What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-01 · 188 added, 145 removed, 119 unchanged (74% of the section changed)

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2021 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

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

The 2021 year continued to be impacted by the COVID-19 pandemic resulting in load factor reductions and a higher than normal level of cancellations across the industry.

Despite the COVID challenges, highlights during the year included:

– Expanded the network by adding 111 new routes and eight new cities bringing total routes and cities served to 608 and 133 respectively as of December 31, 2021

– After the addition of Boeing 737 MAX aircraft, the list of potential incremental routes to add to the network will exceed 1,400

– Allegiant World Mastercard voted USA Today Readers' Choice Best Airline Co-Branded Credit Card for the third consecutive year

– Reported profitability in the second, third and fourth quarters 2021 after pandemic losses

– One of only a few domestic carriers to record a profitable year

– Successful equity offering completed in the second quarter of 2021 which resulted in the receipt of $335.1 million in cash

– Announced plans for a fully-integrated Commercial Alliance Agreement with Viva Aerobus

– Entered into an agreement with Boeing to purchase 50 737 MAX aircraft, powered by CFM LEAP 1-B engines, with deliveries beginning mid-2023

– Launched the Allways Rewards non-card loyalty program during the third quarter and ended 2021 with nearly 13 million members

– Partnered with Schneider Electric after the end of the year to help develop an ESG program.

– Included on Forbes' list of America's Best Employers for Diversity in 2021

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:

All of the aircraft in our fleet as of December 31, 2021 are owned by us except as indicated in the footnotes to the table:

As of December 31,

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Total 108 95 91

(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.

(1) Does not include nine aircraft of which we have taken delivery as of December 31, 2021 and were not in service as of that date.

Of the nine aircraft, two aircraft were acquired under operating leases and four were acquired under finance leases.

(2) Includes eleven aircraft under finance lease and eleven aircraft under operating lease as of December 31, 2021.

(3) Includes four aircraft under operating lease as of December 31, 2021.

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.

As of December 31, 2021, we are party to forward purchase agreements for 51 aircraft with one delivery expected in 2022, ten in 2023 and the remainder thereafter.

Additionally, we are party to finance leases of nine aircraft expected to deliver in 2022.

Refer to Part I - Item 2.

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Total routes 595 497 466

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.

The COVID-19 pandemic has significantly impacted our operating results for the years ended December 31, 2020 and 2021 and may continue to do so into the future.

We believe that demand in the foreseeable future will continue to fluctuate in response to fluctuations in COVID-19 cases, variants of the virus, hospitalizations, deaths, treatment efficacy, the availability of vaccines, CDC recommendations, and government restrictions.

Despite the pandemic and airline industry challenges, since the beginning of 2021 and through December 31, 2021, we have announced service on 111 new routes and to eight new cities, i n cluding 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.

Boeing Agreement

In December 2021, we signed an agreement with The Boeing Company to purchase 50 newly manufactured 737MAX aircraft scheduled to be delivered in 2023 to 2025 with options to purchase an additional 50 737’s.

We believe this new aircraft purchase is complimentary with our low cost strategy based on of our intent to retain ownership of the aircraft, the longer useful life for depreciation purposes, expected fuel savings and operational reliability from the use of these new aircraft.

We plan to continue to grow our aircraft fleet and route network and have executed agreements to acquire 69 incremental aircraft since January 1, 2021, of which 60 have yet to be delivered as of February 14, 2022.

Our future profitability will be affected by the success of our growth initiatives.

Noncontrollable and controllable factors have contributed to a higher than normal level of cancellations beginning in second quarter 2021 and have resulted in increased irregular operations costs.

The noncontrollable factors include labor shortages, weather, TSA delays generally and particularly at smaller airports, airport overcrowding and supply chain disruptions.

Controllable issues relate to various aspects of our operations as we had to readjust to providing peak capacity while also facing a number of external issues as indicated above.

We believe these issues are not unique to Allegiant nor do we believe they are systemic.

Our irregular operations costs are also impacted by our policy to compensate passengers for their inconvenience in addition to the ticket price, which we believe is unique and incremental to what other airlines provide on cancellations.

We are investing incrementally in our operations in an attempt to improve performance and this may put pressure on unit costs in the near term.

However, if these problems persist, we may suffer reputational damage and incur higher costs for irregular operations.

Union Negotiations

The collective bargaining agreement with our pilots is currently amendable and the parties have begun to discuss the terms of a new labor agreement for this work group.

The terms of any new collective bargaining agreement will impact our costs over the term of the contract.

Aircraft Fuel

The cost of fuel is volatile, as it is subject to many economic and geopolitical factors we can neither control nor predict.

Significant increases in fuel costs could materially affect our operating results and profitability.

We have not sought to use financial derivative products to hedge our exposure to fuel price volatility, nor do we have any plans to do so in the future.

Engagement of Schneider Electric as ESG Consultant

We have entered into a three-year partnership with Schneider Electric to help us develop an Environmental, Social and Governance (ESG) program including:

– Identifying and prioritizing relevant ESG topics through a materiality assessment

– Establishing ESG goals and environmental goal achievement plans

– Developing an inaugural ESG report referencing the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) frameworks

– Providing ongoing carbon emissions reporting of Scope 1, 2 and 3 greenhouse gas (GHG) emissions

– Supporting the communications efforts around our ESG program

Viva Aerobus Alliance

In December 2021, we announced plans for a fully-integrated commercial alliance agreement with Viva Aerobus, designed to expand options for nonstop leisure air travel between our markets in the United States and Mexico.

We and Viva Aerobus have

submitted a joint application to the DOT requesting approval of and antitrust immunity for the alliance.

The transactions are also subject to clearance by the Mexican Federal Economic Competition Commission.

We and Viva Aerobus currently expect to offer flights under the alliance beginning in the first quarter of 2023, pending governmental approval of the applications.

Sunseeker Resort

We recommenced the construction of our Sunseeker Resort in Southwest Florida in August 2021.

In October 2021, we entered into a credit agreement with affiliates of Castlelake L.P.

to finance up to $350 million of the remaining construction cost.

With this funding, we expect to open the Resort in early 2023.

Our Operating Expenses

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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.

Salaries 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 salaries and benefits expense.

Depreciation and amortization expense includes the depreciation of all owned fixed assets and 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.

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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.

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, Sunseeker Resort - Charlotte Harbor, and the now discontinued Allegiant Nonstop family entertainment centers and Teesnap), 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.

Payroll Support Programs 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 taken in 2021 include charges specifically related to COVID-19.

See Note 2 to the Consolidated Financial Statements for further information.

RESULTS OF OPERATIONS

2021 compared to 2020

Operations during 2020 consisted of two months of pre-pandemic activity and the period from March 2020 through December 2020 which was substantially impacted by the pandemic.

The comparisons below of the results for 2021 and 2020 should be read with this in mind.

As comparisons of our 2021 results to 2020 reflect disproportionate changes due to the impact of the pandemic on air travel, we have also provided analysis of certain revenue and expense line items to 2019 results where helpful to understand trends in our performance.

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.

Passenger revenue increased 75.0 percent in 2021 compared with 2020.

The increase was primarily attributable to the effects of COVID-19 in 2020, where a significant decline in passenger demand impacted operations from March to December 2020.

Scheduled service passengers and average base fares in 2021 were up 57.9 percent and 11.5 percent, respectively, over 2020.

As compared to 2019, passenger revenue decreased by 6.2 percent, as the impact of a 13.6 percentage point decline in scheduled service load factor was partially offset by a 9.5 percent increase in capacity as we continued to restore capacity from 2020 levels and expand our route network.

Air ancillary average fare for 2021 increased by 10.0 percent when compared to 2020 and 12.3 percent when compared to 2019, the increase over 2019 more than offsetting a 5.0 percent decline in average base fares.

The increase was primarily driven by an increased take rate on bundled air ancillary products.

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.

Third party products revenue for 2021 increased 86.1 percent over 2020 and 23.5 percent when compared to 2019.

The increase from 2020 was primarily the result of greater travel demand for rental cars and hotels than the early part of the pandemic.

The increase from 2019 was attributable to growth in our co-branded credit card revenues, which more than offset declines in rental car days and hotel room nights.

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.

Fixed fee contract revenue for 2021 increased 53.3 percent compared with 2020.

This was primarily due to a 37.1 percent increase in related departures due to increased charter activity when compared to 2020, which was most impacted by the pandemic.

During 2021, ad-hoc charters increased by 181.1 percent over 2020 levels as we benefited from March Madness which did not occur in 2020 due to the pandemic and also the return of a full college football season.

Fixed fee contract revenue for 2021 as compared to 2019 decreased by 36.7 percent due to continuing depressed demand for group charters compared to pre-pandemic periods.

Other revenue .

Other revenue decreased $8.4 million year over year.

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

Other revenue decreased by 87.6 percent for 2021, when compared to 2020.

The decrease is due to decreased activity in our non-airline subsidiaries, including the closure of the family entertainment centers in 2020 and the sale of our Teesnap golf management business in April 2021.

Operating Expenses

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

For the Year Ended December 31, Percent

Consolidated unitized costs (in cents) 2020 2019 Change

Salary and benefits 2.88 2.78 3.6 %

Twelve Months Ended December 31, Percent Change

Unitized costs (in cents) 2021 2020 2019 YoY Yo2Y

Aircraft fuel 2.52 1.69 2.65 49.1 % (4.9) %

Depreciation and amortization 1.34 0.96 39.6

Salaries and benefits 2.77 2.88 2.78 (3.8) (0.4)

Station operations 1.39 1.10 1.06 26.4 31.1

Maintenance and repairs 0.61 0.49 0.57 24.5 7.0

Depreciation and amortization 1.04 1.34 0.96 (22.4) 8.3

Sales and marketing 0.42 0.33 0.49 27.3 (14.3)

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Other 0.47 0.61 0.62 (23.0) (24.2)

CARES Act grant recognition (1.16) — NM

Operating Special charges 2.33 — NM

Payroll Support Programs grant recognition (1.16) (1.16) — — NM

Special charges 0.08 2.33 — (96.6) NM

CASM 8.26 9.68 9.13 (14.7) (9.5)

Operating CASM, excluding fuel (2)

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.

5.74 7.99 6.48 (28.2) (11.4)

Adjusted CASM (1)

9.12 8.61 9.13 5.9 (0.1)

Adjusted CASM, excluding fuel (2)

6.60 6.92 6.48 (4.6) 1.9

(1) Reconciliation of CASM to Adjusted CASM:

Year Ended December 31,

(in millions) Per ASM (cents) (in millions) Per ASM (cents)

CASM (cents) 8.26 9.68

Net Benefit from Payroll Support Programs (3)

$ 192.0 1.09 $ 165.4 1.26

Operating Special Charges (14.0) (0.08) (306.3) (2.33)

Bonus Accrual (27.1) (0.15) — —

Adjusted CASM (cents) 9.12 8.61

(2) Excludes aircraft fuel expense.

(3) Net benefit from Payroll Support Programs includes Payroll Support Programs grant recognition and Employee Retention Tax Credit.

Salaries and benefits expense.

Salaries and benefits expense increased $106.7 million, or 28.3 percent, in 2021 compared to 2020.

The increase is largely due to a 15.4 percent year over year increase in the average number of full-time equivalent employees.

The increase was also driven by voluntary leave programs offered to employees, voluntary pay reductions, and suspension of the bonus accrual that were in effect during 2020 during the early stages of the pandemic.

Salaries and benefits expense increased by $34.1 million or 7.6 percent as compared to 2019.

The increase is driven by a 2.2 percent increase in the average number of full time equivalent employees and annual increases in crew pay.

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.

Aircraft fuel expense increased $218.4 million, or 98.5 percent, in 2021 compared to the same period in 2020.

The increase was due to the recovery from the COVID-19 pandemic as departures increased by 33.1 percent resulting in an increase of 36.9 percent in fuel gallons consumed along with a 45.3 percent increase in average fuel cost per gallon.

Aircraft fuel expense increased by $12.4 million or 2.9 percent in 2021 compared to 2019.

This was primarily driven by a 5.9 percent increase in departures resulting in a 4.2 percent increase in fuel gallons consumed offset by a 1.4 percent decrease in average fuel cost per gallon.

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.

Station operations expense during 2021 increased $98.6 million or 68.1 percent over 2020 primarily due to a 33.1 percent increase in departures, increased costs associated with irregular operations, and increased airport and landing fees.

As compared to 2019, station operations expense increased by $71.9 million or 42.0 percent due to a 5.9 percent increase in departures, increased costs associated with irregular operations and airport fees.

Irregular operations costs in 2021 were significantly attributable to COVID absences of flight crews which were highest in December 2021.

These absences resulted in

numerous flight cancellations.

The amount of irregular operations costs is significantly impacted by our decision to compensate impacted passengers for their inconvenience in addition to the ticket price.

Unusually high cancellations due to flight crew COVID absences have continued into early 2022.

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.

Depreciation and amortization expense during 2021 increased $4.8 million or 2.7 percent including a $2.9 million increase in amortization of deferred heavy maintenance as compared to 2020 as there was an increase of 5.7 percent in the average number of aircraft in service.

When compared to 2019, depreciation and amortization expense increased 16.2 percent including a 59.7 percent increase in amortization of deferred heavy maintenance as the average number of aircraft in service during the period increased 20.3 percent.

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.

Maintenance and repairs expense during 2021 increased by $42.0 million or 65.8 percent compared to 2020.

This was primarily due to a 5.7 percent increase in the average number of aircraft in service and an 18.6 percent increase in utilization year over year as capacity was 33.3 percent lower in 2020 as a result of the pandemic.

As compared to 2019, maintenance and repairs expense increased by $14.2 million or 15.5 percent as the number of aircraft in service increased by 20.3 percent, offset by the effect of a 12.5 percent decrease in utilization year over two 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.

Sales and marketing expense during 2021 increased 67.2 percent compared to 2020.

In 2020, advertising spend was intentionally pulled back beginning in March due to the pandemic.

There was also an increase in net credit card fees in 2021 as a result of a 75.0 percent increase in passenger revenue year over year.

As compared to 2019, sales and marketing expense decreased by 7.8 percent due to our efforts to more adeptly deploy advertising spend.

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.

Other expense increased by $4.6 million or 5.8 percent year over year, due to increased flight operations year over year.

Payroll Support Programs grant recognition.

We received a total of $203.9 million during 2021 from the U.S.

Treasury through the payroll support programs.

The direct grants were recognized as a credit to operating expense on our statement of income, over the periods for which the funds were intended to compensate.

During 2020, we received $176.9 million in funds through the payroll support programs.

We recognized $152.4 million of the direct grants as an offset to operating expense on our statement of income.

Special charges.

Special charges of $14.0 million were recorded within operating expenses during 2021 compared to $306.3 million in 2020.

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.

These charges in 2021 include accelerated retirements of two airframes and three engines, acceleration of certain existing stock awards and an impairment loss on a building associated with the Allegiant Nonstop family entertainment line of business.

Special charges recorded during 2020 included accelerated retirements of aircraft and airframes, impairment charges primarily in our non-airline subsidiaries, a loss on sale-leaseback transactions we would not likely have transacted absent cash conservation efforts as a result of COVID, salaries and benefits expense, and other various expenses during 2020.

See Note 2 of the Notes to Consolidated Financial Statement 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.

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

We did not have any non-operating special charges in 2021.

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.

We recorded a $44.8 million tax expense (22.8 percent effective tax rate) compared to a $176.9 million tax benefit (49.0 percent effective tax rate) during 2021 and 2020 respectively.

The 22.8 percent effective tax rate for 2021 differed from the statutory federal income tax rate of 21.0 percent primarily due to state income taxes and the impact of ASU 2016-09 related to share-based payments.

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 the majority of the 2020 net operating loss at a 35.0 percent tax rate applicable in earlier years as well as the remeasurement of deferred taxes and state taxes.

2020 compared to 2019

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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.

Current liquidity

Cash, cash equivalents and investment securities (short-term and long-term) increased to $1.2 billion at December 31, 2021, from $685.2 million at December 31, 2020.

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.

Restricted cash represents escrowed funds under fixed fee contracts, escrowed project funds 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.

During 2021, we received a total of $203.9 million in assistance through the payroll support programs.

We suspended share repurchases and our quarterly cash dividend in first quarter 2020, 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, we agreed not to repurchase shares or pay cash dividends through September 30, 2022.

We believe we have more than adequate liquidity resources through our cash, cash equivalent and short term investment balances, operating cash flows and borrowings, to meet our current contractual obligations.

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

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.

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.

Our debt and finance lease obligations balance, without reduction for related issuance costs, increased from $1.68 billion as of December 31, 2020 to $1.77 billion as of December 31, 2021.

During 2021, we borrowed $384.6 million and we made principal payments of $301.1 million, including $53.9 million on our senior secured revolving credit facility that matured on March 31, 2021 and $79.0 million in prepayments of debt secured by aircraft.

Sources and Uses of Cash

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During 2021, our operating activities provided $538.2 million of cash compared to $234.6 million during 2020.

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.

This change was mostly attributable to a $335.9 million 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.

Cash used in investing activities was $593.3 million during 2021 compared to $365.7 million in 2020.

The change was due to an increase of $111.6 million of purchases of investment securities, net of maturities and a $50 million investment in 2021 in a note receivable to the counterparty in our announced joint venture alliance.

In addition, there was $87.6 million related to proceeds from sale-leaseback transactions during 2020 compared to no such transactions in 2021.

Purchases of property and equipment increased $25.6 million year over year.

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.

Cash provided by financing activities for 2021 was $285.5 million, compared to $164.6 million in 2020.

The year-over-year change is mostly due to the equity offering completed on May 10, 2021 which resulted in the receipt of $335.1 million in cash.

This was offset by the net effect of debt activity, as principal payments and debt issuance costs exceeded debt proceeds by $27.7 million during 2021, compared to $203.0 million of debt proceeds (net of related costs) in excess of principal payments during 2020.

Additionally, there were no share repurchases or dividends paid in 2021, where there was $33.8 million and $11.4 million of such activity, respectively, in 2020.

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, 2021 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

Contractual obligations Less than 1 year 2-3 years 4-5 years More than 5 years Total

Long-term debt obligations (1)

$ 175,892 $ 991,921 $ 273,526 $ 411,696 $ 1,853,035

Finance lease obligations 45,121 118,361 102,516 451,357 717,355

Operating lease obligations 25,781 50,917 36,342 49,317 162,357

Aircraft acquisition obligations (2)

224,587 1,397,830 305,068 — 1,927,485

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

Total future payments under contractual obligations $ 471,381 $ 2,559,029 $ 717,452 $ 912,370 $ 4,660,232

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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.

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If the estimated timing of the next maintenance event changes, the related amortization period would also change.

Passenger Revenue

Sales of passenger tickets not yet flown are recorded in air traffic liability.

Passenger revenue is recognized when transportation is provided.

The air traffic liability primarily includes sales of passenger tickets with scheduled departure dates in the future as well as credit vouchers which can be applied as payment toward the cost of a ticket.

Credit vouchers are typically issued as a result of canceled travel prior to the contractual expiration date.

We have experienced significant levels of canceled travel, particularly in the early months of the pandemic in 2020.

During 2020, we suspended change and cancellation fees.

In 2020, we announced that credit vouchers issued as a result of canceled travel beginning in January 2020 would have an extended expiration date of two years from the original booking date.

This policy continued for credit vouchers issued through June 30, 2021.

Effective July 1, 2021, credit vouchers issued have an expiration date of one year from the original booking date.Credit vouchers represented approximately 22 percent of the air traffic liability as of December 31, 2021.

This compares to approximately 72 percent as of December 31, 2020 and approximately 8 percent prior to the onset of the COVID-19 pandemic.

We estimate the amount of credit vouchers not expected to be redeemed prior to their contractual expiration date ("credit voucher breakage") and recognize the associated passenger revenue at the time of issuance.

Our credit voucher breakage estimates are primarily based on historical usage data, contract duration and resulting customer behavior.

Given the impact of the COVID-19 pandemic on customer behavior and changes made in ticket validity terms, as well as the suspension of change and cancellation fees, our estimates of passenger revenue that will be recognized from the air traffic liability for credit voucher breakage may be adjusted in future periods as we periodically review our estimates based on actual experience to date.

For additional information on our significant accounting policies related to passenger ticket sales, see Note 3 of the Notes to the Consolidated Financial Statements.

RECENT ACCOUNTING PRONOUNCEMENTS

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What changed 10-K

Item 7. Management’s Discussion and Analysis