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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-03-01 · 215 added, 149 removed, 158 unchanged (70% of the section changed)

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The following discussion and analysis presents factors that had a material effect on our results of operations during the years ended December 31, 2022 and 2021.

As comparisons of our 2022 results to 2021 reflect disproportionate changes due to the continued impact of the pandemic on air travel during 2021, we have also provided analysis of certain revenue and expense line items to 2019 results (the last year unaffected by the pandemic) where helpful to understand trends in our performance.

Unless otherwise expressly stated, for discussion and analysis of 2021 and a comparison of our 2021 results to 2020 results, please refer to our Annual Report on Form 10-K for the year ended December 31, 2021, under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

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2022 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

– Our highest ever annual total operating revenue of $2.3 billion, up 25.0 percent as compared to 2019, on a total system capacity increase of 13.9 percent

– Full-year TRASM was 12.50 cents, up 10.8 percent as compared to 2019 on scheduled service capacity increases of 15.2 percent

– Our highest ever annual average ancillary air related revenue per passenger of $67.74

– We made great progress to strengthen our system and operations by:

– Adding more than 850 full-time equivalent employees

– Adding 13 Airbus A320 Series aircraft to our operating fleet

– Adding three new bases in Flint, Michigan, Appleton, Wisconsin and Provo, Utah, increasing the number of our bases to 24

– Investing in the systems implementations discussed in the Business section.

– Planning to induct our new Boeing aircraft

– Acquired over 150 thousand new Allegiant co-branded credit card holders during the year, with over 410 thousand active cardholders at year end

– Added over 2 million Allegiant Allways Rewards ® members during 2022, with more than 15 million total members at year end

– Allegiant co-branded credit card and Allegiant Allways Rewards ® were voted as the No.

1 Best Airline Credit Card and Best Frequent Flyer Program in USA Today's 10 Best 2022 Loyalty/Rewards Readers' Choice Awards.

Allegiant's co-branded credit card was named the best airline co-branded credit card for the fourth consecutive year

– Named to Newsweek's Top 100 Most Loved Workplaces® list for the second consecutive year

– Donated $100,000 to the American Red Cross for critical disaster relief to communities in the aftermath of Hurricane Ian

– Published the company's inaugural sustainability report

Operating Fleet

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Total 121 108 95

(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.

(1) Does not include five aircraft of which we have taken delivery as of December 31, 2022 and were not in service as of that date.

Of the five aircraft, one aircraft was acquired under forward purchase and four were acquired under finance leases.

(2) Includes twenty aircraft under finance lease and thirteen aircraft under operating lease as of December 31, 2022.

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

As of December 31, 2022, we are party to forward purchase agreements for 54 aircraft with seven deliveries expected in 2023, 24 in 2024 and the remainder thereafter.

Three of the aircraft scheduled for delivery in 2023 are the initial aircraft under our Boeing contract, which are scheduled to be delivered in fourth quarter 2023.

Refer to Part I - Item 2.

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Total routes 572 595 497 466

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.

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.

The COVID-19 pandemic significantly impacted our operating results in 2021 and into 2022.

In particular, we suffered numerous cancellations due to the effect of the Omicron variant on flight crews in late 2021 and early 2022.

COVID-19 may continue to impact our operations into the future.

Although demand has recovered during 2022, we believe that demand in the foreseeable future could 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.

Strong Demand Momentum

As concerns over COVID-19 have declined, we have seen significant increases in load factors and average total fare per passenger beginning in March 2022 and continuing into 2023.

Total revenue per available seat mile ("TRASM") in the fourth quarter of 2022 was 14.03 cents, the highest quarterly TRASM in Company history, up 21.3 percent compared to fourth quarter 2019 despite a scheduled service capacity increase of 11.9 percent.

Full year TRASM was 12.50 cents, up 10.8 percent as compared to 2019 despite a scheduled service capacity increase of 15.2 percent.

Aircraft Fuel

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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.

The cost per gallon of fuel began to increase significantly in 2021 and the increases were exacerbated by the geopolitical impact of the war in Ukraine and increases in refinery costs added to our fuel cost.

As a result, the average fuel cost per gallon increased by 73.5 percent in 2022 over 2021 and 71.1 percent over 2019.

We expect high fuel costs will continue to impact our total costs and operating results.

Boeing Agreement

We believe this new aircraft purchase is complimentary with our low cost strategy based on 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.

Staffing challenges continue to impact our operations and costs and we have pulled back some of our planned growth for 2023 as a result.

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 unique approach to compensate passengers for their inconvenience in addition to the ticket price, not generally done in the airline industry.

We are investing incrementally in our employee hiring and retention and 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 jointly requested the involvement of the National Mediation Board ("NMB") to assist with the negotiations.

The mediation process with the NMB has begun.

We are also in the process of negotiating a new contract with the union representing our flight attendants.

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

Until new agreements are in place, attrition and difficulty hiring sufficient personnel in the affected work groups could have an adverse effect on our operations and growth.

Pilot Scarcity

The supply of pilots necessary for airline industry growth may be a limiting factor.

The pandemic resulted in more than 3,000 early pilot retirements across U.S.

mainline and cargo carriers and the pipeline for new pilots does not appear at the present time to be sufficiently robust to replace retired pilots and to allow for projected industry growth.

The ability to hire and retain pilots will be critical to our and the industry’s growth.

Engagement of Schneider Electric as ESG Consultant

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– Identifying and prioritizing relevant ESG topics through a materiality assessment.

These topics were addressed in our inaugural ESG report.

– 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

– Developing an inaugural ESG report referencing the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) frameworks, which was issued in December 2022.

– Providing ongoing carbon emissions reporting of Scope 1, 2 and 3 greenhouse gas (GHG) emissions, the initial report having been included in our inaugural ESG report.

– 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.

VivaAerobus Alliance

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

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

VivaAerobus has received approval for the alliance from the Mexican Federal Economic Competition Commission.

We and VivaAerobus currently expect to offer new routes under the alliance beginning in the first half of in 2023, pending U.S.

governmental approval of the applications and the return of Mexico to Category 1 under the FAA's IASA program.

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.

Near the end of September 2022, Hurricane Ian cut a destructive path through Florida and Charlotte County, in particular.

Sunseeker Resort suffered damage from the Hurricane, to a large extent attributable to subcontractor cranes which fell onto the buildings.

We maintain robust insurance coverage against damage from hurricanes and business interruption insurance and are pursuing claims to recover losses.

The Resort was previously selling rooms for as early as May 2023.

With delays caused by damage from the Hurricane, the Resort has now pushed back the selling date to October 2023.

We have yet to announce an opening date, but we expect to make that announcement in second quarter 2023.

Our Operating Expenses

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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.

The CARES Act employee retention tax credit was recorded as an offset to salaries and benefits expense in both 2021 and 2022.

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.

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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, 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.

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, 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 was recognized as a credit to operating expense on the statements of income for 2021 and 2020.

Special charges include charges taken in 2021 for accelerated retirements of two airframes and three engines and an impairment loss on a building associated with the Allegiant Nonstop family entertainment line of business.

The special charges in 2022 relate to the estimated loss incurred from the impact of Hurricane Ian and subsequent insured losses.

The amount of the loss will be offset by amounts to be recovered under our insurance policies, including $ 18.1 million of insurance recoveries recognized in fourth quarter 2022.

RESULTS OF OPERATIONS

2022 compared to 2021

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.

As comparisons of our 2022 results to periods during 2021 reflect disproportionate changes due to the continued impact of the pandemic on air travel during 2021, 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.

Passenger revenue increased 35.4 percent in 2022 compared with 2021 as scheduled service passengers were up 23.1 percent due to stronger passenger demand in general and when compared to lower passenger demand related to COVID-19 in 2021.

In addition, stronger passenger demand resulted in a 14.3 percent increase in scheduled service average base fare.

As compared to 2019, passenger revenue increased by 27.0 percent, as scheduled service passengers increased by 12.2 percent on a 15.2 percent increase in capacity.

These factors, coupled with a 3.6 percent increase in average stage length, resulted in a 1.1 percentage point increase in load factor.

Average total fare per scheduled service passenger increased by 13.8 percent over 2019 primarily driven by an 18.7 percent increase in ancillary air related revenue per passenger and a 28.6 percent increase in ancillary third party revenue per passenger.

The increase in ancillary air related revenue per passenger over the same period in 2019 was primarily driven by increased revenue from the sale of bundled products as bundled products were not offered in 2019.

Third party products revenue.

Third party products revenue for 2022 increased 16.7 percent over 2021 and 44.2 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.

The increase from 2021 was primarily the result of greater travel demand for rental cars and hotels and increased Allways ® Rewards Program revenues.

Increased rental car and hotel rates combined with a 6.4 percent increase in rental car days sold and an 8.3 percent increase in room nights sold contributed to the substantial increase over 2021.

The increase from 2019 is attributable to increased rental car and hotel room rates (which more than offset the impact of fewer rental car days and hotel room nights) and substantial growth in our Allways ® Rewards Program revenues.

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.

Fixed fee contract revenue for 2022 increased 48.0 percent compared with 2021 as a result of a 10.8 percent increase in fixed fee departures largely due to lower charter activity during the continuance of the pandemic in 2021.

In addition, fuel per gallon pass throughs (which are accounted for as fixed fee contract revenue) increased 73.5 percent as compared to the same period in 2021.

Fixed fee contract revenue for 2022 as compared to 2019 decreased by 6.3 percent as a result of a 17.6 percent decrease in fixed fee revenue departures as we devoted more or our resources to scheduled service.

This was partially offset by an increase in fuel pass throughs treated as revenue.

Operating Expenses

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

Twelve Months Ended December 31, Percent Change

Excluding Sunseeker operating costs allows management and investors to better compare our airline unit costs with those of other airlines.

Year Ended December 31, Percent Change

Unitized costs (in cents) 2022 2021 2019 YoY Yo3Y

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Other 0.61 0.47 0.62 29.8 (1.6)

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

Special charges 0.08 2.33 — (96.6) NM

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

Special charges 0.19 0.08 — NM NM

CASM 12.00 ¢ 8.26 ¢ 9.13 ¢ 45.3 31.4

Operating CASM, excluding fuel 7.58 ¢ 5.74 ¢ 6.48 ¢ 32.1 17.0

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.

Sunseeker Resort CASM 0.25 0.05 0.05 NM NM

Airline operating CASM, excluding fuel and Sunseeker Resort activity 7.33 ¢ 5.69 ¢ 6.43 ¢ 28.8 14.0

NM - Not meaningful

Our CASM performance was significantly impacted by lower utilization of our aircraft in 2022 as block hours per aircraft declined by 4.3 percent compared to 2021 and by 16.3 percent compared to 2019.

Aircraft fuel expense.

Aircraft fuel expense increased $374.6 million, or 85.1 percent, in 2022 compared to 2021.

This was primarily driven by a 73.5 percent increase in average fuel cost per gallon and increased refinery costs added to our cost of fuel (crack spread).

When compared to the same period in 2019, aircraft fuel expense increased by 90.5 percent as average fuel cost per gallon increased 71.1 percent, crack spreads increased and fuel gallons consumed increased 11.3 percent on a 13.9 percent increase in capacity.

Salaries and benefits expense.

Salaries and benefits expense increased $67.8 million, or 14.0 percent, in 2022 compared to 2021.

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.

On a per ASM basis, salaries and benefits expense increased by 8.3 percent.

The increase is largely due to a 19.2 percent year-over-year increase in the number of full-time equivalent employees, offset by the employee retention tax credit recognized in 2022.

Salaries and benefits expense increased by $102.0 million or 22.6 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.

The increase is driven by a 21.8 percent increase in the number of full time equivalent employees, offset by the employee retention tax credit recognized in 2022.

On a per ASM basis, salaries and benefits expense increased 7.9 percent.

The cost increases primarily relate to increases in crew pay and increased salaries and benefits costs associated with irregular operations.

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.

Station operations expense during 2022 increased $11.8 million or 4.9 percent over 2021 due to a 0.9 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 $83.7 million or 48.9 percent due to a 6.8 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.

Irregular operations costs in 2022 were significantly attributable to employee absences due to the Omicron COVID variant in January and February.

These absences resulted in numerous flight cancellations.

In addition, there were higher than usual cancellations during the year as a result of staffing challenges and other factors.

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.

Depreciation and amortization expense during 2022 increased $16.5 million or 9.1 percent including a $1.7 million increase in amortization of deferred heavy maintenance as compared to 2021 as there was an increase of 8.2 percent in the average number of aircraft owned and in service.

When compared to 2019, depreciation and amortization expense increased 26.7 percent including a 66.1 percent increase in amortization of deferred heavy maintenance as the average number of aircraft owned and in service during the period increased 19.7 percent.

Maintenance and repairs expense.

Maintenance and repairs expense during 2022 increased by $11.9 million or 11.2 percent compared to 2021.

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.

This was primarily due to a 10.9 percent increase in the average number of aircraft in service.

As compared to 2019, maintenance and repairs expense increased by $26.1 million or 28.5 percent as the number of aircraft in service increased by 33.4 percent, offset by the effect of a 16.3 percent decrease in utilization compared to 2019.

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.

Sales and marketing expense during 2022 increased 38.4 percent compared to 2021, due to an increase in net credit card fees in 2022 as a result of a 35.4 percent increase in passenger revenue year-over-year.

As compared to 2019, sales and marketing expense increased by 27.6 percent due to an increase in net credit card fees in 2022 as a result of a 27.0 percent increase in passenger revenue compared to 2019.

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.

Other expense increased by $29.6 million or 35.3 percent year-over-year, due to increased service, incremental increases in our employee training activity and offset by decreased activity in our non-airline subsidiaries due to the sale of Teesnap in the second quarter of 2021.

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.

During 2021, we received $203.9 million in funds through the payroll support programs and recognized $202.2 million as an offset to operating expense on our income statement for year ended December 31, 2021.

The funds were fully utilized in 2021.

There were no such funds received in 2022.

Special charges.

Special charges of $34.6 million were recorded within operating expenses during 2022 compared to $14.0 million in 2021.

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.

The special charges in 2022 include estimated loss from property damage to Sunseeker Resort related to Hurricane Ian and two subsequent insurance events that occurred during the fourth quarter, offset by insurance recoveries recorded to date.

The amount of the losses will continue to be offset in future periods by amounts to be recovered under the company's insurance policies.

The special charges in 2021 relate to expenses that were unique and specific to COVID-19 including 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.

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.

We recorded a $2.5 million tax expense compared to a $44.8 million tax expense during 2022 and 2021 respectively.

The effective tax rate for 2022 differed from the statutory federal income tax rate of 21.0 percent primarily due to state income taxes.

The 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.

2021 compared to 2020

The comparison of our 2021 results to 2020 results is included in our Annual Report on Form 10-K for the year ended December 31, 2021, under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

For the Year Ended December 31, Percent Change (5)

Operating statistics (unaudited):

2022 2021 2020 2019 YoY Yo2Y Yo3Y

Total system statistics:

Passengers 16,796,544 13,637,405 8,623,984 15,012,149 23.2% 94.8% 11.9%

Available seat miles (ASMs) (thousands) 18,419,045 17,490,571 13,125,533 16,174,240 5.3 40.3 13.9

Operating expense per ASM (CASM) (cents) (1)

12.00 ¢ 8.26 ¢ 9.68 ¢ 9.13 ¢ 45.3 24.0 31.4

Fuel expense per ASM (cents) 4.42 ¢ 2.52 ¢ 1.69 ¢ 2.65 ¢ 75.4 161.5 66.8

Operating CASM, excluding fuel (cents) (1)

7.58 ¢ 5.74 ¢ 7.99 ¢ 6.48 ¢ 32.1 (5.1) 17.0

Sunseeker Resort CASM (cents) (2)

0.25 ¢ 0.05 ¢ 1.12 ¢ 0.05 ¢ 400.0 (77.7) 400.0

Airline operating CASM, excluding fuel and Sunseeker Resort activity (cents) 7.33 ¢ 5.69 ¢ 6.87 ¢ 6.43 ¢ 28.8 6.7 14.0

Departures 118,069 117,047 87,955 110,542 0.9 34.2 6.8

Block hours 278,792 264,628 196,849 248,513 5.4 41.6 12.2

Average stage length (miles) 884 856 862 855 3.3 2.6 3.4

Average number of operating aircraft during period 114.2 103.0 97.4 85.6 10.9 17.2 33.4

Average block hours per aircraft per day 6.7 7.0 5.9 8.0 (4.3) 13.6 (16.3)

Full-time equivalent employees at end of period 5,315 4,458 3,863 4,363 19.2 37.6 21.8

Fuel gallons consumed (thousands) 218,606 204,689 149,479 196,442 6.8 46.2 11.3

ASMs per gallon of fuel 84.3 85.4 87.8 82.3 (1.3) (4.0) 2.4

Average fuel cost per gallon $ 3.73 $ 2.15 $ 1.48 $ 2.18 73.5 152.0 71.1

Scheduled service statistics:

Passengers 16,630,138 13,509,544 8,553,623 14,823,267 23.1 94.4 12.2

Revenue passenger miles (RPMs) (thousands) 15,224,346 11,963,715 7,626,470 13,038,003 27.3 99.6 16.8

Available seat miles (ASMs) (thousands) 17,909,190 17,027,902 12,814,080 15,545,818 5.2 39.8 15.2

Load factor 85.0 % 70.3 % 59.5 % 83.9 % 14.7 25.5 1.1

Departures 114,066 113,121 85,276 105,690 0.8 33.8 7.9

Block hours 270,516 256,991 191,732 238,361 5.3 41.1 13.5

Average seats per departure 175.7 174.2 172.8 171.1 0.9 1.7 2.7

Yield (cents) (3)

7.31 ¢ 6.61 ¢ 5.88 ¢ 7.00 ¢ 10.6 24.3 4.4

Total passenger revenue per ASM (TRASM) (cents) (2)

12.50 ¢ 9.78 ¢ 7.40 ¢ 11.28 ¢ 27.8 68.9 10.8

Average fare - scheduled service (4)

$ 66.88 $ 58.50 $ 52.45 $ 61.58 14.3 27.5 8.6

Average fare - air-related charges (4)

$ 61.67 $ 58.33 $ 53.02 $ 51.96 5.7 16.3 18.7

Average fare - third party products $ 6.07 $ 6.40 $ 5.43 $ 4.72 (5.2) 11.8 28.6

Average fare - total $ 134.62 $ 123.24 $ 110.91 $ 118.26 9.2 21.4 13.8

Average stage length (miles) 890 862 867 859 3.2 2.7 3.6

Fuel gallons consumed (thousands) 212,466 198,891 145,528 188,596 6.8 46.0 12.7

Average fuel cost per gallon $ 3.72 $ 2.13 $ 1.48 $ 2.18 74.6 151.4 70.6

Rental car days sold 1,447,708 1,361,123 1,132,173 1,921,930 6.4 27.9 (24.7)

Hotel room nights sold 282,854 261,158 199,059 415,593 8.3 42.1 (31.9)

Percent of sales through website during period 96.0 % 94.7 % 93.1 % 93.3 % 1.3 2.9 2.7

(1) Includes effect of special items in 2020, 2021 and 2022.

(2) Various components of this measure do not have a direct correlation to ASMs.

These figures are provided on a per ASM basis so as to facilitate comparisons with airlines reporting costs and revenues on a per ASM basis.

(3) Defined as scheduled service revenue divided by revenue passenger miles.

(4) Reflects division of passenger revenue between scheduled service and air-related charges in our booking path.

(5) Except load factor and percent of sales through website, which is percentage point change.

The following terms used in this section and elsewhere in this annual report have the meanings indicated below:

“ Available seat miles ” or “ ASMs ” represents the number of seats available for passengers multiplied by the number of miles the seats are flown.

“ Average fuel cost per gallon ” represents total aircraft fuel expense for our total system divided by the total number of fuel gallons consumed in our total system.

“ Average stage length ” represents the average number of miles flown per flight.

“Block hours” represents the number of hours during which the aircraft is in revenue service, measured from the time of gate departure until the time of gate arrival at the destination.

“ Load factor ” represents the percentage of aircraft seating capacity utilized (revenue passenger miles divided by available seat miles).

“ Operating expense per ASM ” or “ CASM ” represents operating expenses divided by total system available seat miles.

“ Operating CASM, excluding fuel ” represents operating expenses, less aircraft fuel expense, divided by total system available seat miles.

This statistic 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 and therefore are beyond our control.

“ Passengers ” represents the total number of passengers flown on all flight segments.

“ Revenue passenger miles ” or “RPMs” represents the number of miles flown by revenue passengers.

“Total passenger revenue per ASM” or “TRASM” represents total passenger revenue divided by scheduled service available seat miles.

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.

Cash, cash equivalents and investment securities (short-term and long-term) decreased to $1.02 billion at December 31, 2022, from $1.19 billion at December 31, 2021.

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

As of February 1, 2023, we have $275.0 million of undrawn capacity under revolving credit facilities plus another $169.7 million of undrawn capacity under our PDP financing facility.

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.

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

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.

We resumed our share repurchases in fourth quarter 2022 as we purchased 378,952 shares at an average price of $78.92 per share for total repurchases of $29.9 million.

In January 2023, our board increased our stock repurchase authority back to $100.0 million.

We believe we have more than adequate liquidity resources through our cash, cash equivalent and short term investment balances, our undrawn capacity under existing credit facilities, operating cash flows and anticipated access to liquidity, to meet our current contractual obligations and remain in compliance with the debt covenants in our existing financing agreements for the next 12 months.

We will continue to consider raising funds through debt financing to finance aircraft purchases and also on an opportunistic basis.

Our debt and finance lease obligations balance, without reduction for related issuance costs, increased from $1.77 billion as of December 31, 2021 to $2.12 billion as of December 31, 2022.

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.

During 2022, we borrowed $1.06 billion including debt of $550.0 million to refinance our term loan due 2024, $175 million under our construction loan, and $192 million in aircraft finance leases.

During this period we made principal payments of $701.6 million, including a $531.7 million prepayment of our term loan due 2024 and $24.7 million prepayment of our payroll support program loans.

Sources and Uses of Cash

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During 2022, our operating activities provided $303.1 million of cash compared to $538.2 million during 2021.

This change was mostly attributable to a $335.9 million increase in net income.

This change was mostly attributable to a $149.4 million decrease in net income and a $181.5 million decrease in tax receivable and deferred tax activity offset by a $72.1 million increase in our air traffic liability in 2022 compared to a small decrease in the prior year.

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.

Cash used for investing activities was $491.4 million during 2022 compared to $593.3 million in 2021.

During 2022, there was a $275.7 million increase in purchases of property and equipment, including $84.6 million related to aircraft pre-delivery deposits.

This increase was more than offset by a $327.6 million increase in proceeds from maturities, net of purchases, of investment securities during 2022.

Proceeds from maturities exceeded purchases of investment securities in 2022, but not in 2021.

Financing Activities.

Cash provided by financing activities for 2022 was $33.1 million, compared to $285.5 million in 2021.

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.

The change resulted from $335.1 million of proceeds from the issuance on common stock in 2021 offset by an increase in proceeds from debt issuance in excess of principal payments and debt issuance costs of $175.5 million compared to 2021 as debt proceeds exceeded principal payments and debt issuance costs in 2022 but not in 2021.

The repurchase of $29.9 million of stock in 2022 also contributed to a lower amount of cash provided by financing activities in 2022.

The $84.7 million in other financing activities is mostly attributable to $62.8 million of net deposit activity in the construction deposit account for Sunseeker Resort and as such, is a partial offset to $175.0 million of proceeds from the issuance of debt obligations for Sunseeker Resort during 2022.

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, 2022 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

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

Long-term debt obligations (1)

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Total future payments under contractual obligations $ 852,304 $ 2,157,217 $ 1,059,074 $ 707,021 $ 4,775,616

(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.

(1) Long-term debt obligations (including variable interest entities) include scheduled interest payments, using applicable reference rates as of December 31, 2022, and excludes debt issuance costs.

(2) Includes aircraft and engine acquisition obligations under existing purchase agreements, which are not reflected on our balance sheet.

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Affinity Credit Card Program

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

The Allegiant co-branded credit card is issued by Bank of America through which arrangement points are sold and consideration is received under an agreement which expires in 2029.

Under this arrangement, we identified the following deliverables:

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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.

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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.

Effective July 1, 2021, credit vouchers issued have an expiration date of one year from the original booking date.

Credit vouchers represented approximately 18.7 percent of the air traffic liability as of December 31, 2022.

This compares to approximately 22 percent and 72 percent as of December 31, 2021 and December 31, 2020 respectively, and approximately eight percent as of December 31, 2019, 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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis