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, 2021 and 2020. Unless otherwise expressly stated, for discussion and analysis of 2019 and a comparison of our 2020 results to 2019 results, please refer to our Annual Report on Form 10-K for the year ended December 31, 2020, 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, 2021 and 2020. 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.
37
2021 Highlights
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
38
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 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,
2021 2020 2019
A320 (1)(2)
73 61 54
A319 (3)
35 34 37
Total 108 95 91
(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, 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. Properties for further detail regarding our aircraft fleet. We continuously consider aircraft acquisitions on an opportunistic basis.
39
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 14, 2022, and including recent service announcements, we were selling seats on 615 routes serving 132 cities in 43 states. This includes our recent announcements through February 14, 2022.
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,
2021 2020 2019
Leisure destinations 33 28 27
Origination cities 99 96 97
Total cities 132 124 124
Total routes 595 497 466
40
TRENDS
COVID-19
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.
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.
Growth
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.
Operations
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
41
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
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.
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.
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, irregular operations, and other related services.
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.
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 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, 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.
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 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 related to Sunseeker Resort Charlotte Harbor. Special charges taken in 2021 include charges specifically related to COVID-19. See Note 2 to the Consolidated Financial Statements for further information.
42
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 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 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 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 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
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.
43
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) %
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)
Aircraft lease rentals 0.12 0.07 — 71.4 NM
Other 0.47 0.61 0.62 (23.0) (24.2)
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)
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,
2021 2020
(in millions) Per ASM (cents) (in millions) Per ASM (cents)
CASM (cents) 8.26 9.68
Add:
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 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 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
44
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 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 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 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 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 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 during 2020. We did not have any non-operating special charges in 2021.
Income Tax Expense. 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
The comparison of our 2020 results to 2019 results is included in our Annual Report on Form 10-K for the year ended December 31, 2020, under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
45
LIQUIDITY AND CAPITAL RESOURCES
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, 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.
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.
Debt
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
Operating Activities. Operating cash inflows are primarily derived from providing air transportation and related ancillary products and services to customers. During 2021, our operating activities provided $538.2 million of cash compared to $234.6 million during 2020. This change was mostly attributable to a $335.9 million increase in net income.
Investing Activities. 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 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.
46
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:
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
Total future payments under contractual obligations $ 471,381 $ 2,559,029 $ 717,452 $ 912,370 $ 4,660,232
(1) Long-term debt obligations (including variable interest entities) include scheduled interest payments, using LIBOR rates as of December 31, 2021, and excludes debt issuance costs.
(2) Includes aircraft and engine acquisition obligations under existing purchase agreements, which are not reflected on our balance sheet.
47
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 input 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. 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.
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.
48
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.
49
RECENT ACCOUNTING PRONOUNCEMENTS
See related disclosure in Note 3 to our Consolidated Financial Statements.
50