per gallon) increased 6.6 percent year over year due to reduced load factor of 24.4 percentage points and less air traffic congestion at airports.

Station operations expense.

Station operations expense for 2018 increased $18.4 million, or 12.9 percent, on a 9.2 percent increase in scheduled service departures compared with 2017.

The increase in expense outpaced the increase in departures due primarily to rate increases, including landing and ground handling fees, at our larger airports which tend to be more expensive.

Airport expense is viewed as a key factor when considering new market entrance.

Station operations expense for 2020 decreased $26.6 million, or 15.5 percent, on a 19.3 percent decrease in scheduled service departures as we reduced the number of flights offered due to reduced demand.

Depreciation and amortization expense.

Depreciation and amortization expense for 2018 increased $7.6 million, or 6.3 percent, compared with 2017, partially related to a 4.2 percent increase in the average number of aircraft in service as we continued to add Airbus aircraft into our fleet.

Depreciation expense for the Airbus fleet was $85.3 million in 2018 compared to $56.8 million in 2017 as a result of the addition of 24 Airbus aircraft during the year.

Amortization of major maintenance costs under the deferral method of accounting for the Airbus aircraft was $12.5 million for 2018 compared to $6.7 million for 2017 due to the growing number of Airbus aircraft in service and related scheduled major maintenance events.

No depreciation expense was recognized in 2018 for our MD-80 fleet as an impairment charge was taken in the fourth quarter 2017 which reduced the carrying value of this fleet to zero.

Depreciation expense for our MD-80 fleet and related assets in 2017 was $20.9 million.

Our remaining Boeing 757-200 aircraft and related assets were retired in 2017.

Depreciation and amortization expense for 2020 increased $20.4 million, or 13.1 percent, as the average number of aircraft in service increased 13.8 percent year over year.

Accounting for a large portion of this increase, amortization of major maintenance costs was $37.6 million for 2020 compared to $26.0 million for 2019, due to an increase in the number of aircraft and related deferred maintenance costs associated with them.

We expect these costs will continue to increase as our fleet ages.

Maintenance and repairs expense.

Maintenance and repairs expense for 2020 decreased $27.8 million, or 30.3 percent, compared with 2019.

The year-over-year decrease is partially due to fewer heavy maintenance events performed on our MD-80 series aircraft, as they were systematically retired from our operating fleet throughout 2018.

The cost of major maintenance events for our Airbus aircraft was capitalized in accordance with the deferral method of accounting and the amortization of these expenses was included under depreciation and amortization expense.

Routine maintenance costs decreased as aircraft utilization was down 26.3 percent during the year.

Sales and marketing expense.

Sales and marketing expense for 2018 increased $16.8 million, or 29.7 percent, compared to 2017, partly due to an increase in net credit card fees paid as a result of an 11.8 percent increase in passenger revenue year

There were also increased expenses related to various marketing initiatives, including our multi-year partnerships with the Vegas Golden Knights and Minor League Baseball.

Other expense.

Other expense for 2018 increased by $7.7 million, or 8.3 percent, compared with 2017.

The increase was primarily due to information technology administration expenses, as well as other expenses incurred to support our airline operations and non-airline initiatives.

Sales and marketing expense for 2020 decreased $35.4 million, or 44.9 percent, compared to 2019, due to a decrease in net credit card fees paid as a result of a 46.4 percent decrease in passenger revenue year over year.

Other operating expense.

Other expense decreased $21.6 million in 2020 compared to 2019, mostly due to decreased activity in our non-airline subsidiaries.

CARES Act grant recognition.

We received a total of $176.9 million in funds during 2020 through the Payroll Support Program Agreement (the “PSPA”) under the CARES Act.

Of the total, $152.4 million of these funds relate to direct grants, and were recognized as a credit to operating expense on our statement of income during 2020.

Operating special charges.

Special charges of $306.3 million were recorded within operating expenses in 2020.

We did not have any special charges in 2019.

The special charges relate to expenses that were unique and specific to COVID-19.

These charges include impairment charges, accelerated depreciation on airframes and engines resulting from an accelerated retirement plan, losses on the sale-leaseback transactions, a portion of salary and benefits expense in relation to the elimination of positions as well as the acceleration of certain existing stock awards, and impairments within our non-airline subsidiaries.

See Note 2 of Notes to Consolidated Financial Statements for further information.

Non-operating special charges

Special charges of $26.6 million were recorded within non-operating expenses for 2020.

We did not have any special charges in 2019.

The non-operating special charges include payments to terminate the loan agreement with Sixth Street Partners (formerly TSSP) intended to finance the development of Sunseeker Resort Charlotte Harbor.

The termination resulted from the suspension of construction due to the pandemic.

Income Tax Expense

Our effective tax rate was 18.8 percent and 0.4 percent for 2018 and 2017, respectively.

The increase in the effective tax rate year over year was primarily due to a $74.7 million one-time tax benefit related to the remeasurement of deferred tax balances recognized in 2017 per the Tax Act.

We recorded a $176.9 million tax benefit (49.0 percent effective tax rate) compared to a $69.1 million tax provision (22.9 percent effective tax rate) for 2020 and 2019, respectively.

The 49.0 percent effective tax rate for 2020 differed from the statutory federal income tax rate of 21.0 percent primarily due to the tax accounting impact of the CARES Act which includes a $98.0 million federal income tax benefit related to the full utilization of 2018 and 2019 net operating losses as well as the ability to carryback a majority of the 2020 net operating loss at the 35.0 percent tax rate applicable in earlier years.

The effective tax rate was also impacted by the remeasurement of deferred taxes and state taxes.

We expect our effective tax rate to be between 23 percent and 24 percent in the near term.

2019 compared to 2018

The comparison of our 2019 results to 2018 results is included in our Annual Report on Form 10-K for the year ended December 31, 2019, under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and investment securities (short-term and long-term) increased at December 31, 2019 to $473.4 million from $447.5 million in 2018 .

Cash, cash equivalents and investment securities (short-term and long-term) increased at December 31, 2020 to $685.2 million from $473.4 million at December 31, 2019.

Investment securities represent highly liquid marketable securities which are available-for-sale.

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The prepayments are escrowed until the flight is completed and are recorded as restricted cash with a corresponding amount reflected as air traffic liability.

Our operating cash flows, long-term debt borrowings and non-cash tax paying status have allowed us to invest in our fleet, return capital to shareholders in the form of recurring regular quarterly dividends and share repurchases, and invest in Sunseeker Resort and our Allegiant Nonstop family entertainment centers.

Future capital needs are primarily for the acquisition of additional aircraft, including our existing aircraft commitments, as well as planned capital outlay related to Sunseeker Resort and other travel and leisure initiatives.

We believe we have more than adequate liquidity resources through our operating cash flows, borrowings, debt commitments and cash balances, to meet our future contractual obligations.

We have suspended share repurchases and our quarterly cash dividend, as part of cash conservation efforts in response to the effects of COVID-19 on our business.

In connection with our receipt of financial support under the payroll support programs with the Treasury, we agreed not to repurchase shares or pay cash dividends through March 31, 2022.

We also suspended all non-airline capital expenditures and reduced airline capital expenditures in 2020 .

We received $94 million in tax refunds in 2020 related to net operating loss carrybacks and expect to receive in 2021 $147 million in federal income tax refunds related to 2019 and 2020 net operating losses and $29 million in various other tax refunds.

We believe we have more than adequate liquidity resources through our operating cash flows, borrowings, cash balances, Treasury payroll support programs and tax refunds to meet our future contractual obligations and availability of credit which could be secured by unencumbered aircraft.

We will continue to consider raising funds through debt financing on an opportunistic basis.

In addition to our recurring quarterly cash dividend, our current share repurchase authority is $85.3 million .

There is no expiration date for the program.

Our total long-term debt and finance lease obligations balance, without reduction for related issuance costs, increased from $1.45 billion as of December 31, 2019 to $1.68 billion as of December 31, 2020.

During 2019, we borrowed $874.9 million , including $450.0 million under the Credit and Guaranty Agreement (the “Term Loan”), additional debt secured by aircraft and engines of $343.9 million , and $81.0 million against our senior secured revolving credit facility.

During 2019, we retired our unsecured notes of $450.0 million and made additional debt and finance lease repayments, resulting in $705.8 million in total principal debt and finance lease repayments during 2019.

As of February 13, 2020, we entered into an amendment to our Term Loan under which the interest rate has been reduced by 150 basis points, the principal amount of the debt was increased by $100.0 million to $545.5 million , and the quarterly payments of principal were increased to $1.4 million .

During 2020, we borrowed $428.0 million, including a $100.0 million up-size under the Credit and Guaranty Agreement (the “Term Loan”), $150.0 million 8.5% Senior Secured Notes due 2024, senior unsecured term promissory note to the US treasury (the "PSP Note") of $23.0 million, and additional debt secured by aircraft and engines of $115.0 million.

During 2020, we made $181.9 million in net principal and finance lease repayments.

In October 2020, we closed on the private offering of $150.0 million principal amount of 8.5% Senior Secured Notes due 2024.

The Senior Secured Notes and related guarantees are secured by first priority security interests in substantially all of our property and assets and the guarantors of the Notes (excluding aircraft, aircraft engines and certain other assets).The guarantors of the Senior Secured Notes include all significant subsidiaries other than Sunseeker Resorts, Inc.

and its subsidiaries

In February 2020, we entered into an amendment to our Term Loan under which the interest rate was reduced by 150 basis points, the principal amount of the debt was increased by $100.0 million to $545.5 million, and the quarterly payments of principal were increased to $1.4 million.

The remaining provisions of the Term Loan remain substantially unchanged, including the maturity date of February 2024.

The proceeds from the increased loan will be used to repay debt, to pay transaction expenses and for general corporate purposes.

In March 2019, we entered into a Construction Loan Agreement with certain lenders affiliated with TPG Sixth Street Partners, LLC under which we may borrow up to $175.0 million to fund the completion of construction of Phase 1 of Sunseeker Resort - Charlotte Harbor.

No amount under this loan agreement has been drawn to date as we are required to first fund $295.0 million of the $470.0 million estimated total construction costs.

In September 2020, we borrowed $84.0 million under a loan agreement secured by aircraft and spare engines.

The notes bear interest at a fixed rate, payable in monthly installments maturing in September 2025 and September 2026 for the spare engines and aircraft, respectively.

In April 2020, we borrowed $31.0 million under a loan agreement secured by two aircraft.

The note bears interest at a fixed rate, payable in quarterly installments with a maturity date in April 2028.

Sources and Uses of Cash

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During 2020, our operating activities provided $234.6 million of cash compared to $442.2 million during 2019.

The increase is largely due to a $ 70.3 million increase in net income in 2019.

The decrease in cash from operating activities is largely due to a $416.2 million decrease in net income offset by $292.8 million in non-cash special charges recognized in 2020.

During 2019, our operating activities provided $442.2 million of cash compared to $356.6 million in 2018.

The year-over-year decrease in reported cash inflows largely resulted from the decrease in net income.

The year-over-year increase in reported cash inflows largely resulted from the increase in net income.

Investing Activities.

During 2020, cash used for investing activities was $365.7 million compared to $476.5 million in 2019.

The increase in cash used is mostly due to a $ 172.1 million year-over-year increase in cash outlays for the purchase of property and equipment, as cash used for capital expenditures was $506.8 million in 2019 (of which $437.1 million related to the airline) compared to $334.8 million in 2018 (of which $285.9 million related to the airline).

Furthermore, the proceeds from maturities and sales of investment securities decreased year over year, as proceeds (net of purchases) were $18.6 million during 2019 compared to $65.1 million during 2018.

The use of cash for investing activities in 2019 was reduced by an $11.1 million difference in cash provided by other investing activities compared to 2018, largely related to proceeds received from the sales of MD-80 parts.

The decrease in cash used is mostly due to a $225.7 million year-over-year decrease in cash outlays for the purchase of property and equipment combined with $87.6 million in proceeds from sale-leaseback transactions offset by purchases of investment securities (net of proceeds from maturities and sales) of $200.6 million.

Cash used for capital expenditures was $281.2 million in 2020 (of which $262.7 million related to the airline) compared to $506.8 million in 2019 (of which $437.1 million related to the airline).

Purchases of investment securities (net of proceeds from maturities and sales) were $182.0 million during 2020 compared to $18.6 million of proceeds (net of purchases) during 2019.

During 2018, our primary use of cash was for capital expenditures of $334.8 million.

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Financing Activities.

Cash provided by financing activities during 2019 was $75.1 million compared to cash used in financing activities of $62.4 million in 2018 .

The year-over-year change is primarily due to debt financing.

In 2019 , proceeds from debt issuance in excess of principal payments on debt were $169.2 million , compared to principal payments on debt in excess of proceeds from debt issuance of $21.0 million during 2018 .

In 2017 , cash provided by financing activities was $222.1 million .

Proceeds from the issuance of long-term debt in excess of principal payments were $358.7 million , which was offset by $45.7 million in cash dividends paid to shareholders and $90.5 million in stock repurchases.

Cash provided by financing activities during 2020 was $164.6 million compared to $75.1 million in 2019.

The year-over-year change is primarily due to debt financing activity.

In 2020, proceeds from debt issuance in excess of principal payments and debt issuance costs on debt were $203.0 million, compared to $135.8 million during 2019.

In addition, cash dividends paid to shareholders decreased year over year from $45.6 million in 2019 to $11.4 million in 2020 as dividends were suspended after the first quarter 2020.

This decrease was offset by a year-over-year increase in the repurchase of common stock of $15.2 million, stock repurchases also having been suspended after the onset of the pandemic.

In 2018, cash used by financing activities was $62.4 million.

Principal payments on debt in excess of the proceeds from debt issuance were $21.0 million, combined with $45.2 million in cash dividends paid to shareholders, plus $3.7 million in stock repurchases.

OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The following table discloses aggregate information about our contractual cash obligations and off-balance sheet arrangements as of December 31, 2020 and the periods in which payments are due:

(in thousands)

Less than 1 year

More than 5 years

(in thousands) Total Less than 1 year 2-3 years 4-5 years More than 5 years

Long-term debt obligations (1)

$ 1,721,336 $ 263,336 $ 342,461 $ 906,224 $ 209,315

Aircraft acquisition obligations (2)

86,900 65,900 21,000 — —

Finance and operating lease obligations 302,330 35,926 80,884 58,576 126,944

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Affinity Credit Card Program

The Allegiant World Mastercard® is issued by Bank of America through which arrangement points are sold and consideration is received under an agreement with a seven year scheduled duration which expires in 2023.

The Allegiant World Mastercard® is issued by Bank of America through which arrangement points are sold and consideration is received under an agreement which, as amended in September 2020, expires in 2029.

Under this arrangement, we identified the following deliverables:

travel points to be awarded (the travel component), use of our brand and access to our member lists, and certain other advertising and marketing elements (collectively the marketing component).

Applying guidance under Accounting Standards Update (“ASU”) 2009-13 - Revenue Recognition (Topic 606):

Multiple-Deliverable Revenue Arrangements, each of these deliverables is accounted for separately and allocation of the consideration from the agreement is determined based on the relative selling price of each deliverable.

We applied a level of management judgment and estimation in determining the best estimate of selling price for each deliverable by considering multiple inputs and methods including, but

not limited to, the redemption value of points awarded, discounted cash flows, brand value, volume discounts, published selling prices, number of points to be awarded and number of points to be redeemed.

Revenue from the travel component is deferred based on its relative selling price and is recognized into scheduled service revenue when the points are redeemed by cardholders.

Each of these deliverables is accounted for separately and allocation of the consideration from the agreement is determined based on the relative selling price of each deliverable.

We applied a level of management judgment and estimation in determining the best estimate of selling price for each deliverable by considering multiple inputs and methods including, but not limited to, the redemption value of points awarded, discounted cash flows, brand value, volume discounts, published selling prices, number of points to be awarded and number of points expected to be redeemed.

Revenue from the travel component is deferred based on its relative selling price and is recognized into scheduled service revenue when the points are redeemed by cardholders and transportation is provided.

Revenue from the marketing component is considered earned in the period in which points are sold and is therefore recognized into third party products revenue in the same period.

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RECENT ACCOUNTING PRONOUNCEMENTS

See related disclosure in Note 2 of our Consolidated Financial Statements.

See related disclosure in Note 3 to our Consolidated Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis