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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents factors that had a material effect on our results of operations during the years ended December 31, 2020 and 2019. Unless otherwise expressly stated, for discussion and analysis of 2018 and a comparison of our 2019 results to 2018 results, please refer to our Annual Report on Form 10-K for the year ended December 31, 2019, under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Also discussed is our financial position as of December 31, 2020 and 2019. Investors should read this discussion in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this annual report. This discussion and analysis contains forward-looking statements. Please refer to the section entitled “Disclosure Regarding Forward-Looking Statements” at the beginning of this annual report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.

2020 Highlights

The 2020 year was dominated by the COVID-19 pandemic resulting in unprecedented flight cancellations, large capacity and load factor reductions across the industry and billions of dollars of losses for the industry.

–Our focus on health and safety measures ranked us as the #1 airline among North American carriers and among the top five worldwide for best COVID-19 Traveler Safety Measures by Safe Travel Barometer in August 2020;

–Total sources of liquidity received during full year 2020 were $724 million;

–Received $154 million in grants related to the CARES Act payroll support program and $94 million in tax refunds related to net operating loss carrybacks;

–Issued $150 million in senior secured notes, $115 million in secured financings backed by aircraft and engines, $100 million upsize of our Term Loan, $88 million in proceeds from sale leasebacks and $23 million in proceeds from notes related to the payroll support program;

–Total debt increased $237 million versus year end 2019 with debt, net of liquidity, as of December 31, 2020 at $974 million, roughly unchanged from December 31, 2019. We repaid $182 million in net principal payments during 2020;

–Reported total revenue of $990 million, down 46 percent versus prior year, compared to reductions of between 53 percent and 70 percent for the other eight U.S. publicly held airlines with whom we compare ourselves;

–Reduced full year capacity by 18.8 percent, compared to capacity reductions of between 34 percent and 63 percent for the other eight U.S. publicly held airlines with whom we compare ourselves, with reported load factors of 59.5 percent;

–Average total ancillary revenue per passenger (includes air-related and third party products) increased 3 percent versus 2019 to $58.46;

–Cost cutting measures in response to the pandemic generated a decrease in operating expenses (excluding special charges and the effect of payroll support) of 24.4 percent;

–ASMs per gallon of 87.8, up 7 percent in 2020 versus 2019 due to reduced load factor of 24.4 percentage points and less airport and air traffic congestion;

–Named #1 airline co-branded credit card for second year in a row by the USA Today;

–Made Forbes’ Best Mid-Size Employers 2021 list

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Health and Safety

Amid various uncertainties and public concern during the COVID-19 pandemic, we have implemented the below measures to ensure health and safety for all traveling on our flights. Due to our focus on these health and safety measures, we were ranked by Safe Travel Barometer in August 2020 as the #1 airline among North American carriers and among the top five worldwide for best COVID-19 Traveler Safety Measures, with results based on an independent audit of more than 150 airlines.

–Maintain a comprehensive cleaning program for all aircraft that includes a regular schedule of standard and deep-clean procedures in line with both CDC and Airbus guidance

–Aircraft receive regular treatment with an advanced antimicrobial protectant that kills viruses, germs and bacteria on contact for 14 days

–Utilize VOC (volatile organic compound) filters on board every aircraft, which remove additional organic compounds and ensure that cabin air is changed, on average, every three minutes, exceeding HEPA standards

–Require customers to wear face coverings through all phases of travel, including at the ticket counter, in the gate area and during flight

–Complimentary health and safety kits, which include a single-use face mask and cleaning wipes, provided to all of our customers

–Crew members required to wear face masks on board and during any interaction with customers

–Social distancing principles at check-in, boarding and on-board, including limiting adjacent row seating and allowing only customers on the same itinerary to utilize middle seats as practicable

–Treat hard surfaces in all office areas, including airport station offices, maintenance facilities, headquarters/administrative offices, with antimicrobial disinfectant/protectant, and utilize wall-mounted and handheld thermometers for employee and crew member temperature checks

–Partner with Quest Diagnostics to provide at home COVID-19 test kits to employees in the event local testing is not immediately available

AIRCRAFT

Operating Fleet

The following table sets forth the number and type of aircraft in service and operated by us as of the dates indicated. All of the aircraft are owned by us except as indicated in the footnotes to the table:

As of December 31,

(1) Does not include two aircraft of which we have taken delivery as of December 31, 2020.

(2) Includes six aircraft under finance lease and seven aircraft under operating lease as of December 31, 2020.

(3) Includes four aircraft under operating lease as of December 31, 2020.

As of December 31, 2020, we are party to forward purchase agreements for five aircraft. We have taken delivery of one aircraft in 2021 as of the date of this filing and expect delivery of three additional aircraft throughout the remainder of 2021 and one in 2022. Refer to Part I - Item 2. Properties for further detail regarding our aircraft fleet. We continuously consider aircraft acquisitions on an opportunistic basis.

NETWORK

We manage capacity and route expansion through optimization of our flight schedule to, among other things, better match demand in certain markets. We continually adjust our network through the addition of new markets and routes, adjusting the frequencies into existing markets, and exiting under-performing markets, as we seek to achieve and maintain profitability on each route we serve.

As of February 12, 2021, and including recent service announcements, we were selling seats on 577 routes serving 129 cities in 44 states. This includes our recent announcements through February 12, 2021.

The following table shows the number of leisure destinations and cities served as of the dates indicated (includes cities served seasonally):

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As of December 31,

TRENDS

The COVID-19 pandemic and shelter-in-place directives have greatly impacted our operating results for the year ended December 31, 2020 and will continue to do so into the future. Air traffic demand is down substantially and base air fares are down as well. We cannot predict when air travel will return to customary levels or at what pace. In the meantime, our revenues will be adversely affected. We believe that demand in the foreseeable future will continue to fluctuate in response to fluctuations in COVID-19 cases, new variations of the virus, hospitalizations, deaths, treatment efficacy and the availability and delivery of vaccines.

Despite the pandemic and airline industry challenges, since the beginning of 2021 and through February 12, 2021, we have announced service on 64 new routes and to three new cities, including seasonal and temporary routes. We will continue to manage capacity to meet demand, which we believe is a core strength of our business model.

Our primary focus at the current time has been to conserve cash. We have reduced management and support teams by roughly 300 positions. We have suspended payment of cash dividends and stock buybacks. We have suspended construction of the Sunseeker Resort in Southwest Florida and closed and disposed of our family entertainment centers. We have eliminated other nonessential expenditures and have renegotiated arrangements with outside vendors, all in an effort to conserve cash until revenues more fully recover.

In March 2018, our maintenance technicians and related employees, who represent approximately 10 percent of our total employee base (approximately 413 employees), voted for union representation by the International Brotherhood of Teamsters ("IBT"). Negotiations for an initial collective bargaining agreement with this group began in January 2019 and are ongoing.

Any labor actions following an inability to reach a collective bargaining agreement with an employee group could impact our operations during the continuance of any such activity. Any labor agreement reached following negotiations would also likely increase our operating costs. The collective bargaining agreement with our pilots becomes amendable in August 2021 and we expect to begin negotiations for a successor agreement with that labor group as the year progresses.

Due to the various impacts of COVID-19, we suspended construction of Sunseeker Resort and temporarily closed operation of Kingsway Golf Course. At this time, it is uncertain when construction will resume and when the golf course will re-open.

Our Operating Expenses

A brief description of the items included in our operating expense line items follows.

Aircraft fuel expense includes the cost of aircraft fuel, fuel taxes, into plane fees and airport fuel flowage, storage or through-put fees.

Salary and benefits expense includes wages, salaries, and employee bonuses, sales commissions for in-flight personnel, as well as expenses associated with employee benefit plans, stock compensation expense related to equity grants, and employer payroll taxes. The CARES Act employee retention tax credit is recorded as an offset to salary and benefits expense.

Station operations expense includes the fees charged by airports for the use or lease of airport facilities and fees charged by third party vendors for ground handling services, commissary expenses and other related services.

Depreciation and amortization expense includes the depreciation of all owned fixed assets and the amortization of assets recorded in connection with a finance lease, including aircraft and engines. Also included is the amortization of major maintenance expenses on our Airbus A320 series aircraft and engines, which are capitalized under the deferral method of accounting and amortized as a component of depreciation and amortization expense over the estimated period until the next scheduled major maintenance event.

Maintenance and repairs expense includes all parts, materials and spares required to maintain our aircraft. Also included are fees for repairs performed by third party vendors.

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Sales and marketing expense includes all advertising, promotional expenses, sponsorships, travel agent commissions and debit and credit card processing fees associated with the sale of scheduled service and air-related ancillary charges.

Aircraft lease rentals expense consists of the cost of leasing aircraft under operating leases with third parties as well as the cost for sub-service which may be contracted out in conjunction with operational disruptions.

Other expense includes travel and training expenses for crews and ground personnel, facility lease expenses, professional fees, personal property taxes, information technology consulting, non-salary expenses for non-airline initiatives (including Teesnap, Sunseeker Resort - Charlotte Harbor, and our Allegiant Nonstop family entertainment centers), the cost of passenger liability insurance, aircraft hull insurance and all other insurance policies excluding employee welfare insurance. Additionally, this expense includes loss on disposals of aircraft and other equipment disposals, and all other administrative and operational overhead expenses not included in other line items above.

CARES Act grant recognition includes the portion of government payroll support that represents a direct grant and is recognized as a credit to operating expense on the statement of income.

Special charges include non-cash impairment charges taken in 2020 on the long-lived assets of our subsidiaries including Sunseeker Resort, Allegiant Nonstop, Teesnap and on an investment in a third party as well as other charges specifically related to COVID-19 including the non-operating special charges related to the termination of the loan agreement with Sixth Street Partners (formerly TSSP) intended to finance the development of Sunseeker Resort Charlotte Harbor.

RESULTS OF OPERATIONS

2020 compared to 2019

Operating Revenue

Passenger revenue. Passenger revenue for 2020 decreased 46.4 percent compared with 2019. The decrease was driven by a 42.3 percent decrease in scheduled service passengers. This decline was due to a dramatic decline in passenger demand, government travel restrictions, and quarantine requirements related to COVID-19. We reduced our scheduled service capacity by 17.6 percent during 2020, in response to passenger demand trends. Average total passenger fare (includes scheduled service and air ancillary) decreased 6.2 percent year over year, driven by a 14.8 percent decrease in scheduled service average base fare also due to lower passenger demand.

Third party products revenue. Third party products revenue decreased 33.6 percent in 2020 from 2019. This is primarily due to decreased net revenue from both rental cars and hotels, as a result of substantially fewer passengers and with respect to hotel room revenue, particularly reductions in those traveling to Las Vegas.

Fixed fee contract revenue. Fixed fee contract revenue for 2020 decreased 58.7 percent year over year due to a decrease in demand. Departures decreased 45.7 percent resulting from a significant drop in ad hoc charter opportunities in 2020. The decrease in fixed fee revenue is attributable to COVID-19.

Other revenue. Other revenue decreased $8.4 million year over year. The decrease was due to decreased activity in the non-airline segments.

Operating Expenses

The following table presents operating unit costs on a per ASM basis, defined as Operating CASM, for the indicated periods. Excluding fuel on a per ASM basis provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors beyond our control.

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For the Year Ended December 31, Percent

Consolidated unitized costs (in cents) 2020 2019 Change

Aircraft lease rentals 0.07 — NM

CARES Act grant recognition (1.16) — NM

Operating Special charges 2.33 — NM

Salary and benefits expense. Salary and benefits expense for 2020 decreased $72.6 million, or 16.1 percent, compared with 2019. Although the average number of full-time equivalent employees was relatively flat year over year, overall expense decreased due to temporary voluntary leave programs offered to employees, voluntary pay reductions, suspension of the bonus accrual during the year, and recognition of the $13.0 million CARES Act employee retention tax credit .The number of full-time equivalent employees as of December 31, 2020 was down 11.5 percent from December 31, 2019 as a result of staff reductions in the fourth quarter.

Aircraft fuel expense. Aircraft fuel expense decreased $206.0 million, or 48.2 percent in 2020 compared to 2019, largely due to a decrease in system average fuel cost per gallon of 32.1 percent year over year as fuel prices declined due to lower worldwide demand caused by the pandemic. System fuel gallons consumed decreased by 23.9 percent on a 18.8 percent decrease in ASMs as we reduced capacity in light of the pandemic. Fuel efficiency (measured as ASMs per gallon) increased 6.6 percent year over year due to reduced load factor of 24.4 percentage points and less air traffic congestion at airports.

Station operations expense. Station operations expense for 2020 decreased $26.6 million, or 15.5 percent, on a 19.3 percent decrease in scheduled service departures as we reduced the number of flights offered due to reduced demand.

Depreciation and amortization expense. Depreciation and amortization expense for 2020 increased $20.4 million, or 13.1 percent, as the average number of aircraft in service increased 13.8 percent year over year. Accounting for a large portion of this increase, amortization of major maintenance costs was $37.6 million for 2020 compared to $26.0 million for 2019, due to an increase in the number of aircraft and related deferred maintenance costs associated with them. We expect these costs will continue to increase as our fleet ages.

Maintenance and repairs expense. Maintenance and repairs expense for 2020 decreased $27.8 million, or 30.3 percent, compared with 2019. Routine maintenance costs decreased as aircraft utilization was down 26.3 percent during the year.

Sales and marketing expense. Sales and marketing expense for 2020 decreased $35.4 million, or 44.9 percent, compared to 2019, due to a decrease in net credit card fees paid as a result of a 46.4 percent decrease in passenger revenue year over year.

Other operating expense. Other expense decreased $21.6 million in 2020 compared to 2019, mostly due to decreased activity in our non-airline subsidiaries.

CARES Act grant recognition. We received a total of $176.9 million in funds during 2020 through the Payroll Support Program Agreement (the “PSPA”) under the CARES Act. Of the total, $152.4 million of these funds relate to direct grants, and were recognized as a credit to operating expense on our statement of income during 2020.

Operating special charges.Special charges of $306.3 million were recorded within operating expenses in 2020. We did not have any special charges in 2019. The special charges relate to expenses that were unique and specific to COVID-19. These charges include impairment charges, accelerated depreciation on airframes and engines resulting from an accelerated retirement plan, losses on the sale-leaseback transactions, a portion of salary and benefits expense in relation to the elimination of positions as well as the acceleration of certain existing stock awards, and impairments within our non-airline subsidiaries. See Note 2 of Notes to Consolidated Financial Statements for further information.

Non-operating special charges

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Special charges of $26.6 million were recorded within non-operating expenses for 2020. We did not have any special charges in 2019. The non-operating special charges include payments to terminate the loan agreement with Sixth Street Partners (formerly TSSP) intended to finance the development of Sunseeker Resort Charlotte Harbor. The termination resulted from the suspension of construction due to the pandemic.

Income Tax Expense

We recorded a $176.9 million tax benefit (49.0 percent effective tax rate) compared to a $69.1 million tax provision (22.9 percent effective tax rate) for 2020 and 2019, respectively. The 49.0 percent effective tax rate for 2020 differed from the statutory federal income tax rate of 21.0 percent primarily due to the tax accounting impact of the CARES Act which includes a $98.0 million federal income tax benefit related to the full utilization of 2018 and 2019 net operating losses as well as the ability to carryback a majority of the 2020 net operating loss at the 35.0 percent tax rate applicable in earlier years. The effective tax rate was also impacted by the remeasurement of deferred taxes and state taxes. We expect our effective tax rate to be between 23 percent and 24 percent in the near term.

2019 compared to 2018

The comparison of our 2019 results to 2018 results is included in our Annual Report on Form 10-K for the year ended December 31, 2019, under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and investment securities (short-term and long-term) increased at December 31, 2020 to $685.2 million from $473.4 million at December 31, 2019. Investment securities represent highly liquid marketable securities which are available-for-sale.

Restricted cash represents escrowed funds under fixed fee contracts and cash collateral against letters of credit required by hotel properties for guaranteed room availability, airports and certain other parties. Under our fixed fee flying contracts, we require our customers to prepay for flights to be provided by us. The prepayments are escrowed until the flight is completed and are recorded as restricted cash with a corresponding amount reflected as air traffic liability.

We have suspended share repurchases and our quarterly cash dividend, as part of cash conservation efforts in response to the effects of COVID-19 on our business. In connection with our receipt of financial support under the payroll support programs with the Treasury, we agreed not to repurchase shares or pay cash dividends through March 31, 2022. We also suspended all non-airline capital expenditures and reduced airline capital expenditures in 2020 .

We received $94 million in tax refunds in 2020 related to net operating loss carrybacks and expect to receive in 2021 $147 million in federal income tax refunds related to 2019 and 2020 net operating losses and $29 million in various other tax refunds.

We believe we have more than adequate liquidity resources through our operating cash flows, borrowings, cash balances, Treasury payroll support programs and tax refunds to meet our future contractual obligations and availability of credit which could be secured by unencumbered aircraft. We will continue to consider raising funds through debt financing on an opportunistic basis.

Debt

Our total long-term debt and finance lease obligations balance, without reduction for related issuance costs, increased from $1.45 billion as of December 31, 2019 to $1.68 billion as of December 31, 2020. During 2020, we borrowed $428.0 million, including a $100.0 million up-size under the Credit and Guaranty Agreement (the “Term Loan”), $150.0 million 8.5% Senior Secured Notes due 2024, senior unsecured term promissory note to the US treasury (the "PSP Note") of $23.0 million, and additional debt secured by aircraft and engines of $115.0 million. During 2020, we made $181.9 million in net principal and finance lease repayments.

In October 2020, we closed on the private offering of $150.0 million principal amount of 8.5% Senior Secured Notes due 2024. The Senior Secured Notes and related guarantees are secured by first priority security interests in substantially all of our property and assets and the guarantors of the Notes (excluding aircraft, aircraft engines and certain other assets).The guarantors of the Senior Secured Notes include all significant subsidiaries other than Sunseeker Resorts, Inc. and its subsidiaries

In February 2020, we entered into an amendment to our Term Loan under which the interest rate was reduced by 150 basis points, the principal amount of the debt was increased by $100.0 million to $545.5 million, and the quarterly payments of principal were increased to $1.4 million. The remaining provisions of the Term Loan remain substantially unchanged, including the maturity date of February 2024.

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In September 2020, we borrowed $84.0 million under a loan agreement secured by aircraft and spare engines. The notes bear interest at a fixed rate, payable in monthly installments maturing in September 2025 and September 2026 for the spare engines and aircraft, respectively.

In April 2020, we borrowed $31.0 million under a loan agreement secured by two aircraft. The note bears interest at a fixed rate, payable in quarterly installments with a maturity date in April 2028.

Sources and Uses of Cash

Operating Activities. Operating cash inflows are primarily derived from providing air transportation and related ancillary products and services to customers. During 2020, our operating activities provided $234.6 million of cash compared to $442.2 million during 2019. The decrease in cash from operating activities is largely due to a $416.2 million decrease in net income offset by $292.8 million in non-cash special charges recognized in 2020.

During 2019, our operating activities provided $442.2 million of cash compared to $356.6 million in 2018. The year-over-year increase in reported cash inflows largely resulted from the increase in net income.

Investing Activities. During 2020, cash used for investing activities was $365.7 million compared to $476.5 million in 2019. The decrease in cash used is mostly due to a $225.7 million year-over-year decrease in cash outlays for the purchase of property and equipment combined with $87.6 million in proceeds from sale-leaseback transactions offset by purchases of investment securities (net of proceeds from maturities and sales) of $200.6 million. Cash used for capital expenditures was $281.2 million in 2020 (of which $262.7 million related to the airline) compared to $506.8 million in 2019 (of which $437.1 million related to the airline).

Purchases of investment securities (net of proceeds from maturities and sales) were $182.0 million during 2020 compared to $18.6 million of proceeds (net of purchases) during 2019.

During 2018, our primary use of cash was for capital expenditures of $334.8 million. Cash was also used for the purchase of investment securities, net of maturities, of $65.1 million.

Financing Activities. Cash provided by financing activities during 2020 was $164.6 million compared to $75.1 million in 2019. The year-over-year change is primarily due to debt financing activity. In 2020, proceeds from debt issuance in excess of principal payments and debt issuance costs on debt were $203.0 million, compared to $135.8 million during 2019.

In addition, cash dividends paid to shareholders decreased year over year from $45.6 million in 2019 to $11.4 million in 2020 as dividends were suspended after the first quarter 2020. This decrease was offset by a year-over-year increase in the repurchase of common stock of $15.2 million, stock repurchases also having been suspended after the onset of the pandemic.

In 2018, cash used by financing activities was $62.4 million. Principal payments on debt in excess of the proceeds from debt issuance were $21.0 million, combined with $45.2 million in cash dividends paid to shareholders, plus $3.7 million in stock repurchases.

OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The following table discloses aggregate information about our contractual cash obligations and off-balance sheet arrangements as of December 31, 2020 and the periods in which payments are due:

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

(1)Long-term debt obligations (including variable interest entities) include scheduled interest payments, using LIBOR rates as of December 31, 2020, and excludes debt issuance costs.

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

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements based on events and transactions occurring during the periods reported. Note 3 to our Consolidated Financial Statements provides a detailed discussion of our significant accounting policies.

Critical accounting policies are defined as those policies that reflect significant judgments about matters that are inherently uncertain. Our actual results may differ from these estimates under different assumptions or conditions. We believe our critical accounting policies are limited to those described below.

Affinity Credit Card Program

The Allegiant World Mastercard® is issued by Bank of America through which arrangement points are sold and consideration is received under an agreement which, as amended in September 2020, expires in 2029. Under this arrangement, we identified the following deliverables: travel points to be awarded (the travel component), use of our brand and access to our member lists, and certain other advertising and marketing elements (collectively the marketing component). Each of these deliverables is accounted for separately and allocation of the consideration from the agreement is determined based on the relative selling price of each deliverable. We applied a level of management judgment and estimation in determining the best estimate of selling price for each deliverable by considering multiple inputs and methods including, but not limited to, the redemption value of points awarded, discounted cash flows, brand value, volume discounts, published selling prices, number of points to be awarded and number of points expected to be redeemed.

Revenue from the travel component is deferred based on its relative selling price and is recognized into scheduled service revenue when the points are redeemed by cardholders and transportation is provided. Revenue from the marketing component is considered earned in the period in which points are sold and is therefore recognized into third party products revenue in the same period.

Accounting for Long-Lived Assets

We record impairment losses on long-lived assets used in operations, consisting principally of property and equipment, when events or changes in circumstances indicate, in management’s judgment, that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In making these determinations, we utilize certain assumptions, including, but not limited to: (i) estimated fair value of the assets; and (ii) estimated future cash flows expected to be generated by those assets which are based on additional assumptions such as (but not limited to) asset utilization, average fare, block hours, fuel costs, length of service the asset will be used in operations, and estimated salvage values.

In estimating the useful lives and residual values of our aircraft, we have primarily relied upon actual experience with the same or similar aircraft types, current and projected future market information, and recommendations from other industry sources. Subsequent revisions to these estimates could be caused by changing market prices of our aircraft, changes in utilization of the aircraft, and other fleet events. We evaluate these estimates used for each reporting period and adjust when deemed necessary. To the extent a change in estimate for useful lives or salvage values of our property and equipment occurs, there could be an acceleration of depreciation expense associated with the change in estimate. See Note 3 to the Consolidated Financial Statements for further detail.

Aircraft Maintenance and Repair Costs and Major Maintenance Deferral

We account for major maintenance costs of Airbus airframes and the related CFM engines using the deferral method. Under this method, the cost of major maintenance events is capitalized and amortized as a component of depreciation and amortization expense over the estimated period until the next scheduled major maintenance event. The timing of the next major maintenance event is estimated based on assumptions including estimated cycles, hours and months, required maintenance intervals, and the age/condition of related parts. These assumptions may change based on forecasted aircraft utilization changes, updates to government regulations, and manufacturer maintenance intervals, as well as unplanned incidents causing damage requiring a major maintenance event prior to a scheduled visit. If the estimated timing of the next maintenance event changes, the related amortization period would also change.

RECENT ACCOUNTING PRONOUNCEMENTS

See related disclosure in Note 3 to our Consolidated Financial Statements.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are subject to certain market risks, including changes in interest rates and commodity prices (specifically, aircraft fuel). The adverse effects of changes in markets could pose potential loss, as discussed below. The sensitivity analysis does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.

Aircraft Fuel

Our results of operations can be significantly impacted by changes in the price and availability of aircraft fuel. Aircraft fuel expense for the year ended December 31, 2020 represented 17.5 percent of our total operating expenses. Increases in fuel prices or a shortage of supply could have a material effect on our operations and operating results. Based on our 2020 fuel consumption, a hypothetical ten percent increase in the average price per gallon of aircraft fuel would have increased fuel expense by approximately $21.8 million for the 2020 year. We have not hedged fuel price risk in many years.

Interest Rates

As of December 31, 2020, we had $1.15 billion of variable-rate debt, including current maturities and without reduction for $18.3 million in related costs. A hypothetical 100 basis point change in interest rates would have affected interest expense by approximately $11.8 million for 2020.

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Item 8. Financial Statements and Supplementary Data

Selected Quarterly Financial Data (unaudited)

Quarterly results of operations for the years ended December 31, 2020 and 2019 are summarized below. Amounts are shown in thousands, except for per share amounts.

Earnings (loss) per share to common shareholders:

Earnings per share to common shareholders:

(1) $6.8 million in special charges for Sunseeker Resort, related to expense during the first quarter 2020, were reclassified from operating special expense to non-operating special expense for the six months ended June 30, 2020.

The quarterly earnings per share amounts for a year will not add to the earnings per share for that year due to the weighting of shares used in calculating per share data.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Allegiant Travel Company:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Allegiant Travel Company and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three‐year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‐year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the modified retrospective adoption of Accounting Standards Update 2016-02, Leases (Topic 842).

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Impairment of Sunseeker Resort property and equipment

As discussed in Note 2 and Note 17 to the consolidated financial statements, the Company recorded an impairment charge of $128.9 million related to the property and equipment of the Sunseeker Resort (Sunseeker), the Company’s resort development in Southwest Florida. When events or circumstances are identified that indicate the assets may be impaired, the Company estimates the future undiscounted cash flows expected to be generated by Sunseeker to determine if the cash flows are less than the carrying amount of the Sunseeker property and equipment. When the undiscounted cash flows are less than the carrying amount of the assets, the Company estimates the fair value of the assets to determine if the assets are impaired by comparing the fair value to the carrying value. Due to the decreased demand and U.S. government travel restrictions and quarantine requirements caused by COVID-19, a triggering event was identified as of March 31, 2020 and the Company determined the sum of the undiscounted cash flows was less than the assets’ carrying value. As a result, management estimated the fair value of the assets related to Sunseeker and the Company recorded an impairment charge representing the difference between the carrying value of the Sunseeker property and equipment and the estimated fair value of these assets.

We identified the evaluation of impairment of Sunseeker property and equipment as a critical audit matter. Subjective auditor judgment was required to evaluate the key assumptions used to estimate the fair value of the Sunseeker

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property and equipment. Specifically, the market transaction assumptions used to assess the fair value of the assets were challenging to test as they represented subjective determinations of market and economic conditions. The audit effort associated with this estimate required the use of professionals with specialized skills and knowledge.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s property and equipment impairment process, including controls related to the evaluation of market transaction valuation assumptions. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the reasonableness of the estimate of the fair value of the Sunseeker property and equipment. The valuation professionals obtained market data for similar transactions to compare to the Company’s fair value estimate.

Amortization period of deferred engine major maintenance costs

As discussed in Note 3 to the consolidated financial statements, the Company accounts for major maintenance costs of its Airbus fleet using the deferral method. For the year ended December 31, 2020, the Company recognized $17.6 million of amortization expense for the cost of engine major maintenance as a component of depreciation and amortization. The amortization period associated with engine major maintenance costs is based on the estimated period until the next scheduled engine major maintenance event. The timing of next engine major maintenance events is based on certain assumptions, which are dependent upon expected future engine utilization levels.

We identified the evaluation of the amortization period of deferred engine major maintenance costs as a critical audit matter. A high degree of auditor judgment was required to evaluate future engine utilization levels, including the relevance of the use of historical engine utilization data used to assess the reasonableness of expected future engine utilization levels.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s engine major maintenance cost process, including controls over the development of the expected future engine utilization levels used in the determination of the related amortization period. We developed an estimate of the amortization period using actual engine utilization data and compared our estimate to that of the Company. We further analyzed the amortization period by performing sensitivity analyses on the expected future engine utilization levels to assess the impact on the Company’s amortization expense.

/s/ KPMG LLP

We have served as the Company’s auditor since 2016.

Dallas, Texas

March 1, 2021

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ALLEGIANT TRAVEL COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

CURRENT ASSETS

Prepaid expenses and other current assets 24,616 35,617

Long-term investments — 15,542

CURRENT LIABILITIES

Current operating lease liabilities 14,313 2,662

LONG-TERM DEBT AND OTHER NONCURRENT LIABILITIES

COMMITMENTS AND CONTINGENCIES (NOTE 14)

SHAREHOLDERS' EQUITY

Accumulated other comprehensive gain (loss), net (27) 98

The accompanying notes are an integral part of these consolidated financial statements.

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ALLEGIANT TRAVEL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

Year ended December 31,

OPERATING REVENUES:

OPERATING EXPENSES:

CARES Act grant recognition (152,448) — —

OTHER (INCOME) EXPENSES:

Loss on extinguishment of debt 1,222 3,677 —

Special charges 26,632 — —

Earnings (loss) per share to common shareholders:

Shares used for computation:

Cash dividends declared per share: $ 0.70 $ 2.80 $ 2.80

The accompanying notes are an integral part of these consolidated financial statements.

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ALLEGIANT TRAVEL COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Year ended December 31,

Other comprehensive income (loss):

Change in available for sale securities, net of tax (178) 750 (1,153)

Foreign currency translation adjustments 53 9 177

Change in derivatives, net of tax — — 3,155

Total other comprehensive income (loss) (125) 759 2,179

The accompanying notes are an integral part of these consolidated financial statements.

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ALLEGIANT TRAVEL COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

Accumulated

Common Additional other Total

stock Par paid-in comprehensive Retained Treasury shareholders'

outstanding value capital income (loss) earnings shares equity

Stock issued under employee stock purchase plan 33 — — — — 4,268 4,268

Cash dividends declared, $2.80 per share — — — — (45,247) — (45,247)

Stock issued under employee stock purchase plan 39 — — — — 6,027 6,027

Cash dividends declared, $2.80 per share — — — — (45,552) — (45,552)

Other comprehensive income — — — 759 — — 759

Cumulative effect of the New Lease Standard (see Note 8) $ (550) $ (550)

Stock issued under employee stock purchase plan 57 — — — — 5,344 5,344

Cash dividends, $.70 per share for the year(1) — — — — (11,361) — (11,361)

Other comprehensive income (loss) — — — (125) — — (125)

CARES Act warrant issuance — — 1,375 — — — 1,375

(1) Dividend declared and paid in the first quarter of 2020 prior to the onset of the pandemic. As a part of accepting benefits from the Treasury under PSPA and PSP2, the Company has agreed not to pay cash dividends through March 31, 2022.

The accompanying notes are an integral part of these consolidated financial statements.

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ALLEGIANT TRAVEL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year ended December 31,

OPERATING ACTIVITIES:

(Gain)/loss on aircraft and other equipment disposals (1,811) (8,475) 2,360

Changes in certain assets and liabilities:

INVESTING ACTIVITIES:

Proceeds from sale-leaseback transactions 87,580 — —

FINANCING ACTIVITIES:

NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 33,534 40,874 25,272

CASH PAYMENTS/(RECEIPTS) FOR:

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS

Right-of-use (ROU) assets acquired $ 115,082 $ 2,510 $ —

Property capitalized under operating leases $ 19,294 $ 25,830 $ —

Flight equipment acquired under finance leases 27,765 — 127,625

(1) Dividend declared and paid in the first quarter of 2020 prior to the onset of the pandemic. As a part of accepting benefits from the Treasury under PSPA and PSP2, the Company has agreed not to pay cash dividends through March 31, 2022.

The accompanying notes are an integral part of these consolidated financial statements.

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ALLEGIANT TRAVEL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018

Note 1 — Organization and Business of Company

Allegiant Travel Company (the “Company”) is a leisure travel company focused on providing travel services and products to residents of under-served cities in the United States. The Company operates a low-cost, low utilization passenger airline which sells air transportation both on a stand-alone basis and bundled with the sale of ancillary air-related and third party services and products. The Company also provides air transportation under fixed fee flying arrangements, generates other ancillary revenues, and operates non-airline related entities which include the development of Sunseeker Resort and related golf course, and Teesnap golf course management solution. Previously, the Company also operated Allegiant Nonstop family entertainment centers.

Scheduled service and fixed fee air transportation services have similar operating margins, economic characteristics, and production processes (check-in, baggage handling and flight services) which target the same class of customers, and are subject to the same regulatory environment. As a result, the Company believes its airline activities operate under one reportable segment and does not separately track expenses for scheduled service and fixed fee air transportation services. The Company's non-airline related entities represent separate reportable segments and include Sunseeker Resort, and other non-airline activities. Refer to Note 16 for additional information.

Note 2 — Impact of the COVID-19 Pandemic

The rapid spread of COVID-19 and the related government restrictions, social distancing measures, and consumer fears have impacted flight loads, resulted in unprecedented cancellations of bookings and substantially reduced demand for new bookings throughout the airline industry. Starting in March 2020, the Company experienced a severe reduction in air travel, which continued through the remainder of 2020. Demand in the foreseeable future will continue to be affected by fluctuations in COVID-19 cases, hospitalizations, deaths, treatment efficacy and the effectiveness and availability of vaccines. The Company is continuously reevaluating flight schedules and adjusting capacity based on demand trends.

The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted in March 2020, providing support for the airline industry and other businesses and individuals.

On April 20, 2020, the Company through its airline operating subsidiary Allegiant Air, LLC entered into a Payroll Support Program Agreement (the “PSPA”) with the U.S. Department of the Treasury ("Treasury") for an award Allegiant Air would receive under the CARES Act. Allegiant Air received a total of $176.9 million under the PSPA during 2020. The proceeds of the award were used exclusively for wages, salaries and benefits during the second and third quarters of 2020, in accordance with the agreement.

The $176.9 million received under the PSPA during the second and third quarters of 2020 includes direct grants of $153.8 million, a $23.1 million loan, and warrants to purchase 27,681 shares of the Company's common stock with a fair value of $1.4 million, as further discussed below.

In consideration for the grant, Allegiant Air issued to Treasury a low-interest rate, senior unsecured term promissory note (the “PSP Note”) which will mature 10 years after issuance. The principal amount of the PSP Note is $23.1 million. The PSP Note is guaranteed by the Company and is prepayable at any time at par (see Note 7).

Also in consideration for the grant, the Company issued warrants (the “PSP Warrants”) to Treasury to purchase 27,681 shares of common stock of the Company at a price of $83.33 per share (based on the closing price of the Company’s common stock on The Nasdaq Global Select Market on April 9, 2020). The PSP Warrants expire five years after issuance, and will be exercisable either through net share settlement or cash, at the Company’s option. The PSP Warrants include customary anti-dilution provisions, do not have any voting rights and are freely transferable, with registration rights.

As indicated above, the Company made significant progress on strengthening its liquidity through efforts including suspending all stock buybacks and dividends; temporarily reducing executives salaries by 50 percent and temporarily foregoing cash compensation of Board members; enacting a hiring freeze and offering voluntary leave; eliminating cash bonuses; suspending all non-essential capital expenditures including, but not limited to, Sunseeker Resorts, Teesnap and Allegiant Nonstop family entertainment centers; and extending payment terms and renegotiating contracts with vendors.

On December 27, 2020, the Consolidated Appropriations Act, 2021 (the "Payroll Support Program Extension") was signed into law. This Payroll Support Program Extension provides an additional $15.0 billion in support to the airline industry. See Note 18 - Subsequent Events.

Given the above actions and the Company's assumptions about the future impact of COVID-19 on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, the Company expects to meet its cash obligations as well as remain in compliance with the debt covenants in its existing financing agreements for the next 12

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months based on its current level of unrestricted cash and short-term investments, its anticipated access to liquidity, and projected cash flows from operations.

Special Charges

The effects of COVID-19 triggered an impairment review, and non-cash impairment charges were recognized during the year ended December 31, 2020 (see Note 17 - Impairment for additional detail). The Company also identified expenses that were unique and specific to COVID-19. The impairment charges and other expenses that resulted from the effects of COVID-19 are recorded as special charges within both operating and non-operating expenses during the twelve months ended December 31, 2020. See the table below for a summary of operating and non-operating special charges recorded by segment during the year ended December 31, 2020.

(in thousands) Airline Sunseeker Resort Other non-airline Total

Additional detail for the $332.9 million total special charges (operating and non-operating) for the year ended December 31, 2020 appears below:

Operating

–$161.6 million in impairment charges

–Includes Airline - $5.0 million; Sunseeker Resort - $128.9 million; Kingsway - $1.1 million; Other non-airline $26.6 million

–$98.0 million adjustment resulting from the accelerated retirements of eight airframes and five engines, loss on sale leaseback transactions of eight aircraft, and write-offs of other aircraft related assets

–$35.1 million adjustment for additional salary and benefits expense in relation to the elimination of positions as well as other non-recurring compensation expense associated with the acceleration of certain existing stock awards

–Includes Airline - $32.1 million; Sunseeker Resort - $2.9 million

–$5.0 million related to suspension of construction at Sunseeker Resort

–$6.6 million write-down on various non-aircraft assets and other various expenses

Non-operating

–$26.6 million which includes termination fees and debt issuance costs related to the termination of the loan agreement with Sixth Street Partners (formerly TSSP).

Note 3 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Allegiant Travel Company and its majority-owned operating subsidiaries. The Company's investments in unconsolidated affiliates, which are 50 percent or less owned, are accounted for under the equity or cost method. All intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates.

The Company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), (the "New Lease Standard") effective January 1, 2019 using the modified retrospective transition approach. Under this method, the cumulative effect adjustment to the opening balance of retained earnings was recognized at the adoption date. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption on January 1, 2019. See Recent Accounting Pronouncements below for further information.

The Company adopted Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) effective January 1, 2020. The standard requires the use of an “expected loss” model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. The Company adopted this accounting standard prospectively as of January 1, 2020 and it did not have a significant impact on its consolidated financial statements.

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Cash and Cash Equivalents

Cash and cash equivalents include investments and interest bearing instruments with maturities of three months or less at the balance sheet date. Such investments are carried at cost which approximates fair value.

Restricted Cash

Restricted cash represents escrowed funds under fixed fee contracts, and cash collateral held against letters of credit required by hotel properties for guaranteed room availability, airports and certain other parties.

Accounts Receivable

Accounts receivable are carried at face amount which approximates fair value. In addition to income tax receivables, the accounts receivable consist primarily of amounts due from credit card companies associated with the sale of tickets for future travel. These receivables are short-term and generally settle within a few days of sale. There are also receivables related to commission amounts due from Enterprise Holdings Inc. based on terms in the rental car provider agreement and amounts due related to fixed fee charter agreements. If deemed necessary, the Company records charges to its allowance for doubtful accounts for amounts not expected to be collected, for which the balance was immaterial for all years presented. The Company also had outstanding receivables from a third party as of December 31, 2020 and 2019, of which $10.9 million and $11.4 million, respectively, was due more than one year after the balance sheet date and is classified with the Company's other assets.

Short-term and Long-term Investments

The Company’s investments in marketable securities are classified as available-for-sale and are reported at fair value with the net unrealized gain or (loss) reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity. For investments in an unrealized loss position, the Company determines whether a credit loss exists by considering information about the collectability of the instrument and current market conditions. There have been no credit losses. Investment securities with original maturities of three months or less are classified as cash equivalents. Investment securities with original maturities greater than three months are classified as either short-term investments or long-term investments based on the maturity date in relation to the balance sheet date. Short-term investments have a maturity date less than or equal to one year from the balance sheet date, and long-term investments have a maturity date greater than one year from the balance sheet date. As of December 31, 2019, the Company’s long-term investments consisted of corporate debt securities, federal agency debt securities, US Treasury Bonds, and municipal debt securities with contractual maturities of less than 24 months.

The amortized cost of investment securities sold is determined by the specific identification method with any realized gains or losses reflected in other (income) expense. The Company had minimal realized losses during the years ended December 31, 2020, 2019, and 2018. The Company believes unrealized losses related to debt securities are not other-than-temporary and does not intend to sell these securities prior to amortized cost recoverability.

The Company attempts to minimize its concentration risk with regard to its cash, cash equivalents, and investment portfolio. This is accomplished by diversifying and limiting amounts among different counterparties, the type of investment, and the amount invested in any individual security, commercial paper, or money market fund.

Expendable Parts, Supplies and Fuel, Net

Expendable parts, supplies and fuel inventories are valued at cost using the first-in, first-out method. Such inventories are charged to expense as they are used in operations. An obsolescence allowance for expendable parts and supplies is based on salvage values and the average remaining useful life of the Airbus fleet. The obsolescence allowance for expendable parts and supplies was $4.3 million and $2.7 million at December 31, 2020 and 2019, respectively. Rotable aircraft parts inventories are included in property and equipment.

Operating Lease Right-of-Use Asset and Liability

The Company determines if an arrangement is a lease at inception and has lease agreements for aircraft, office facilities, office equipment, certain airport and terminal facilities, and other space and assets with non-cancelable lease terms. Certain real estate and property leases, aircraft leases, and various other operating leases are measured on the balance sheet with a lease liability and right-of-use ("ROU") asset. Airport terminal leases mostly include variable lease payments outside of those based on a fixed index, and are therefore excluded from consideration.

ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available.

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Lease payments include fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, and others as required by the New Lease Standard. Lease payments do not include variable lease payments other than those that depend on an index or rate, any guarantee by the lessee of the lessor’s debt, or any amount allocated to non-lease components.

Lease terms include options to extend when it is reasonably certain that the option will be exercised. Leases with a term of 12 months or less are not recorded on the balance sheet. Additionally, lease and non-lease components are accounted for as a single lease component for real estate agreements.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives less any estimated salvage value. Property under finance leases and related obligations are initially recorded at an amount equal to the present value of future minimum lease payments computed on the basis of the Company’s incremental borrowing rate, and depreciation is recorded on a straight-line basis and is included within depreciation and amortization expense. The estimated useful lives of the principal asset classes are shown below.

Aircraft, engines and related rotable parts 10-25 years

Buildings and leasehold improvements 10-25 years

Equipment 3-10 years

Computer hardware and software 3-10 years

In estimating the useful lives and residual values of aircraft, the Company primarily relies upon actual experience with the same or similar aircraft types, current and projected future market information, and recommendations from other industry sources. Subsequent revisions to these estimates could be caused by changing market prices of the Company’s aircraft, changes in utilization of the aircraft, and other fleet events. These estimates are evaluated each reporting period and adjusted if necessary. Changes in the estimate for useful lives or residual values of the Company’s property and equipment could result in changes in depreciation expense.

Interest is capitalized using the Company’s weighted average borrowing rate and depreciated over the estimated useful life of the related asset(s) acquired/developed. Capitalized interest for the years ended December 31, 2020, 2019 and 2018 was $4.1 million, $4.5 million and $2.4 million, respectively.

Software Capitalization

The Company capitalizes certain internal and external costs related to the acquisition and development of computer software during the application development stage of projects. The Company amortizes these capitalized costs using the straight-line method over the estimated useful life of the software, which typically ranges from three to ten years. The Company had unamortized computer software development costs of $42.3 million and $55.7 million as of December 31, 2020 and 2019, respectively. Amortization expense related to computer software was $9.6 million, $12.2 million and $14.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. Costs incurred during the preliminary and post-implementation stages are expensed as incurred.

Aircraft Maintenance and Repair Costs

The Company accounts for all non-major maintenance and repair costs incurred for its Airbus fleet under the direct expense method. Under this method, maintenance and repair costs for aircraft are charged to operating expenses as incurred. Maintenance and repair costs includes all parts, materials, and line maintenance activities required to maintain the Company's fleet.

The Company accounts for major maintenance costs of its Airbus airframes and the related CFM engines using the deferral method. Under this method, the Company capitalizes the cost of major maintenance events, which are amortized as a component of depreciation and amortization expense, over the estimated period until the next scheduled major maintenance event. During 2020 and 2019, the Company capitalized $12.8 million and $64.1 million of major maintenance costs for engines with associated amortization expense of $17.6 million and $11.1 million, respectively. During 2020 and 2019, the Company capitalized $22.6 million and $18.4 million of major maintenance costs for airframes with associated amortization expense of $19.9 million and $14.9 million, respectively.

Until the full retirement of the MD-80 aircraft in November 2018, the Company accounted for major maintenance costs of the MD-80 airframes and JT8D-219 engines, as well as all non-major maintenance and repair costs incurred for the MD-80 fleet, under the direct expense method.

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Measurement of Impairment of Long-Lived Assets

The Company records impairment losses on long-lived assets used in operations, consisting principally of property and equipment, when events or changes in circumstances indicate, in management’s judgment, that the assets might be impaired, and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In making these determinations, the Company utilizes certain assumptions, including, but not limited to: (i) estimated fair value of the assets; and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service for which the asset will be used in operations, and estimated salvage values.

For the year ended December 31, 2020, the Company recorded a $161.6 million impairment as a result of COVID-19. The impairment is more fully discussed in Note 17.

For the years ended December 31, 2019 and 2018, the Company did not incur any impairment losses.

Revenue Recognition

Passenger revenue

Passenger revenue includes scheduled service revenue, ancillary air-related charges, and travel point redemptions from the co-branded Allegiant World Mastercard® credit card.

Scheduled service revenue consists of ticket revenue generated from nonstop flights in the Company’s route network, recognized either when the transportation is provided or when the itinerary expires unused. Nonrefundable scheduled itineraries expire on the date of the intended flight, unless the date is extended by notification from the customer in advance. Itineraries sold for transportation not yet used, as well as unexpired credits, are included in air traffic liability.

Ancillary air-related charges include various unbundled services and products related to the flight such as baggage fees, the use of the Company’s website to purchase scheduled service transportation, advance seat assignments, and other services. Revenues from air-related charges are recognized when the transportation is provided. If a customer cancels a flight, a voucher may be issued for a future flight, at which time the associated revenue is recognized. Additionally, the Company estimates the value of vouchers that will expire unused and recognizes such revenue at the time of issuance.

Various taxes and fees, assessed on the sale of tickets to customers, are collected by the Company serving as an agent, and remitted to taxing authorities. These taxes and fees are not included as revenue in the Company’s consolidated statements of income and are recorded as a liability until remitted to the appropriate taxing authority.

Revenue from travel point redemptions from the co-branded credit card are described in the Affinity Credit Card Program section below.

Third party products revenue

Ancillary third party products revenue is generated from the sale of hotel rooms, rental cars and ticket attractions, as well as marketing revenue associated with the co-branded credit card. Revenue from the sale of third party products is recognized at the time the product is utilized, such as the time a purchased hotel room is occupied. The Company follows accounting standards for determining the amount of revenue to be recognized for each element of a bundled sale involving third party products in addition to airfare. Revenue from the sale of third party products is recorded net of amounts paid to wholesale providers, travel agent commissions, and transaction costs.

Pursuant to the co-brand arrangement with Bank of America, the Company has various performance obligations which are collectively referred to as the marketing component. These obligations consist of use of the Company’s brand and access to its member lists, and certain other advertising and marketing elements. The marketing component is recorded as third party products revenue in the period in which points are awarded to the credit card holders.

Fixed fee contract revenue

Fixed fee contract revenue consists of agreements to provide charter service on a year-round and ad hoc basis. Fixed fee contract revenue is recognized when the transportation is provided.

Other revenue

Other revenue is generated from non-airline activities as well as leasing aircraft and engines. Lease revenue is recognized ratably over the lease term.

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 that was amended in 2020 and expires in 2029. Under this arrangement, the Company identified the following deliverables: travel points to be awarded (the travel component), use of the Company’s brand and access to its

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member lists, and certain other advertising and marketing elements (collectively the marketing component). Each of these deliverables is accounted for separately and allocation of the consideration from the agreement is determined based on the relative selling price of each deliverable. The Company applied a level of management judgment and estimation in determining the best estimate of selling price for each deliverable by considering multiple inputs and methods including, but not limited to, the redemption value of points awarded, discounted cash flows, brand value, volume discounts, published selling prices, number of points to be awarded and number of points expected to be redeemed.

Revenue from the travel component is deferred based on its relative selling price and is recognized into passenger revenue when the points are redeemed by cardholders and transportation is provided. Revenue from the marketing component is considered earned in the period in which points are sold and is therefore recognized into third party products revenue in the same period.

Advertising Costs

Advertising costs are charged to expense in the period incurred. Advertising expense was $12.4 million, $29.1 million and $28.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. In 2019, the Company entered into a naming rights agreement with the Raiders of the National Football League for the professional football stadium in Las Vegas which opened in 2020. Prepayments and other associated advertising expenses began in mid-2020 and will continue through the term of this agreement.

Earnings per Share

Basic and diluted earnings per share are computed pursuant to the two-class method as opposed to the treasury method. Under the two-class method, the Company attributes net income to two classes, common stock and unvested restricted stock awards. Unvested restricted stock awards granted to employees under the Company’s Long-Term Incentive Plan are considered participating securities because they receive non-forfeitable rights to cash dividends at the same rate as common stock.

Diluted net income per share is calculated using the more dilutive of two methods. Under both methods, the exercise of employee stock options is assumed using the treasury stock method. The assumption of vesting of restricted stock, however, differs as described below:

1.Assume vesting of restricted stock using the treasury stock method.

2.Assume unvested restricted stock awards are not vested, and allocate earnings to common shares and unvested restricted stock awards using the two-class method.

For the years ended December 31, 2019 and 2018, the second method above was used in the computation because it was more dilutive than the first method. Given the loss position in 2020, both methods yield the same result. The following table sets forth the computation of net income (loss) per share on a basic and diluted basis for the periods indicated:

Year ended December 31,

Basic:

Diluted:

Dilutive effect of stock options and restricted stock — 51 53

Participating securities excluded under two-class method — (37) (27)

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Stock awards outstanding of 24,004, 19,928, and 77,037 shares (not in thousands) as of December 31, 2020, 2019, and 2018, respectively, were excluded from the computation of diluted earnings per share as they were antidilutive.

Share-Based Compensation

The Company accounts for share-based compensation in accordance with accounting standards which require the compensation cost related to share-based payment transactions be recognized in the Company’s consolidated statements of income. The share-based cost is measured based on grant date fair value. The Company’s share-based employee compensation plan is more fully discussed in Note 13.

Income Taxes

The Company recognizes deferred income taxes based on the asset and liability method required by accounting standards. Deferred tax assets and liabilities are determined based on the timing differences between book basis for financial reporting purposes and tax basis of the asset and liability and measured using the enacted tax rates and provisions of the enacted tax law. A valuation allowance for deferred tax assets is provided if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company determines the net non-current deferred tax assets or liabilities separately for federal, state, foreign and other local jurisdictions.

The Company’s income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities in the jurisdictions where the Company operates. The Company assesses potentially unfavorable outcomes of such examinations based on the criteria set forth in uncertain tax position accounting standards. The accounting standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.

Accounting standards for income taxes utilize a two-step approach for evaluating tax positions. Recognition (Step I) occurs when the Company concludes that a tax position, based on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step II) is only addressed if the position is deemed to be more likely than not to be sustained. Under Step II, the tax benefit is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.

The tax positions failing to qualify for initial recognition are recognized in the first subsequent interim period they meet the “more likely than not” standard. If it is subsequently determined that a previously recognized tax position no longer meets the “more likely than not” standard, it is required that the tax position be derecognized. As applicable, the Company will recognize accrued penalties and interest related to unrecognized tax benefits in the provision for income taxes.

Recent Accounting Pronouncements

In February 2016, the FASB issued the New Lease Standard. This standard requires leases, other than short-term, to be recognized on the balance sheet as a liability and a corresponding ROU asset.

This standard was effective for interim and annual reporting periods beginning after December 15, 2018 and the Company adopted the New Lease Standard as of January 1, 2019. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

The Company adopted the New Lease Standard using the modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11, "Targeted Improvements - Leases (Topic 842)." Under this method, the cumulative effect adjustment to the opening balance of retained earnings was recognized at the adoption date. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption on January 1, 2019.

The Company's consolidated balance sheet was affected by this standard, but the consolidated statements of income and cash flows were not significantly impacted. The most significant change to the consolidated balance sheet upon adoption on January 1, 2019 related to the recognition of new right-of-use (ROU) assets of $18.0 million and operating liabilities of $19.1 million. The Company's accounting for finance leases remains substantially unchanged. See Note 7 for more information on the impact of this standard.

On June 16, 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The standard requires the use of an “expected loss” model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. The Company adopted this accounting standard prospectively as of January 1, 2020, and it did not have a significant impact on its consolidated financial statements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is intended to simplify various aspects related to accounting for income taxes and is effective for fiscal years

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beginning after December 15, 2020, including interim periods therein, and early adoption is permitted. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application of Topic 740. The Company plans to adopt ASU 2019-12 in the first quarter of 2021 and its adoption is not expected to have a material effect on the Company's consolidated financial statements.

Note 4 — Revenue Recognition

Passenger revenue

Passenger revenue is the most significant category in our reported operating revenues, as outlined below:

Year Ended December 31,

Sales of passenger tickets not yet flown are recorded in air traffic liability. Passenger revenue is recognized when transportation is provided or when ticket voucher breakage occurs, to the extent different from estimated breakage. As of December 31, 2020, approximately 27.9 percent of the air traffic liability balance was related to forward bookings, with the remaining 72.1 percent related to credit vouchers for future travel.

The normal contract term of passenger tickets is 12 months and revenue associated with future travel will principally be recognized within this time frame. $201.0 million of the $250.0 million that was recorded in the air traffic liability balance at December 31, 2019 was recognized into passenger revenue during the 12 months ended December 31, 2020.

In April 2020, the Company announced that credits issued for canceled travel in April through the end of the COVID-19 pandemic will have an extended expiration date of two years from the original booking date. The Company later announced that this extension would also apply to credits issued for cancelled travel in January through March 2020. This change has been considered in estimating the future breakage rate, which represents the value of credit vouchers that are not expected to be redeemed prior to their contractual expiration date.

Co-brand redemptions

In relation to the travel component of the co-branded credit card contract with Bank of America, the Company has a performance obligation to provide cardholders with points to be used for future travel award redemptions. Therefore, consideration received from Bank of America related to the travel component is deferred based on its relative selling price and is recognized into passenger revenue when the points are redeemed and the transportation is provided.

The following table presents the activity of the co-brand point liability as of the dates indicated:

Year Ended December 31,

As of December 31, 2020 and 2019, $10.9 million and $11.6 million, respectively, of the current points liability is reflected in accrued liabilities and represents the current estimate of revenue to be recognized in the next 12 months based on historical trends, with the remaining balance reflected in other noncurrent liabilities and expected to be recognized into revenue in periods thereafter.

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Note 5 — Property and Equipment

Property and equipment consisted of the following:

As of December 31,

Land and buildings/leasehold improvements (1) 87,030 98,885

Less accumulated depreciation and amortization (598,546) (484,510)

(1) Balance includes a building currently held for sale in Chesterfield, Missouri with a carrying value of $4.8 million

As of December 31, 2020, the Company had firm commitments to purchase three Airbus A320 series aircraft which are expected to be delivered between 2021 and 2022.

Accrued capital expenditures as of December 31, 2020 and 2019 were $16.9 million and $16.5 million, respectively.

Note 6 — Accrued Liabilities

Accrued liabilities consisted of the following:

As of December 31,

Note 7 — Long-Term Debt

Long-term debt consisted of the following:

As of December 31,

Less current maturities, net of related costs 217,234 173,274

Weighted average fixed-interest rate on debt 5.7 % 3.7 %

Weighted average variable-interest rate on debt 2.4 % 4.5 %

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Maturities of long-term debt as of December 31, 2020, for the next five years and thereafter, in the aggregate, are:

(in thousands) As of December 31, 2020

Total debt and finance lease obligations, net of related costs $ 1,659,011

Total long-term debt is presented net of related costs of $23.5 million and $23.6 million at December 31, 2020 and 2019, respectively.

Term Loan and Senior Secured Notes

In February 2019, the Company entered into a Credit and Guaranty Agreement (the “Term Loan”) to borrow $450.0 million, guaranteed by all of the Company's subsidiaries, excluding Sunseeker Resorts Inc. and its subsidiaries, and other insignificant subsidiaries (the "Term Loan Guarantors"). In February 2020, the Company entered into an amendment to the Term Loan under which the interest rate was reduced by 150 basis points, and the principal amount of the debt was increased by a net amount of $100.0 million to $545.5 million. Quarterly principal payments increased under the amendment, but the remaining provisions were substantially unchanged, including the maturity date. The Term Loan is secured by substantially all property and assets of the Company and the Term Loan Guarantors, excluding aircraft and aircraft engines, and excluding certain other assets. The Term Loan bears interest based on LIBOR with a zero percent floor and provides for quarterly interest payments along with quarterly principal payments of $1.4 million through February 2024, at which time the Term Loan is due. The Term Loan may be prepaid at any time without penalty.

In October 2020, the Company closed on the private offering of $150.0 million principal amount of 8.5 percent Senior Secured Notes due 2024 (the "Senior Secured Notes"). The Senior Secured Notes and related guarantees are secured by first priority security interests in the same collateral package as securing the Term Loan and the debt is subject to an Intercreditor Agreement with the collateral agent for the Term Loan.The guarantors of the Notes include all significant subsidiaries other than Sunseeker Resorts, Inc. and its subsidiaries.

Consolidated Variable Interest Entities

The Company evaluates ownership, contractual lease arrangements and other interests in entities to determine if they are variable interest entities ("VIEs") based on the nature and extent of those interests. The Company consolidates a VIE when, among other criteria, it has the power to direct the activities that most significantly impact the VIE’s economic performance as well as the obligation to absorb losses or the right to receive benefits of the VIE, thus making the Company the primary beneficiary of the VIE.

In October 2019, the Company, through a wholly owned subsidiary, entered into agreements with a trust to borrow $23.5 million secured by one Airbus A320 series aircraft. The trust was funded on inception. The borrowing bears interest at a blended rate of 3.2 percent and is payable in monthly installments through October 2024, at which time the Company will have a purchase option at a fixed amount. As this transaction is a common control transaction, the Company, as the primary beneficiary, has measured and recorded the assets and liabilities at their carrying values, which were $18.6 million and $23.5 million, respectively, at the time of borrowing.

In March 2019, the Company, through a wholly owned subsidiary, entered into agreements with a trust to borrow $44.0 million secured by one aircraft. The trust was funded on inception. The borrowing bears interest at a blended rate of 3.8 percent and is payable in quarterly installments through April 2029, at which time the Company will have a purchase option at a fixed amount. As this transaction is a common control transaction, the Company, as the primary beneficiary, has measured and recorded the assets and liabilities at their carrying values, which were $38.5 million and $44.0 million, respectively, at the time of borrowing.

In September 2018, the Company, through a wholly owned subsidiary, entered into agreements with a trust to borrow $44.0 million secured by one Airbus A320 series aircraft. The trust was funded on inception. The borrowing bears interest at a blended rate of 4.0 percent and is payable in quarterly installments through September 2028, at which time the Company will have a purchase option at a fixed amount. As this transaction is a common control transaction, the Company, as the primary beneficiary, has measured and recorded the assets and liabilities at their carrying values, which were $37.8 million and $44.0 million, respectively, at the time of borrowing.

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CARES Act Payroll Support Program Loan

In April 2020 the Company entered into a low-interest rate, senior unsecured term promissory note (the "PSP" Note) with the Treasury under the CARES Act payroll support program. The Note matures in full on April 20, 2030, and bears interest at a rate of 1.0 percent per annum prior to April 20, 2025 and, thereafter, at the secured overnight financing rate (SOFR) plus 2 percent. The PSP Note is prepayable at any time at par, without penalty.

During 2020, the Company received $23.1 million in funds under the PSP Note, which is recorded within noncurrent debt on the balance sheet.

In connection with the PSP Note, the Company is required to comply with the relevant provisions of the CARES Act, including those prohibiting the repurchase of common stock and the payment of common stock dividends until September 30, 2021, as well as those restricting the payment of certain executive compensation for periods through March 24, 2022. These restrictions have been extended until March 31, 2022 with respect to stock repurchases and payment of dividends and until October 1, 2022 with respect to executive compensation limits as a result of the Payroll Support Extension Program.

Senior Secured Revolving Credit Facility

The Company has a senior secured revolving credit facility under which it is entitled to borrow up to $81.0 million. The facility has a term of 24 months and the borrowing ability is based on the value of the Airbus A320 series aircraft placed in the collateral pool. In December 2019, the Company drew down $81.0 million under this facility. Principal payments were made during 2020 totaling $27.1 million, and the remaining balance as of December 31, 2020 is $53.9 million. Aircraft remain in the collateral pool for up to two years, and, as of December 31, 2020, there were six aircraft in the pool. The notes for the amounts borrowed under the facility bear interest at a floating rate based on LIBOR and are due in March 2021.

Other Secured Debt

In September 2020, the Company borrowed $84.0 million under a loan agreement secured by aircraft and spare engines. The note bears interest at a fixed rate, payable in monthly installments maturing in September 2025 and September 2026 for the spare engines and aircraft, respectively.

In April 2020, the Company borrowed $31.0 million under a loan agreement secured by two aircraft. The note bears interest at a fixed rate, payable in quarterly installments with a maturity date in April 2028.

General Unsecured Notes

In connection with the Term Loan discussed above, the Company completed a tender offer in February 2019, whereby it purchased $347.9 million of its previously outstanding unsecured notes due July 2019, and incurred related debt extinguishment costs of $3.7 million. The remaining $102.1 million of the unsecured notes were paid at their maturity in July 2019.

Construction Loan Agreement

In March 2019, Sunseeker Florida, Inc. (“SFI”), a wholly owned subsidiary of the Company, entered into a Construction Loan Agreement with certain lenders affiliated with TPG Sixth Street Partners, LLC (the “Lender”). Under the Construction Loan Agreement, SFI would have been able to borrow up to $175.0 million (the “Loan”) to fund the construction of Phase 1 of Sunseeker Resort - Charlotte Harbor. No amount was ever drawn under this agreement.

Due to the various impacts of COVID-19, the Company suspended construction of Sunseeker Resort, and it is uncertain when construction will resume. In light of these conditions, the Company reached a $19.8 million settlement agreement with the Lender to terminate the Loan which was fully paid in 2020. The expense is reflected within non-operating special charges on the statement of income.

Finance Leases

The Company has finance lease obligations related to six aircraft, which impacted the Company's recognized assets and liabilities as of December 31, 2020. See Note 8 for more information on finance lease obligations.

Note 8 — Leases

Total rental expense for operating leases for the years ended December 31, 2020, 2019 and 2018 was $24.6 million, $15.0 million and $12.7 million, respectively.

The Company had six aircraft under finance leases as of December 31, 2020 with remaining terms through 2029.

Lease Costs

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The components of lease costs recognized on the statements of income were as follows:

Year Ended December 31,

(in thousands) Classification on the Statements of Income 2020 2019

Finance lease costs:

Amortization of assets Depreciation and amortization $ 6,631 $ 6,517

Interest on lease liabilities Interest expense 5,335 5,264

Lease position as of December 31, 2020

The table below presents the lease-related assets and liabilities recorded on the balance sheet.

As of December 31,

(in thousands) Classification on the Balance Sheet 2020 2019

Assets

Finance lease assets Property and equipment, net 133,175 111,665

Liabilities

Current

Operating Current operating lease liabilities $ 14,313 $ 2,662

Noncurrent

Operating Noncurrent operating lease liabilities 102,289 21,290

Finance Long-term debt and finance lease obligations 117,060 107,930

Weighted-average remaining lease term

Operating leases 8.3 years 9.1 years

Finance leases 7.6 years 9.9 years

Weighted-average discount rate

Operating leases 5.4 % 4.3 %

Finance leases 5.0 % 4.4 %

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Sale-Leaseback Transactions

During the year ended December 31, 2020, the Company entered into sale-leaseback transactions involving eight total aircraft. The transactions qualified as sales, and generated $87.6 million of proceeds. As a result of the sales, the aircraft were removed from property and equipment in the Company's balance sheet, resulting in a $53.2 million loss on the sales. The loss is reflected within operating special charges on the statement of income since the Company would not likely have completed the transactions absent cash conservation efforts as a result of COVID-19. The leased aircraft were subsequently recorded within operating lease right-of-use assets, with the related lease liabilities recorded within current and noncurrent operating lease liabilities on the balance sheet. The proceeds from the sales of aircraft in these transactions are treated as cash inflows from investing activities on the statement of cash flows.

Other Information

The table below presents supplemental cash flow information related to leases during the year ended December 31.

Year Ended December 31,

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows for operating leases $ 13,102 $ 2,927

Operating cash flows for finance leases $ 5,335 5,264

Financing cash flows for finance leases 15,908 7,336

Maturities of Lease Liabilities

The table below indicates the future minimum payments of lease liabilities as of December 31, 2020.

(in thousands) Operating Leases Finance Leases

Note 9 — Shareholders’ Equity

The Company is authorized by its Board of Directors to acquire the Company’s stock through open market purchases under its share repurchase program. As repurchase authority is exhausted, the Board of Directors has, to date, authorized additional expenditures for share repurchases. The Company suspended stock repurchases upon the onset of the pandemic and as part of accepting benefits from the Treasury under the PSPA and PSP2, the Company has agreed not to repurchase stock through March 31, 2022.

Share repurchases consisted of the following during the periods indicated:

Year Ended December 31,

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(1) Share amounts shown above include only open market repurchases and do not include shares withheld from employees for tax withholding obligations related to restricted stock vestings, which were 19,001, 27,700 and 22,981 shares for 2020, 2019 and 2018, respectively.

Cash dividends declared by the Board and paid by the Company consisted of the following during the periods indicated:

Year Ended December 31,

Total quarterly cash dividends declared, per share $ 0.70 $ 2.80 $ 2.80

The Company suspended payment of cash dividends upon the onset of the pandemic and as part of accepting benefits from the Treasury under the PSPA and PSP2, the Company has agreed not to pay cash dividends through March 31, 2022.

Note 10 — Fair Value Measurements

Investments

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 - Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities

Level 2 - Defined as inputs other than Level 1 inputs that are either directly or indirectly observable

Level 3 - Defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions

The Company uses the market approach valuation technique to determine fair value for investment securities. The assets classified as Level 1 consist of money market funds for which original cost approximates fair value. The assets classified as Level 2 consist of commercial paper, municipal debt securities, federal agency debt securities, corporate debt securities, and US treasury bonds, which are valued using quoted market prices or alternative pricing sources including transactions involving identical or comparable assets and models utilizing market observable inputs. The Company has no investment securities classified as Level 3.

For those assets classified as Level 2 that are not in active markets, the Company obtains fair value from pricing sources using quoted market prices for identical or comparable instruments, and uses pricing models which include all significant observable inputs: maturity dates, issue dates, settlement dates, benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers and other market related data. These inputs are observable or can be derived from, or corroborated by, observable market data for substantially the full term of the asset.

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Financial instruments measured at fair value on a recurring basis:

(in thousands) Total Level 1 Level 2 Total Level 1 Level 2

Cash equivalents

Federal agency debt securities 51,400 — 51,400 — — —

Short-term

Long-term

US Treasury Bonds — — — 146 — 146

There were no significant transfers between Level 1 and Level 2 assets for the years ended December 31, 2020 or 2019.

Long-term Debt

None of the Company's long-term debt is publicly traded. The Company has determined the estimated fair value of all of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to changes in inputs.The Company utilizes the discounted cash flow method to estimate the fair value of Level 3 debt.

Carrying value and estimated fair value of long-term debt, including current maturities and without reduction for related costs:

Other

Due to the short term nature, carrying amounts of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value.

Note 11 — Income Taxes

The Company is subject to income taxation in the United States, foreign countries and various state jurisdictions in which it operates. In accordance with income tax accounting standards, the Company recognizes tax benefits or expenses on the temporary differences between the financial reporting and tax bases of its assets and liabilities.

In 2020, 2019 and 2018, the Company recorded net tax (benefit)/provision of $(177.0) million, $69.1 million and $37.5 million, respectively. Cash taxes, net of refunds, were $(95.2) million, $2.2 million and $41.6 million, respectively.

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Components of Income before Income Taxes from Continuing Operations

The components of income before taxes for domestic and foreign operations consisted of the following:

Year ended December 31,

Income Tax Provision/(Benefit)

The provision for income taxes is composed of the following:

Year ended December 31,

Current:

Deferred:

Reconciliation of Effective Tax Rate

The effective tax rate on income before income taxes differed from the federal statutory income tax rate as follows:

Year ended December 31,

State income taxes, net of federal income tax benefit (5,495) 5,070 3,560

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Deferred Taxes

The major components of the Company’s net deferred tax assets and liabilities are as follows:

As of December 31,

Deferred tax assets:

Accrued bonus — 5,523

State taxes — 88

Stock-based compensation expense 1,025 1,415

Deferred tax liabilities:

Net Operating Loss and Tax Credit Carryforwards

Pursuant to the CARES Act, the Company carried back net operating losses generated in 2018, 2019 and 2020 in the amounts of $185.4 million, $116.7 million and $422.1 million respectively to tax years ended December 31, 2013 through December 31, 2016. The net operating loss carryback resulted in prior years’ foreign tax credits and general business credits being released, and these credits generated in 2014 - 2020 in the amount of $5.7 million and $5.2 million will be carried forward. The foreign tax credit and general business credits will expire 2024 – 2040, but the Company expects to utilize these credits prior to the expiration.

In addition, as of December 31, 2020, the Company recognized federal and state net operating loss carryforwards for income tax purposes in the amount of $8.5 million and $7.4 million, respectively. Federal net operating loss carryforwards will not expire per the “Tax Cuts and Jobs Act” (the “Tax Act”). The majority of the state net operating loss carryforward amounts will expire between 2022 and 2040 while some state net operating losses have an indefinite carryforward period.

The Company previously recognized a federal capital loss carryforward of $0.7 million, as remeasured pursuant to the Tax Act, as of December 31, 2016 which expired in 2021.

Tax Contingencies

The reconciliation of the Company's tax contingencies is as follows:

As of December 31,

Increases for tax position of prior years — — 3,364

Increases for tax position of current year — 146 293

Decreases for tax positions of prior years (3,602) (135) (10)

Decreases for lapses in statute of limitations — — (140)

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company’s income tax returns are subject to examination by the Internal Revenue Service as well as

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other taxing jurisdictions. The timing of the resolution of income tax examinations is uncertain, and the ultimate resolution with these taxing authorities may differ from the amounts accrued. Therefore, the Company cannot currently provide an estimate of the range of possible outcomes in the next twelve months.

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Note 12— Related Party Transactions

During the years ended December 31, 2020 and 2019, 2018 there were no related party transactions that required disclosure.

Note 13 — Employee Benefit Plans

401(k) Plan

The Company has a defined contribution plan covering all eligible employees. Under the plan, employees may contribute up to 90 percent of their eligible annual compensation with the Company making matching contributions on employee deferrals of up to 5 percent of eligible employee wages. The matching contributions on pilot deferrals is 10 percent of eligible wages resulting from the pilot collective bargaining agreement.

The Company recognized expense under this plan of $18.6 million, $19.0 million, and $19.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Share-based employee compensation

The Company reserved 2,000,000 shares of common stock for the Company to grant stock options, restricted stock, cash-settled stock appreciation rights ("SARs") and other stock-based awards to certain officers, directors and employees of the Company under the 2016 Long-Term Incentive Plan (the "2016 Plan"). The 2016 Plan is administered by the Company’s compensation committee of the Board of Directors.

Employee Stock Purchase Plan

The Company reserved 1,000,000 shares of common stock for employee purchases under the 2014 Employee Stock Purchase Plan ("ESPP"). Shares are purchased semi-annually, at a discount, based on the market value at period-end. Employees may contribute up to 25 percent of their base pay per offering period, not to exceed $25,000 each calendar year, for the purchase of common stock. The ESPP is a compensatory plan under applicable accounting guidance and results in the recognition of compensation expense.

The following table provides information about the Company’s ESPP activity during 2020, 2019, and 2018:

(1) The weighted-average fair value of the discount under the ESPP granted is equal to a percentage discount from the market value of the common stock at the end of each semi-annual purchase period. The Company increased the discount from 10 percent to 15 percent for the second offering period of 2018. 15 percent is the maximum allowable discount under the ESPP.

Compensation expense

For the years ended December 31, 2020, 2019 and 2018, the Company recorded compensation expense of $20.1 million, $19.2 million and $15.6 million, respectively, related to restricted stock, stock options, cash-settled SARs and the ESPP. Forfeiture rates are estimated at the time of grant based on historical actuals for similar grants, and are matched to actuals over the vesting period.

The unrecognized compensation cost was $27.5 million as of December 31, 2020 for unvested restricted stock expected to be recognized over a weighted-average period of 1.34 years. As of December 31, 2020, there was no unrecognized compensation cost for either cash-settled SARs or stock options.

Stock options

The fair value of stock options granted is estimated as of the grant date using the Black-Scholes option pricing model. The contractual terms of the Company’s stock option awards granted range from five to ten years. A summary of option activity as of December 31, 2020, 2019 and 2018, and changes during the years then ended, is presented below:

Outstanding at December 31, 2019 — $ — 0.00 $ —

Exercised — —

Outstanding at December 31, 2020 — $ — 0.00 $ —

During the years ended December 31, 2020, 2019 and 2018, the total intrinsic value of options exercised was $0.0 million, $0.2 million and $1.4 million, respectively. Cash received from option exercises for the years ended December 31, 2020, 2019 and 2018 was $0.0 million, $1.1 million and $1.6 million, respectively.

Restricted stock awards

The closing price of the Company's stock on the date of grant is used as the fair value for the issuance of restricted stock. A summary of the status of non-vested restricted stock grants during the years ended December 31, 2020, 2019 and 2018 is presented below:

Shares Weighted Average Grant Date Fair Value Per Share

The total fair value of restricted stock that vested during the years ended December 31, 2020, 2019 and 2018 was $43.0 million, $15.9 million and $13.4 million, respectively.

Cash-settled SARs

Cash-settled SARs are liability classified awards for which the fair value and compensation expense recognized are updated monthly using the Black-Scholes option pricing model.

The following range of assumptions in the Black-Scholes pricing model was used to determine fair value as of December 31 of the years indicated below (all cash-settled SARs were fully vested as of December 31, 2019):

Weighted-average volatility — % — % 35.0 %

Expected term (in years) N/A N/A 0.8

Risk-free interest rate — % — % 2.6 %

Dividend yield — % — % 1.68 %

These rights were fully vested as of December 31, 2019. Expected volatilities used for award valuation are based on the historical volatility of the Company's common stock price.

Expected term represents the weighted average time between the award’s grant date and its expected exercise date. The Company estimated the expected term assumption in 2020, 2019 and 2018 using historical award exercise activity and employee termination activity.

The risk-free interest rate for periods equal to the expected term of an award is based on a blended historical rate using Federal Reserve rates for U.S. Treasury securities.

The dividend yield reflects the effect that paying a dividend has on the fair value of the Company's stock.

The contractual term of the Company’s cash-settled SARs awards granted is five years.

A summary of cash-settled SARs awards activity during the years ended December 31, 2020, 2019 and 2018 is presented below:

Exercisable at December 31, 2020 — $ — 0.00 $ —

Note 14 — Commitments and Contingencies

The Company leases assets including aircraft, office facilities, office equipment, certain airport and terminal facilities, and other space. These commitments have remaining non-cancelable lease terms, which range from 2021 to 2048. Refer to Note 8 for more information on the Company's lease agreements.

The Company's contractual purchase commitments consist primarily of aircraft and engine acquisitions. The total future commitments are as follows:

(in thousands) As of December 31, 2020