Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. Investors should read this discussion in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this annual report. This discussion and analysis contains forward-looking statements. Please refer to the section entitled “Disclosure Regarding Forward-Looking Statements” at the beginning of this annual report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.
2020 Highlights
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
31
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
AIRCRAFT
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,
2020 2019 2018
A320 (1)(2)
61 54 44
A319 (3)
34 37 32
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.
NETWORK
We manage capacity and route expansion through optimization of our flight schedule to, among other things, better match demand in certain markets. 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 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):
32
As of December 31,
2020 2019 2018
Leisure destinations 28 27 23
Origination cities 96 97 98
Total cities 124 124 121
Total routes 497 466 417
TRENDS
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 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
A brief description of the items included in our operating expense line items follows.
Aircraft fuel expense includes the cost of aircraft fuel, fuel taxes, into plane fees and airport fuel flowage, storage or through-put fees.
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 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. Also included are fees for repairs performed by third party vendors.
33
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 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.
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
2020 compared to 2019
Operating Revenue
Passenger revenue. 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 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 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 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 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.
34
For the Year Ended December 31, Percent
Consolidated unitized costs (in cents) 2020 2019 Change
Salary and benefits 2.88 2.78 3.6 %
Aircraft fuel 1.69 2.65 (36.2)
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 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 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 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 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 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. Routine maintenance costs decreased as aircraft utilization was down 26.3 percent during the year.
Sales and marketing expense. 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
35
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
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, 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.
Restricted cash represents escrowed funds under fixed fee contracts and cash collateral against letters of credit required by hotel properties for guaranteed room availability, airports and certain other parties. Under our fixed fee flying contracts, we require our customers to prepay for flights to be provided by us. The prepayments are escrowed until the flight is completed and are recorded as restricted cash with a corresponding amount reflected as air traffic liability.
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.
Debt
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 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.
36
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
Operating Activities. Operating cash inflows are primarily derived from providing air transportation and related ancillary products and services to customers. During 2020, our operating activities provided $234.6 million of cash compared to $442.2 million during 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 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 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. Cash was also used for the purchase of investment securities, net of maturities, of $65.1 million.
Financing Activities. 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) 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
Total future payments under contractual obligations $ 2,110,566 $ 365,162 $ 444,345 $ 964,800 $ 336,259
(1) Long-term debt obligations (including variable interest entities) include scheduled interest payments, using LIBOR rates as of December 31, 2020, and excludes debt issuance costs.
(2) Includes aircraft and engine acquisition obligations under existing purchase agreements, which are not reflected on our balance sheet.
37
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements based on events and transactions occurring during the periods reported. Note 3 to our Consolidated Financial Statements provides a detailed discussion of our significant accounting policies.
Critical accounting policies are defined as those policies that reflect significant judgments about matters that are inherently uncertain. Our actual results may differ from these estimates under different assumptions or conditions. We believe our critical accounting policies are limited to those described below.
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 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). 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.
Accounting for Long-Lived Assets
We record impairment losses on long-lived assets used in operations, consisting principally of property and equipment, when events or changes in circumstances indicate, in management’s judgment, that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In making these determinations, we utilize certain assumptions, including, but not limited to: (i) estimated fair value of the assets; and (ii) estimated future cash flows expected to be generated by those assets which are based on additional assumptions such as (but not limited to) asset utilization, average fare, block hours, fuel costs, length of service the asset will be used in operations, and estimated salvage values.
In estimating the useful lives and residual values of our aircraft, we have primarily relied upon actual experience with the same or similar aircraft types, current and projected future market information, and recommendations from other industry sources. Subsequent revisions to these estimates could be caused by changing market prices of our aircraft, changes in utilization of the aircraft, and other fleet events. We evaluate these estimates used for each reporting period and adjust when deemed necessary. To the extent a change in estimate for useful lives or salvage values of our property and equipment occurs, there could be an acceleration of depreciation expense associated with the change in estimate. See Note 3 to the Consolidated Financial Statements for further detail.
Aircraft Maintenance and Repair Costs and Major Maintenance Deferral
We account for major maintenance costs of Airbus airframes and the related CFM engines using the deferral method. Under this method, the cost of major maintenance events is capitalized and amortized as a component of depreciation and amortization expense over the estimated period until the next scheduled major maintenance event. The timing of the next major maintenance event is estimated based on assumptions including estimated cycles, hours and months, required maintenance intervals, and the age/condition of related parts. These assumptions may change based on forecasted aircraft utilization changes, updates to government regulations, and manufacturer maintenance intervals, as well as unplanned incidents causing damage requiring a major maintenance event prior to a scheduled visit. If the estimated timing of the next maintenance event changes, the related amortization period would also change.
RECENT ACCOUNTING PRONOUNCEMENTS
See related disclosure in Note 3 to our Consolidated Financial Statements.
38