Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Spirit Airlines, Inc. (“Spirit”) and its consolidated subsidiaries (together with Spirit, the "Company").
These unaudited condensed consolidated financial statements reflect all normal recurring adjustments which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the audited annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on February 6, 2023.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect both the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
The interim results reflected in the unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for other interim periods or for the full year. The air transportation business is subject to significant seasonal fluctuations as demand is generally greater in the second and third quarters of each year. The air transportation business is volatile and highly affected by economic cycles and trends.
2. Recent Developments
JetBlue Merger
On July 28, 2022, Spirit entered into an Agreement and Plan of Merger (the “Merger Agreement”) with JetBlue Airways Corporation, a Delaware corporation (“JetBlue”), and Sundown Acquisition Corp., a Delaware corporation and a direct, wholly owned subsidiary of JetBlue (“Merger Sub”), pursuant to which and subject to the terms and conditions therein, Merger Sub will merge with and into Spirit, with Spirit continuing as the surviving entity (the “Merger”). As a result of the Merger, each outstanding share of Spirit's common stock (except for dissenting shares, treasury stock, and shares of Spirit's common stock owned by JetBlue, Merger Sub or any of their respective wholly owned subsidiaries), will be converted into the right to receive an amount in cash per share, without interest, equal to (such amount, the “Merger Consideration”) (i) $33.50 minus (ii) (A) $2.50 (the “Approval Prepayment Amount”), paid on October 26, 2022 following the adoption by Spirit stockholders of the Merger Agreement on October 19, 2022 and (B) an additional monthly per share prepayment amount calculated as the product of $0.10 and the number of additional prepayments paid (or, in the event the Closing occurs after the record date of, but before the payment date of any such additional prepayment, to the extent payable after the Closing), not to exceed $1.15 per share of Spirit common stock, by JetBlue to Spirit stockholders in accordance with the Merger Agreement (each such payment is referred to as an “Additional Prepayment” and such $0.10 amount is referred to as the “Additional Prepayment Amount”). If an aggregate of $1.15 of Additional Prepayment Amounts has been paid out before consummation or termination of the Merger, Spirit stockholders will thereafter continue to receive monthly Additional Prepayments, at the same $0.10 per month rate until the transaction closes or the Merger Agreement is terminated. The Merger Agreement becomes unilaterally terminable by either JetBlue or Spirit after July 24, 2024.
In accordance with the terms of the Merger Agreement, JetBlue is required to pay or cause to be paid the Approval Prepayment Amount to Spirit stockholders as of the record date established by Spirit for the special meeting to approve the Merger Agreement within five business days following such Spirit stockholder approval. Thereafter, on or prior to the last business day of each month beginning after December 31, 2022 until the earlier of the Closing or termination of the Merger Agreement, JetBlue will also pay or cause to be paid the Additional Prepayment Amount to Spirit stockholders as of a record date not more than five business days prior to the last business day of such month. Payments made from JetBlue to Spirit stockholders do not impact the Company's results of operations or cash flows.
On October 19, 2022, Spirit’s stockholders approved the Merger Agreement at a special meeting of stockholders. The record date for both the Company’s special meeting and the Approval Prepayment was September 12, 2022. In accordance with
the terms of the Merger Agreement, on October 26, 2022, JetBlue paid the Spirit stockholders the Approval Prepayment Amount of $2.50 per share. Additionally, on January 31, 2023, February 28, 2023, March 31, 2023, April 28, 2023, May 31, 2023, June 30, 2023, July 31, 2023, August 31, 2023 and September 29, 2023, JetBlue paid the Additional Prepayments of $0.10 per share of common stock to all Spirit stockholders of record as of January 25, 2023, February 22, 2023, March 27, 2023, April 24, 2023, May 24, 2023, June 26, 2023, July 25, 2023, August 25, 2023 and September 25, 2023, respectively.
Due to the payment of the Approval Prepayment and each of the Additional Prepayment Amounts, in accordance with the terms of the respective debt indentures and warrant agreements, the Company announced related adjustments to the conversion rates of its convertible notes due 2025 and its convertible notes due 2026 as well as adjustments to the exercise prices and warrant shares of the PSP1, PSP2 and PSP3 warrants outstanding. As of September 30, 2023, the conversion rate of the convertible notes due 2025 and 2026 were 93.0267 and 24.1714 shares of voting common stock per $1,000 principal amount of convertible notes, respectively. In addition, as of September 30, 2023, the exercise price of the PSP1, PSP2 and PSP3 warrants were $11.924, $20.680 and $30.869, respectively and the number of warrant shares issuable upon the exercise of the PSP1, PSP2 and PSP3 warrants were adjusted to 614,963.26, 162,665.78 and 95,100.17, respectively.
Completion of the Merger is subject to the satisfaction or waiver of certain closing conditions, including, among other things: (1) approval of the transactions by Spirit’s stockholders, which was received on October 19, 2022; (2) receipt of applicable regulatory approvals, including approvals from the U.S. Federal Communications Commission, the U.S. Federal Aviation Administration and the U.S. Department of Transportation ("DOT") and the expiration or early termination of the statutory waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other competition laws, and other required regulatory approvals; (3) the absence of any law or order prohibiting the consummation of the transactions; and (4) the absence of any material adverse effect (as defined in the Merger Agreement) on Spirit.
On March 7, 2023, the U.S. Justice Department filed suit to block the Merger. The trial date for the lawsuit was originally set for October 16, 2023. On October 25, 2023, the trial date was rescheduled to October 31, 2023 due to scheduling conflicts with other cases, and the trial will be held at the United States District Court of Massachusetts in Boston.
In addition, Spirit has agreed, among other things, that neither it nor any of its directors, officers, employees and representatives will (1) solicit alternative transactions, (2) participate in any discussions or negotiations relating to alternative transactions, (3) furnish any non-public information in connection with alternative transactions or (4) enter into any agreement relating to alternative transactions, except under limited circumstances described in the Merger Agreement. However, in certain circumstances, Spirit may terminate the Merger Agreement to enter into a definitive agreement for a Superior Proposal (as defined in the Merger Agreement). In addition, Spirit, JetBlue and Merger Sub each make certain customary representations, warranties and covenants, as applicable, in the Merger Agreement.
The Merger Agreement contains certain termination rights for Spirit and JetBlue, including, without limitation, a right for either party to terminate if the Merger is not consummated on or before July 28, 2023 (the "Outside Date"), subject to certain automatic extensions up to July 24, 2024 if needed to obtain regulatory approvals. Since all regulatory approvals required to consummate the Merger were not obtained as of July 28, 2023, the current Outside Date has been automatically extended to January 28, 2024. Upon termination of the Merger Agreement under specified circumstances, Spirit will be required to pay JetBlue a termination fee of $94.2 million. Upon the termination of the Merger Agreement by JetBlue because of a material, uncured breach by Spirit of the Merger Agreement, Spirit will be required to pay JetBlue an amount equal to the sum of all amounts paid by JetBlue to the Spirit stockholders. Upon the termination of the Merger Agreement for failure to obtain antitrust regulatory clearance, JetBlue will be required to pay (i) to Spirit, $70.0 million, and (ii) to the Spirit stockholders, the excess of (A) $400.0 million minus (B) the sum of the Approval Prepayment Amount and all Additional Prepayment Amounts previously paid by JetBlue to the Spirit stockholders.
Pratt & Whitney
On July 25, 2023, RTX, parent company of Pratt & Whitney, announced that it had determined that a rare condition in powder metal used to manufacture certain engine parts will require accelerated inspection of the PW1100G-JM (GTF) fleet, which powers the A320neo aircraft.
On August 4, 2023, Pratt & Whitney issued a special instruction (SI), to operators of GTF powered A320 aircraft, requiring accelerated inspections and engine removals covering the initial tranche of operational engines, no later than September 15, 2023. Pratt & Whitney has also recently developed a fleet management plan for the remaining affected PW1100 GTF engines requiring a combination of a repetitive removal and inspection protocol. This fleet plan is expected to be released in one or more service bulletins (SB), following alignment with regulators. The accelerated inspections are anticipated to result in approximately 600 to 700 incremental shop visits for all operators between now and the end of 2026. A majority of the
incremental engine removals will occur in 2023 and early 2024. Pratt & Whitney stated that they are focused on addressing the challenges arising from the powder metal manufacturing issue and will proactively take steps to support and mitigate the operational impact to its customers.
As of September 30, 2023, in accordance with the SI issued by Pratt & Whitney, the Company has removed five engines from service, four of which are currently awaiting induction for inspection. Pratt & Whitney recently notified the Company that all GTF engines in its fleet, including the engines slotted for future aircraft deliveries, for a yet to be determined period, may be subject to the removal and inspection, or replacement, of the powdered metal high-pressure turbine and compressor discs. The Company currently estimates these engines will require removal and inspection primarily during 2023 and 2024, but through 2026, based on SBs issued by Pratt & Whitney and related airworthiness directives issued by the FAA. Pratt & Whitney has provided an initial inspection and removal schedule for these engines, and the Company is assessing the impact to its capacity plans. However, the Company does expect to reduce capacity in amounts and timing commensurate with the scheduled inspection and removal of these impacted engines. The Company has begun discussions with Pratt & Whitney regarding compensation for the loss of utilization; however, the amount, timing, or structure of the compensation that will be agreed upon is not yet known.
In addition to the effects of Pratt & Whitney GTF engine issues on its operations, the Company has experienced an overall decrease in demand for its products and increasingly higher fuel prices, which have negatively affected revenue and costs. The Company currently expects these trends to continue for the foreseeable future, which may create uncertainty in operating results. As a result, the Company has assessed the impact of such on its liquidity requirements and expects to have sufficient liquidity to meet its future cash needs with cash and cash equivalents, cash flows from operations, the implementation of discretionary cost reduction strategies, and pursuing additional financing arrangements. The Company also expects to receive compensation from Pratt & Whitney for the loss of utilization of the GTF engines.
3. Revenue
Operating revenues are comprised of passenger revenues, which includes fare and non-fare revenues, and other revenues. The following table shows disaggregated operating revenues for the three and nine months ended September 30, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
| Operating revenues: | | | | | | | |
| Fare | $ | 526,776 | | | $ | 673,848 | | | $ | 1,782,981 | | | $ | 1,796,044 | |
| Non-fare | 707,136 | | | 648,231 | | | 2,188,465 | | | 1,823,650 | |
| Total passenger revenues | 1,233,912 | | | 1,322,079 | | | 3,971,446 | | | 3,619,694 | |
| Other | 24,631 | | | 21,100 | | | 69,343 | | | 57,443 | |
| Total operating revenues | $ | 1,258,543 | | | $ | 1,343,179 | | | $ | 4,040,789 | | | $ | 3,677,137 | |
The Company is managed as a single business unit that provides air transportation for passengers. Operating revenues by geographic region as defined by the DOT are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
| DOT—Domestic | $ | 1,091,157 | | | $ | 1,163,193 | | | $ | 3,511,446 | | | $ | 3,154,984 | |
| DOT—Latin America | 167,386 | | | 179,986 | | | 529,343 | | | 522,153 | |
| Total | $ | 1,258,543 | | | $ | 1,343,179 | | | $ | 4,040,789 | | | $ | 3,677,137 | |
The Company defers the amount for award travel obligations as part of loyalty deferred revenue within air traffic liability ("ATL") on the Company's condensed consolidated balance sheets and recognizes loyalty travel awards in passenger revenues as points are used for travel or expire unused.
As of September 30, 2023 and December 31, 2022, the Company had ATL balances of $429.4 million and $429.6 million, respectively. Substantially all of the Company's ATL is expected to be recognized within 12 months of the respective balance sheet date.
Loyalty Programs
The Company operates the Spirit Saver$ Club®, which is a subscription-based loyalty program that allows members access to unpublished, extra-low fares as well as discounted prices on bags and seats, shortcut boarding and security, "Flight Flex" flight modification product, and exclusive offers on hotels, rental cars and other travel necessities. The Company also operates the Free Spirit loyalty program, which attracts members and partners and builds customer loyalty for the Company by offering a variety of awards, benefits and services. Free Spirit loyalty program members earn and accrue points for dollars spent on Spirit for flights and other non-fare services as well as services from non-air partners such as retail merchants, hotels or car rental companies. Customers may also earn points based on their spending with the Company's co-branded credit card company with which the Company has an agreement to sell points. The Company's co-branded credit card agreement provides for joint marketing pursuant to which cardholders earn points by making purchases using co-branded cards. Points earned and accrued by Free Spirit loyalty program members can be redeemed for travel awards such as free (other than taxes and government-imposed fees), discounted or upgraded travel. On June 28, 2023, the Company extended its agreement with the administrator of the Free Spirit affinity credit card program to extend through December 31, 2028.
4. Loss (Gain) on Disposal
During the three and nine months ended September 30, 2023, the Company recorded a gain of $2.3 million and a loss of $5.7 million, respectively, in loss (gain) on disposal of assets in the condensed consolidated statements of operations. Gain on disposal of assets for the three months ended September 30, 2023 included a $2.2 million gain related to three aircraft sale leaseback transactions completed during the third quarter 2023. Loss (gain) on disposal of assets for the nine months ended September 30, 2023 included a $4.5 million loss related to eight aircraft sale leaseback transactions completed during the nine months ended September 30, 2023.
In addition, during the fourth quarter 2022, the Company made the decision to accelerate the retirement of 29 of its A319 aircraft and, in January 2023, the Company executed a sale agreement to sell these aircraft over the next two years. During the three months ended September 30, 2023, the Company completed the sale of four A319 airframes and five A319 engines and recorded a related net gain of $0.3 million. During the nine months ended September 30, 2023, the Company completed the sale of 11 A319 airframes and 16 A319 engines and recorded a related net gain of $1.9 million. The remaining A319 aircraft subject to the sale agreement remain in service and will continue to operate until immediately before the sale of the aircraft.
In addition, the Company recorded $0.2 million and $3.1 million in losses recorded during the three and nine months ended September 30, 2023, respectively, related to the write-off of obsolete assets and other adjustments.
During the three and nine months ended September 30, 2022, the Company recorded $9.4 million and $31.6 million, respectively, in loss (gain) on disposal of assets in the condensed consolidated statements of operations. Loss (gain) on disposal of assets for the three months ended September 30, 2022 primarily consisted of $9.4 million related to the loss on four aircraft sale leaseback transactions completed during the third quarter of 2022. Loss (gain) on disposal of assets for the nine months ended September 30, 2022 primarily consisted of $23.8 million related to the loss on 11 aircraft sale leaseback transactions completed during the nine months ended September 30, 2022 and $6.6 million related to the impairment during the first quarter of 2022 of one spare engine which was damaged beyond economic repair.
5. Special Charges
During the three and nine months ended September 30, 2023, the Company recorded $9.6 million and $30.0 million, respectively, within special charges on the Company's condensed consolidated statements of operations, in legal, advisory and other fees related to the Merger Agreement with JetBlue entered into on July 28, 2022. In addition, as part of the Merger Agreement with JetBlue, the Company implemented an employee retention award program (the "JetBlue Retention Award Program") during the third quarter of 2022. The target retention award will be paid to the Company's employees upon the successful close of the Merger. In the event the Merger fails or is abandoned, 50% of the target retention award will be paid to the Company's employees. This amount will be paid to the Company's employees in two installments. The first installment was paid in July 2023 and the second installment is payable in July 2024 or upon termination or abandonment of the Merger, whichever comes first. During the three and nine months ended September 30, 2023, the Company recorded $2.7 million and $16.3 million, respectively, within special charges on the Company's condensed consolidated statements of operations, related to the Company's retention award program.
During the three and nine months ended September 30, 2022, the Company recorded $17.7 million and $39.2 million, respectively, within special charges on the Company's condensed consolidated statements of operations, in legal, advisory and other fees related to the former merger agreement with Frontier (the "Former Frontier Merger Agreement") executed during the first quarter of 2022 and JetBlue's unsolicited proposal, received in March 2022, to acquire all of the Company's outstanding shares in an all-cash transaction.
In addition, as part of the Former Frontier Merger Agreement, the Company implemented an employee retention award program (the "Frontier Retention Award Program"). On July 27, 2022, the Former Frontier Merger Agreement was mutually terminated; therefore, 50% of the target retention award was awarded to the Company's employees during the third quarter of 2022. In addition, as mentioned above, the Company implemented the JetBlue Retention Award Program during the third quarter of 2022. During the three and nine months ended September 30, 2022, the Company recorded $20.6 million and $32.7 million, respectively, within special charges on the Company's condensed consolidated statements of operations, related to the Company's retention award programs.
6. Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands, except per-share amounts) |
| Numerator | | | | | | | |
| Net income (loss) | $ | (157,552) | | | $ | (36,377) | | | $ | (263,812) | | | $ | (283,486) | |
| | | | | | | |
| | | | | | | |
| Denominator | | | | | | | |
| Weighted-average shares outstanding, basic | 109,164 | | | 108,853 | | | 109,145 | | | 108,711 | |
| Effect of dilutive shares | — | | | — | | | — | | | — | |
| Adjusted weighted-average shares outstanding, diluted | 109,164 | | | 108,853 | | | 109,145 | | | 108,711 | |
| Earnings (loss) per share | | | | | | | |
| Basic earnings (loss) per common share | $ | (1.44) | | | $ | (0.33) | | | $ | (2.42) | | | $ | (2.61) | |
| Diluted earnings (loss) per common share | $ | (1.44) | | | $ | (0.33) | | | $ | (2.42) | | | $ | (2.61) | |
| | | | | | | |
| | | | | | | |
Anti-dilutive common stock equivalents excluded from the diluted loss per share calculation for any of the periods presented are not material.
7. Short-term Investment Securities
The Company's short-term investment securities are classified as available-for-sale and generally consist of U.S. Treasury and U.S. government agency securities with contractual maturities of 12 months or less. These securities are stated at fair value within current assets on the Company's condensed consolidated balance sheets. Realized gains and losses on sales of investments, if any, are reflected in non-operating other (income) expense in the condensed consolidated statements of operations.
As of September 30, 2023 and December 31, 2022, the Company had $110.9 million and $107.1 million, respectively, in short-term available-for-sale investment securities. During the nine months ended September 30, 2023 and 2022, these investments earned interest income at a weighted-average fixed rate of approximately 4.3% and 0.5%, respectively. For the three and nine months ended September 30, 2023, an unrealized loss of $15 thousand and an unrealized gain of $205 thousand, net of deferred taxes, respectively, was recorded within accumulated other comprehensive income ("AOCI") related to these investment securities. For the three and nine months ended September 30, 2022, an unrealized gain of $100 thousand and unrealized loss $335 thousand, net of deferred taxes, respectively, was recorded within AOCI related to these investment securities. For the three and nine months ended September 30, 2023 and September 30, 2022, the Company had no realized gains or losses as the Company did not sell any of these securities during these periods. As of September 30, 2023 and December 31, 2022, $61 thousand and $267 thousand, net of tax, respectively, remained in AOCI, related to these instruments.
8. Accrued Liabilities
Other current liabilities as of September 30, 2023 and December 31, 2022 consisted of the following:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
| Salaries, wages and benefits | $ | 175,228 | | | $ | 154,881 | |
| Airport obligations | 107,789 | | | 84,928 | |
| Federal excise and other passenger taxes and fees payable | 93,162 | | | 96,424 | |
| Aircraft maintenance | 90,455 | | | 59,243 | |
| Fuel | 44,063 | | | 76,979 | |
| Interest payable | 31,291 | | | 32,613 | |
| Aircraft and facility lease obligations | 25,347 | | | 22,068 | |
| Other | 70,951 | | | 29,194 | |
| Other current liabilities | $ | 638,286 | | | $ | 556,330 | |
9.Leases
The Company leases aircraft, engines, airport terminals, maintenance and training facilities, aircraft hangars, commercial real estate, and office and computer equipment, among other items. Certain of these leases include provisions for variable lease payments which are based on several factors, including, but not limited to, relative leased square footage, enplaned passengers, and airports’ annual operating budgets. Due to the variable nature of the rates, these leases are not recorded on the Company's condensed consolidated balance sheets as a right-of-use asset and lease liability. Lease terms are generally 8 years to 18 years for aircraft and up to 99 years for other leased equipment and property.
During the nine months ended September 30, 2023, the Company took delivery of eleven aircraft under direct operating leases, eight aircraft under sale leaseback transactions and four spare engines purchased with cash. As of September 30, 2023, the Company had a fleet consisting of 202 A320 family aircraft. As of September 30, 2023, the Company had 107 aircraft financed under operating leases with lease term expirations between 2025 and 2041. In addition, the Company owned 94 aircraft, of which, as of September 30, 2023, 22 were unencumbered. The Company also had one aircraft recorded as a failed sale leaseback. The related finance obligation is recorded within long-term debt in the Company's condensed consolidated balance sheets. Refer to Note 12, Debt and Other Obligations for additional information. The related asset is recorded within flight equipment in the Company's condensed consolidated balance sheets. As of September 30, 2023, the Company also had 6 spare engines financed under operating leases with lease term expiration dates ranging from 2024 to 2033 and owned 28 spare engines, of which, as of September 30, 2023, 4 were unencumbered and 24 were pledged as collateral under the Company's revolving credit facility maturing in 2024.
Aircraft rent expense consists of monthly lease rents for aircraft and spare engines under the terms of the Company's aircraft and spare engine lease agreements recognized on a straight-line basis. Supplemental rent, recorded within aircraft rent expense, is primarily made up of probable and estimable return condition obligations and lease return cost adjustments related to lease modifications and aircraft and engines purchased off lease.
Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under the majority of the lease agreements are fixed for the term of the lease. The lease agreements contain standard termination events, including termination upon a breach of the Company's obligations to make rental payments and upon any other material breach of the Company's obligations under the leases, and standard maintenance and return condition provisions. These return provisions are evaluated at inception of the lease and throughout the lease terms and are accounted for as either fixed or variable lease payments (depending on the nature of the lease return condition) when it is probable that such amounts will be incurred. When determining probability and estimated cost of lease return obligations, there are various other factors that need to be considered such as the contractual terms of the lease, the ability to swap engines or other aircraft components, current condition of the aircraft, the age of the aircraft at lease expiration, utilization of engines and other components, the extent of repairs needed at return, return locations, current configuration of the aircraft and cost of repairs and materials at the time of return. Management assesses the factors listed above and the need to accrue lease return costs throughout the lease as facts and circumstances warrant an assessment. The Company expects lease return costs will increase as individual aircraft lease agreements approach their respective termination dates and the Company begins to accrue the estimated cost of return conditions for the corresponding aircraft. Upon a termination of the lease due to a breach by the Company, the Company would be liable for standard contractual damages, possibly including damages suffered by the lessor in connection with remarketing the aircraft or while the aircraft is not leased to another party.
As of September 30, 2023, the Company's finance lease obligations primarily related to the lease of computer equipment used by the Company's flight crews and office equipment. Payments under these finance lease agreements are fixed for terms ranging from four to five years. Finance lease assets are recorded within property and equipment and the related liabilities are recorded within long-term debt and finance leases in the Company's condensed consolidated balance sheets.
During the fourth quarter of 2019, the Company purchased an 8.5-acre parcel of land for $41.0 million and entered into a 99-year lease agreement for the lease of a 2.6-acre parcel of land, in Dania Beach, Florida, where the Company is building its new headquarters campus and a 200-unit residential building. During the first quarter of 2022, the Company began building its new headquarters campus and its 200-unit residential building with the project having an expected completion during the first quarter 2024. The 8.5-acre parcel of land is capitalized within ground property and equipment on the Company's condensed consolidated balance sheets. The 99-year lease was determined to be an operating lease and is recorded within operating lease right-of-use asset and operating lease liability on the Company's condensed consolidated balance sheets. Operating lease commitments related to this lease are included in the table below within property facility leases.
The following table provides details of the Company's future minimum lease payments under finance lease liabilities and operating lease liabilities recorded on the Company's condensed consolidated balance sheets as of September 30, 2023. The table does not include commitments that are contingent on events or other factors that are currently uncertain or unknown.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Finance Leases | | Operating Leases | | |
| | | Aircraft and Spare Engine Leases | | Property Facility Leases | | Other | | Total
Operating and Finance Lease Obligations |
| | (in thousands) |
| Remainder of 2023 | | $ | 88 | | | $ | 104,765 | | | $ | 1,792 | | | $ | 177 | | | $ | 106,822 | |
| 2024 | | 252 | | | 410,295 | | | 6,624 | | | 176 | | | 417,347 | |
| 2025 | | 154 | | | 395,582 | | | 4,143 | | | — | | | 399,879 | |
| 2026 | | 76 | | | 369,269 | | | 3,994 | | | — | | | 373,339 | |
| 2027 | | 27 | | | 353,560 | | | 3,166 | | | — | | | 356,753 | |
| 2028 and thereafter | | — | | | 3,568,211 | | | 145,094 | | | — | | | 3,713,305 | |
| Total minimum lease payments | | $ | 597 | | | $ | 5,201,682 | | | $ | 164,813 | | | $ | 353 | | | $ | 5,367,445 | |
| Less amount representing interest | | 34 | | | 1,913,165 | | | 134,284 | | | 6 | | | 2,047,489 | |
| Present value of minimum lease payments | | $ | 563 | | | $ | 3,288,517 | | | $ | 30,529 | | | $ | 347 | | | $ | 3,319,956 | |
| Less current portion | | 283 | | | 205,497 | | | 5,150 | | | 347 | | | 211,277 | |
| Long-term portion | | $ | 280 | | | $ | 3,083,020 | | | $ | 25,379 | | | $ | — | | | $ | 3,108,679 | |
| | | | | | | | | | |
Commitments related to the Company's noncancellable short-term operating leases not recorded on the Company's condensed consolidated balance sheets are expected to be $3.6 million for the remainder of 2023 and none for 2024 and beyond.
The table below presents information for lease costs related to the Company's finance and operating leases:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
| Finance lease cost | | | | | | | |
| Amortization of leased assets | $ | 102 | | | $ | 188 | | | $ | 362 | | | $ | 563 | |
| Interest of lease liabilities | 7 | | | 13 | | | 25 | | | 47 | |
| Operating lease cost | | | | | | | |
Operating lease cost (1) | 95,798 | | | 66,241 | | | 271,159 | | | 194,922 | |
Short-term lease cost (1) | 7,411 | | | 10,451 | | | 29,780 | | | 30,259 | |
Variable lease cost (1) | 61,170 | | | 54,711 | | | 168,071 | | | 153,433 | |
| Total lease cost | $ | 164,488 | | | $ | 131,604 | | | $ | 469,397 | | | $ | 379,224 | |
(1) Expenses are classified within aircraft rent and landing fees and other rents on the Company's condensed consolidated statements of operations.
The table below presents lease terms and discount rates related to the Company's finance and operating leases: | | | | | | | | | | | |
| September 30, 2023 | | September 30, 2022 |
| Weighted-average remaining lease term | | | |
| Operating leases | 15.1 years | | 14.5 years |
| Finance leases | 2.4 years | | 2.1 years |
| Weighted-average discount rate | | | |
| Operating leases | 6.66 | % | | 5.94 | % |
| Finance leases | 4.27 | % | | 4.45 | % |
10. Commitments and Contingencies
Aircraft-Related Commitments and Financing Arrangements
The Company’s contractual purchase commitments consist primarily of aircraft and engine acquisitions through manufacturers and aircraft leasing companies. As of September 30, 2023, the Company's total firm aircraft orders consisted of 101 A320 family aircraft with Airbus, including A320neos and A321neos, with deliveries expected through 2029. Out of these 101 aircraft, the Company has 3 aircraft scheduled for delivery in the remainder of 2023 and 7 aircraft scheduled for delivery in 2024. During 2023, the number of aircraft expected for delivery in 2024 was higher than expected due to delivery delays from Airbus over the last 18 months or so resulting in aircraft originally scheduled for delivery in 2022 through 2024 being delayed primarily into 2023 through 2025. On July 31, 2023, the Company entered into Amendment No. 6 (the “Amendment”) to the A320 NEO Family Purchase Agreement, dated as of December 20, 2019 (the “Airbus Purchase Agreement”) with Airbus S.A.S. (“Airbus”). The Amendment converts the remaining A319neo aircraft to be delivered under the Airbus Purchase Agreement to A321neo aircraft. The Amendment also (i) defers certain A320neo aircraft deliveries from 2024 to 2025 and later years, (ii) extends delivery dates for certain A320neo and A321neo aircraft deliveries from 2025-2027 to 2025-2029 and (iii) adjusts the timing of option aircraft delivery dates from 2026-2028 to 2027-2029. In addition, the Amendment creates a more equal distribution of aircraft deliveries and option rights across the delivery periods. As of September 30, 2023, the Company had secured financing for 7 aircraft scheduled for delivery from Airbus through 2024, which will be financed through sale leaseback transactions. As of September 30, 2023, the Company did not have financing commitments in place for the remaining 94 Airbus aircraft on firm order through 2029. However, the Company has a financing letter of agreement with Airbus which provides backstop financing for a majority of the aircraft included in the Airbus Purchase Agreement. The agreement provides a standby credit facility in the form of senior secured mortgage debt financing. The contractual purchase amounts for all aircraft orders from Airbus are included within the purchase commitments below. In addition, rent commitments related to aircraft that will be financed through sale leaseback transactions are included within the aircraft rent commitments below.
During the third quarter of 2021, the Company entered into an Engine Purchase Support Agreement which requires the Company to purchase a certain number of spare engines in order to maintain a contractual ratio of spare engines to aircraft in the fleet. As of September 30, 2023, the Company is committed to purchase 19 PW1100G-JM spare engines, with deliveries through 2029.
As of September 30, 2023, purchase commitments for the Company's aircraft and engine orders, including estimated amounts for contractual price escalations and pre-delivery payments, were expected to be $120.3 million for the remainder of 2023, $456.0 million in 2024, $1,018.6 million in 2025, $1,034.3 million in 2026, $1,100.0 million in 2027, and $1,959.1 million in 2028 and beyond.
During the third quarter of 2019, the United States announced its decision to levy tariffs on certain imports from the European Union, including commercial aircraft and related parts. These tariffs include aircraft and other parts that the Company is already contractually obligated to purchase including those reflected above. In June 2021, the United States Trade Representative announced that the United States and European Union had agreed to suspend reciprocal tariffs on large civilian aircraft for five years, pending discussions to resolve their trade dispute.
In addition to the Airbus Purchase Agreement, as of September 30, 2023, the Company had agreements in place for 24 A321neos to be financed through direct leases with third-party lessors with deliveries scheduled from the remainder of 2023 through 2025. As of September 30, 2023, aircraft rent commitments for future aircraft deliveries to be financed under direct leases from third-party lessors and sale leaseback transactions were expected to be approximately $4.7 million for the remainder of 2023, $90.3 million in 2024, $140.8 million in 2025, $143.2 million in 2026, $143.2 million in 2027, and $1,196.1 million in 2028 and beyond.
Interest commitments related to the secured debt financing of 73 delivered aircraft as of September 30, 2023 were $15.4 million for the remainder of 2023, $53.3 million in 2024, $45.8 million in 2025, $38.3 million in 2026, $30.1 million in 2027, and $60.2 million in 2028 and beyond. As of September 30, 2023, interest commitments related to the Company's 8.00% senior secured notes, convertible debt financing, unsecured term loans and revolving credit facility were $25.7 million for the remainder of 2023, $96.4 million in 2024, $89.4 million in 2025, $5.9 million in 2026, $3.4 million in 2027, and $10.5 million in 2028 and beyond. For principal commitments related to the Company's debt financing, refer to Note 12, Debt and Other Obligations.
The Company is contractually obligated to pay the following minimum guaranteed payments for its reservation system, construction commitments related to its new headquarters campus and residential building and other miscellaneous subscriptions and services as of September 30, 2023: $35.9 million for the remainder of 2023, $21.7 million in 2024, $19.9 million in 2025, $17.1 million in 2026, $17.1 million in 2027, and $1.7 million in 2028 and thereafter. During the first quarter of 2018, the Company entered into a contract renewal with its reservation system provider which expires in 2028.
Litigation and Assessments
The Company is subject to commercial litigation claims and to administrative and regulatory proceedings and reviews that may be asserted or maintained from time to time. The Company believes the ultimate outcome of such lawsuits, proceedings and reviews will not, individually or in the aggregate, have a material adverse effect on its financial position, liquidity or results of operations. In making a determination regarding accruals, using available information, the Company evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings and assessments to which the Company is a party and records a loss contingency when it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. These subjective determinations are based on the status of such legal or regulatory proceedings, the merits of the Company's defenses, and consultation with legal counsel. Actual outcomes of these legal and regulatory proceedings may materially differ from the Company's current estimates. It is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to the Company's condensed consolidated results of operations, liquidity, or financial condition.
In 2017, the Company was sued in the Eastern District of New York in a purported class action, Cox, et al. v. Spirit Airlines, Inc., alleging state-law claims of breach of contract, unjust enrichment and fraud relating to the Company's practice of charging fees for ancillary products and services. The original action was dismissed by the District Court; however, following the plaintiff's appeal to the Second Circuit, the case was remanded to the District Court for further review on the breach of contract claim. A hearing on the Company's Motion for Summary Judgment and plaintiff's Motion for Class Certification was held on December 10, 2021. The Court granted the plaintiff's class certification motion and denied Spirit’s summary judgment motion on March 29, 2022. The Company subsequently filed a motion for reconsideration on April 26, 2022, and an oral argument was held on May 19, 2022. The Court denied Spirit’s motion for reconsideration on February 14, 2023. On April 3, 2023, Spirit moved to compel arbitration of and/or dismiss certain class members’ claims for lack of personal jurisdiction. Trial was set to begin on January 16, 2024. In June 2023, the Company reached a tentative settlement in mediation for a maximum amount of $8.3 million. The Court issued a preliminary approval order on September 21, 2023, and the final approval hearing is scheduled for December 11, 2023. The total amount paid will depend on a number of factors, including participation of class members and any conditions on the settlement approved by the Court. Currently, the Company's best estimate of the probable loss associated with the settlement is $6.0 million, and the Company has recorded this amount in other operating expenses within its condensed consolidated statements of operations.
On February 27, 2023, ALPA filed a grievance against the Company claiming that it violated the collective bargaining agreement (“CBA”) by excluding its pilots from the Company's retention award programs granted as part of the Former Frontier Merger Agreement and the Merger Agreement with JetBlue. On September 8, 2023, the Company filed a motion to dismiss the grievance as it does not believe that ALPA filed the grievance within the timeline set forth in the CBA. This matter is scheduled for arbitration in November 2023 in Washington D.C. As of September 30, 2023, the potential outcomes of this claim cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made.
Following an audit by the Internal Revenue Service ("IRS") related to the collection of federal excise taxes on optional passenger seat selection charges covering the period of the second quarter 2018 through the fourth quarter 2020, on March 31, 2022, the Company was assessed $34.9 million. On July 19, 2022, the assessment was reduced to $27.5 million. The Company believes it has defenses available and intends to challenge the assessment; therefore, the Company believes a loss in this matter is not probable and has not recognized a loss contingency.
Credit Card Processing Arrangements
The Company has agreements with organizations that process credit card transactions arising from the purchase of air travel, baggage charges, and other ancillary services by customers. As is standard in the airline industry, the Company's contractual arrangements with credit card processors permit them, under certain circumstances, to retain a holdback or other collateral, which the Company records as restricted cash, when future air travel and other future services are purchased via credit card transactions. The required holdback is the percentage of the Company's overall credit card sales that its credit card processors hold to cover refunds to customers if the Company fails to fulfill its flight obligations.
The Company's credit card processors do not require the Company to maintain cash collateral provided that the Company satisfies certain liquidity and other financial covenants. Failure to meet these covenants would provide the processors the right to place a holdback resulting in a commensurate reduction of unrestricted cash. As of September 30, 2023 and December 31, 2022, the Company's credit card processors were holding back no remittances.
The maximum potential exposure to cash holdbacks by the Company's credit card processors, based upon advance ticket sales and Spirit Saver$ Club® memberships as of September 30, 2023 and December 31, 2022, was $473.8 million and $468.5 million, respectively.
Employees
The Company has six union-represented employee groups that together represented approximately 85% of all employees as of September 30, 2023. The table below sets forth the Company's employee groups and status of the collective bargaining agreements. | | | | | | | | | | | | | | | | | | | | |
| Employee Groups | | Representative | | Amendable Date (1) | | Percentage of Workforce |
| Pilots | | Air Line Pilots Association, International ("ALPA") | | January 2025 | | 27% |
| Flight Attendants | | Association of Flight Attendants ("AFA-CWA") | | January 2026 | | 48% |
| Dispatchers | | Professional Airline Flight Control Association ("PAFCA") | | October 2023 | | 1% |
| Ramp Service Agents | | International Association of Machinists and Aerospace Workers ("IAMAW") | | November 2026 | | 3% |
| Passenger Service Agents | | Transport Workers Union of America ("TWU") | | February 2027 | | 2% |
| Aircraft Maintenance Technicians | | Aircraft Mechanics Fraternal Association (AMFA) (2) | | N/A (2) | | 5% |
(1) Subject to standard early opener provisions.
(2) Collective bargaining agreement is currently under negotiation.
During the fourth quarter of 2022, the Company reached an agreement with ALPA for a new two-year agreement, which was ratified by ALPA members on January 10, 2023. The ratified agreement includes increased pay rates and other enhanced benefits.
In February 2023, the Company and AFA-CWA reached an agreement with the Company's flight attendants which was ratified by the flight attendants on April 13, 2023 and becomes amendable in January 2026. The ratified agreement includes increased pay rates and other enhanced benefits.
In August 2022, the Company's aircraft maintenance technicians ("AMTs") voted to be represented by the Aircraft Mechanics Fraternal Association ("AMFA") as their collective bargaining agent. In November 2022, AMFA notified the Company of its intent to negotiate a CBA and began negotiations. As of September 30, 2023, the Company continued to negotiate with AMFA. As of September 30, 2023, the Company had approximately 650 AMTs.
In May 2023, PAFCA provided notice to the Company that it intends to amend its Collective Bargaining Agreement with its dispatchers. The parties began negotiating changes to the CBA on July 12, 2023. As of September 30, 2023, the Company continued to negotiate with PAFCA.
11.Fair Value Measurements
Under ASC 820, "Fair Value Measurements and Disclosures," disclosures relating to how fair value is determined for assets and liabilities are required, and a hierarchy for which these assets and liabilities must be grouped is established, based on significant levels of inputs, as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes several valuation techniques in order to assess the fair value of the Company’s financial assets and liabilities.
Long-Term Debt
The estimated fair value of the Company's secured notes, term loan debt agreements and revolving credit facilities have been determined to be Level 3 as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes a discounted cash flow method to estimate the fair value of the Level 3 long-term debt. The estimated fair value of the Company's publicly and non-publicly held EETC debt agreements and the Company's convertible notes has been determined to be Level 2 as the Company utilizes quoted market prices in markets with low trading volumes to estimate the fair value of its Level 2 long-term debt.
The carrying amounts and estimated fair values of the Company's long-term debt at September 30, 2023 and December 31, 2022 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Fair Value Level Hierarchy |
| | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value | |
| (in millions) | | |
8.00% senior secured notes | $ | 1,110.0 | | | $ | 1,093.0 | | | $ | 1,110.0 | | | $ | 1,085.0 | | | Level 3 |
| Fixed-rate term loans | 994.2 | | | 912.6 | | | 1,094.7 | | | 1,003.9 | | | Level 3 |
| Unsecured term loans | 136.3 | | | 116.9 | | | 136.3 | | | 116.0 | | | Level 3 |
| 2015-1 EETC Class A | 267.6 | | | 239.3 | | | 278.6 | | | 247.5 | | | Level 2 |
| 2015-1 EETC Class B | 44.0 | | | 42.9 | | | 48.0 | | | 45.6 | | | Level 2 |
| 2015-1 EETC Class C | — | | | — | | | 63.8 | | | 63.1 | | | Level 2 |
| 2017-1 EETC Class AA | 172.2 | | | 149.4 | | | 186.3 | | | 161.6 | | | Level 2 |
| 2017-1 EETC Class A | 57.4 | | | 48.4 | | | 62.1 | | | 52.3 | | | Level 2 |
| 2017-1 EETC Class B | 48.2 | | | 42.8 | | | 51.7 | | | 44.9 | | | Level 2 |
| 2017-1 EETC Class C | — | | | — | | | 85.5 | | | 85.1 | | | Level 2 |
4.75% convertible notes due 2025 | 25.1 | | | 43.1 | | | 25.4 | | | 44.9 | | | Level 2 |
1.00% convertible notes due 2026 | 500.0 | | | 419.3 | | | 500.0 | | | 405.1 | | | Level 2 |
| | | | | | | | | |
| Total long-term debt | $ | 3,355.0 | | | $ | 3,107.7 | | | $ | 3,642.4 | | | $ | 3,355.0 | | | |
Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2023 and December 31, 2022 were comprised of liquid money market funds and cash, and are categorized as Level 1 instruments. The Company maintains cash with various high-quality financial institutions.
Restricted Cash
Restricted cash is comprised of cash held in an account subject to account control agreements or otherwise pledged as collateral against the Company's letters of credit and is categorized as a Level 1 instrument. As of September 30, 2023, the Company had $85.0 million in standby letters of credit secured by $75.0 million of restricted cash, of which $42.3 million were issued letters of credit. In addition, the Company had $44.4 million of restricted cash held in accounts subject to control agreements to be used for the payment of interest and fees on the 8.00% senior secured notes.
Short-term Investment Securities
Short-term investment securities at September 30, 2023 and December 31, 2022 were classified as available-for-sale and generally consisted of U.S. Treasury and U.S. government agency securities with contractual maturities of 12 months or less. The Company's short-term investment securities are categorized as Level 1 instruments, as the Company uses quoted market prices in active markets when determining the fair value of these securities. For additional information, refer to Note 7, Short-term Investment Securities.
Derivative Liability
The Merger Agreement with JetBlue modified the settlement terms for any conversions of the convertible notes due 2026 (as defined below) that caused the conversion option, which is an embedded derivative, not to qualify for the derivative accounting scope exception provided under ASC 815. As such, the Company bifurcated the fair value of the conversion option of the convertible notes due 2026 as a derivative liability with subsequent changes in fair value recorded in earnings.
The Company records the fair value of the embedded derivative as a derivative liability within deferred gains and other long-term liabilities on its condensed consolidated balance sheets. The fair value of the derivative liability was estimated as the difference in value of the traded price of the convertible notes, including the conversion option and the value of the convertible notes in the absence of the conversion option (the debt component). The value of the debt component was estimated using a discounted cash flow analysis with a yield calibrated to the traded price of the convertible notes. The change in fair value of the derivative liability is recorded within interest expense on the Company's condensed consolidated statements of operations. During the three and nine months ended September 30, 2023, the Company recorded $5.9 million and $18.4 million in favorable mark to market adjustments, respectively, related to the change in fair value of the derivative liability. During the three and nine months ended September 30, 2022, the Company recorded $15.0 million and $24.3 million in favorable mark to market adjustments, respectively, related to the change in fair value of the derivative liability. The fair value of the derivative liability has been determined to be Level 2 as observable inputs were used to determine the fair value of derivative liability. For additional information, refer to Note 12, Debt and Other Obligations.
Assets and liabilities measured at gross fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of September 30, 2023 |
| | Total | | Level
1 | | Level
2 | | Level
3 |
| (in millions) |
| Cash and cash equivalents | $ | 818.3 | | | $ | 818.3 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| Restricted cash | 119.4 | | | 119.4 | | | — | | | — | |
| Short-term investment securities | 110.9 | | | 110.9 | | | — | | | — | |
| Assets held for sale | 1.9 | | | — | | | — | | | 1.9 | |
| Total assets | $ | 1,050.6 | | | $ | 1,048.7 | | | $ | — | | | $ | 1.9 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Derivative liability | $ | 10.8 | | | $ | — | | | $ | 10.8 | | | $ | — | |
| Total liabilities | $ | 10.8 | | | $ | — | | | $ | 10.8 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2022 |
| | Total | | Level
1 | | Level
2 | | Level
3 |
| (in millions) |
| Cash and cash equivalents | $ | 1,346.4 | | | $ | 1,346.4 | | | $ | — | | | $ | — | |
| Restricted cash | 119.4 | | | 119.4 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Short-term investment securities | 107.1 | | | 107.1 | | | — | | | — | |
| Assets held for sale | 2.5 | | | — | | | — | | | 2.5 | |
| Total assets | $ | 1,575.4 | | | $ | 1,572.9 | | | $ | — | | | $ | 2.5 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Derivative liability | $ | 29.2 | | | $ | — | | | 29.2 | | | $ | — | |
| Total liabilities | $ | 29.2 | | | $ | — | | | $ | 29.2 | | | $ | — | |
The Company had no transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 2023 and the year ended December 31, 2022.
12. Debt and Other Obligations
As of September 30, 2023, the Company had outstanding public and non-public debt instruments.
Revolving credit facility due in 2024
As of September 30, 2023 and December 31, 2022, the Company had a $300.0 million revolving credit facility which was undrawn and available. Any amounts drawn on this facility are included in current maturities of long-term debt, net, and finance leases on the Company's condensed consolidated balance sheets. This facility matures on March 30, 2024.
Convertible senior notes due 2025
On May 12, 2020, the Company completed the public offering of $175.0 million aggregate principal amount of 4.75% convertible senior notes due 2025 ("convertible notes due 2025").
Noteholders may convert their notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock; and (4) at any time from, and including, February 18, 2025 until the close of business on the second scheduled trading day immediately before the maturity date. As of September 30, 2023, the notes may be converted by noteholders through December 31, 2023.
Based on the terms of the indenture, upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election. However, based on the terms of the Merger Agreement with JetBlue, upon conversion of any convertible notes due 2025 through the closing or termination of the Merger Agreement with JetBlue, the conversion value, including the principal amount, will be paid all in shares of the Company's common stock. The initial conversion rate was 78.4314 shares of voting common stock per $1,000 principal amount of convertible notes (equivalent to an initial conversion price of approximately $12.75 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. Due to the payment of the Approval Prepayment and Additional Prepayment Amounts paid by JetBlue to the Company's stockholders, in accordance with the terms of the indenture, the Company has announced related adjustments to the conversion rate of its convertible senior notes due 2025. As of September 30, 2023, the conversion rate was 93.0267 shares of voting common stock per $1,000 principal amount of convertible notes (equivalent to a conversion price of approximately $10.75 per share of common stock). Refer to Note 2, Recent Developments for additional information on the Approval Prepayment and Additional Prepayment Amounts.
During the first quarter of 2023, $0.3 million of the Company's convertible notes due 2025 were converted to 27,204 shares of the Company's voting common stock. As of September 30, 2023, the Company had recorded $0.3 million, net of issuance costs and common stock, in additional paid-in-capital on its condensed consolidated balance sheets as of September 30, 2023 related to the conversion of these notes. Since the notes are currently convertible in accordance with the terms of the indenture governing such notes, the Company had $25.1 million recorded within current maturities of long-term debt, net, and finance leases on its condensed consolidated balance sheets as of September 30, 2023 related to its convertible notes due 2025. As of September 30, 2023, the if-converted value exceeds the principal amount of the convertible notes due 2025 by $14.2 million and $15.2 million, respectively, using the average stock price for the three and nine months ended September 30, 2023.
Convertible senior notes due 2026
On April 30, 2021, the Company completed the public offering of $500.0 million aggregate principal amount of 1.00% convertible senior notes due 2026 ("convertible notes due 2026").
Noteholders may convert their notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock; (4) if the Company calls such notes for redemption; and (5) at any time from, and including, February 17, 2026 until the close of business on the second
scheduled trading day immediately before the maturity date. As of September 30, 2023, the notes did not qualify for conversion by noteholders through December 31, 2023.
Based on the terms of the indenture, the Company will have the right to elect to settle conversions in cash, shares of the Company’s common stock or a combination of cash and shares of common stock. Upon conversion of any notes, the Company will pay the conversion value in cash up to at least the principal amount of the notes being converted. However, based on the terms of the Merger Agreement with JetBlue, upon conversion of any convertible notes due 2026 through the closing or termination of the Merger Agreement with JetBlue, the conversion value, including the principal amount, will be paid all in cash. The conversion value will be determined over an observation period consisting of 40 trading days. The initial conversion rate was 20.3791 shares of voting common stock per $1,000 principal amount of convertible notes (equivalent to an initial conversion price of approximately $49.07 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. Due to the payment of the Approval Prepayment and Additional Prepayment Amounts paid by JetBlue to the Company's stockholders, in accordance with the terms of the indenture, the Company has announced related adjustments to the conversion rate of its convertible senior notes due 2026. As of September 30, 2023, the conversion rate was 24.1714 shares of voting common stock per $1,000 principal amount of convertible notes (equivalent to a conversion price of approximately $41.37 per share of common stock). Refer to Note 2, Recent Developments for additional information on the Approval Prepayment and Additional Prepayment Amounts.
The Merger Agreement with JetBlue includes settlement terms for any conversion of the convertible notes due 2026, as described above, that cause the conversion option, which is an embedded derivative, not to qualify for the derivative accounting scope exception provided under ASC 815. As such, the Company bifurcated the fair value of the conversion option of the convertible senior notes due 2026 as a derivative liability with subsequent changes in fair value recorded in earnings. The Company recorded the fair value of the embedded derivative as a derivative liability within deferred gains and other long-term liabilities and a debt discount within long-term debt and finance leases, less current maturities on its condensed consolidated balance sheets. The debt discount will continue to be amortized through interest expense, using the effective interest rate method, over the remaining life of the instrument.
Since the notes are currently not convertible in accordance with the terms of the indenture governing such notes, the Company had $469.7 million, net of the related unamortized debt discount of $30.3 million, recorded within long-term debt and finance leases, less current maturities on the Company's condensed consolidated balance sheets as of September 30, 2023 related to its convertible notes due 2026. For additional information, refer to Note 11, Fair Value Measurements.
Long-term debt is comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of | | As of |
| September 30, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
| | (in millions) | | (weighted-average interest rates) |
8.00% senior secured notes due 2025 | | $ | 1,110.0 | | | $ | 1,110.0 | | | 8.00 | % | | 8.00 | % |
Fixed-rate loans due through 2039 (1) | | 994.2 | | | 1,094.7 | | | 3.52 | % | | 3.52 | % |
| Unsecured term loans due in 2031 | | 136.3 | | | 136.3 | | | 1.00 | % | | 1.00 | % |
| Fixed-rate class A 2015-1 EETC due through 2028 | | 267.6 | | | 278.6 | | | 4.10 | % | | 4.10 | % |
| Fixed-rate class B 2015-1 EETC due through 2024 | | 44.0 | | | 48.0 | | | 4.45 | % | | 4.45 | % |
| Fixed-rate class C 2015-1 EETC due through 2023 | | — | | | 63.8 | | | 4.93 | % | | 4.93 | % |
Fixed-rate class AA 2017-1 EETC due through 2030
| | 172.2 | | | 186.3 | | | 3.38 | % | | 3.38 | % |
Fixed-rate class A 2017-1 EETC due through 2030
| | 57.4 | | | 62.1 | | | 3.65 | % | | 3.65 | % |
Fixed-rate class B 2017-1 EETC due through 2026
| | 48.2 | | | 51.7 | | | 3.80 | % | | 3.80 | % |
Fixed-rate class C 2017-1 EETC due through 2023
| | — | | | 85.5 | | | 5.11 | % | | 5.11 | % |
| Convertible notes due 2025 | | 25.1 | | | 25.4 | | | 4.75 | % | | 4.75 | % |
| Convertible notes due 2026 | | 500.0 | | | 500.0 | | | 1.00 | % | | 1.00 | % |
| | | | | | | | |
| | | | | | | | |
| Long-term debt | | $ | 3,355.0 | | | $ | 3,642.4 | | | | | |
| Less current maturities | | 235.6 | | | 346.4 | | | | | |
Less unamortized discounts, net
| | 76.3 | | | 95.8 | | | | | |
| Total | | $ | 3,043.1 | | | $ | 3,200.2 | | | | | |
(1) Includes obligations related to one aircraft recorded as a failed sale leaseback. Refer to Note 9, Leases for additional information.
During the three and nine months ended September 30, 2023, the Company made scheduled principal payments of $45.2 million and $287.0 million, respectively, on its outstanding debt obligations. During the three and nine months ended September 30, 2022, the Company made scheduled principal payments of $43.0 million and $139.8 million, respectively, on its outstanding debt obligations.
At September 30, 2023, long-term debt principal payments for the next five years and thereafter were as follows:
| | | | | | | | |
| | September 30, 2023 |
| | (in millions) |
| Remainder of 2023 | | $ | 49.7 | |
| 2024 | | 222.1 | |
| 2025 | | 1,323.5 | |
| 2026 | | 731.1 | |
| 2027 | | 197.3 | |
| 2028 and beyond | | 831.3 | |
| Total debt principal payments | | $ | 3,355.0 | |
Interest Expense
Interest expense related to long-term debt and finance leases consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
8.00% senior secured notes (1) | $ | 23,252 | | | $ | 10,461 | | | 69,757 | | | $ | 31,382 | |
| Fixed-rate term loans | 9,111 | | | 10,273 | | | 28,012 | | | 31,442 | |
| Unsecured term loans | 344 | | | 344 | | | 1,020 | | | 1,020 | |
| Class A 2015-1 EETC | 2,758 | | | 2,985 | | | 8,312 | | | 8,986 | |
| Class B 2015-1 EETC | 492 | | | 581 | | | 1,506 | | | 1,772 | |
| Class C 2015-1 EETC | — | | | 856 | | | 777 | | | 2,629 | |
| Class AA 2017-1 EETC | 1,495 | | | 1,615 | | | 4,537 | | | 4,893 | |
| Class A 2017-1 EETC | 539 | | | 582 | | | 1,636 | | | 1,764 | |
| Class B 2017-1 EETC | 470 | | | 503 | | | 1,423 | | | 1,525 | |
| Class C 2017-1 EETC | — | | | 1,104 | | | 522 | | | 3,275 | |
Convertible notes (2) | (1,468) | | | (9,641) | | | (8,510) | | | (9,442) | |
| | | | | | | |
| Finance leases | 7 | | | 13 | | | 24 | | | 47 | |
| Commitment and other fees | 415 | | | 830 | | | 1,243 | | | 1,785 | |
| Amortization of deferred financing costs | 3,845 | | | 3,202 | | | 11,674 | | | 10,634 | |
| | | | | | | |
| Total | $ | 41,260 | | | $ | 23,708 | | | $ | 121,933 | | | $ | 91,712 | |
(1) Includes $1.1 million and $3.2 million of accretion and $22.2 million and $66.6 million of interest expense for the three and nine months ended September 30, 2023, respectively. Includes $0.3 million and $0.8 million of accretion and $10.2 million and $30.6 million of interest expense for the three and nine months ended September 30, 2022, respectively.
(2) Includes $4.4 million and $9.9 million of amortization of the discount for the convertible notes due 2026 as well as interest expense for the convertible notes due 2025 and 2026, offset by $5.9 million and $18.4 million of favorable mark to market adjustments for the convertible notes due 2026 for the three and nine months ended September 30, 2023, respectively. Includes $5.4 million and $14.9 million of amortization of the discount for the convertible notes due 2026, as well as interest expense for the convertible notes due 2025 and 2026, offset by $15.0 million and $24.3 million of favorable mark to market adjustments for the convertible notes due 2026 for the three and nine months ended September 30, 2022, respectively.