Leases

3 Months Ended

Mar. 31, 2019

11.

Leases

Operating and Financing Leases

—

We identify whether a contract contains a lease at contract inception. For leases subsequent to adoption of ASC 842, lease liabilities are calculated using a discount rate based on our incremental borrowing rate at lease commencement. We have operating lease agreements for certain facilities and equipment as well as tower space and base stations. Certain tower space leases have renewal option terms that have been deemed to be reasonably certain to be exercised. These renewal options extend a lease up to 20 years. We recognize operating lease expense on a straight-line basis over the lease term. As of March 31, 2019, there are no significant leases which have not commenced.

The following is a summary of our lease expense included in the unaudited condensed consolidated statements of operations

(in thousands)

	For the Three
	Months Ended
	March 31, 2019
Operating lease cost	$	4,918
Financing lease cost
Amortization of leased assets		205
Interest on lease liabilities		11
Total lease cost	$	5,134

Other information regarding our leases is as follows

(in thousands, except lease terms and discount rates)

	For the Three
	Months Ended
	March 31, 2019
Supplemental cash flow information
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows used in operating leases	$	6,117
Operating cash flows used in financing leases		11
Financing cash flows used in financing leases		125
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		279
Weighted average remaining lease term
Operating leases		9 years
Financing leases		1 year
Weighted average discount rate
Operating leases		10.3	%
Financing leases		8.7	%

Annual future minimum lease payments as of March 31, 2019

(in thousands)

	Operating			Financing
	Leases			Leases
Years ending December 31,
2019 (period from April 1 to December 31)	$	16,966		$	550
2020		21,192			206
2021		20,870			—
2022		19,441			—
2023		15,606			—
Thereafter		76,900			—
Total future minimum lease payments		170,975			756
Less: Amount representing interest		(59,520	)		(28	)
Present value of net minimum lease payments	$	111,455		$	728
Reported as of March 31, 2019
Accrued liabilities	$	11,585		$	584
Non-current operating lease liabilities		99,870			—
Other non-current liabilities		—			144
Total lease liabilities	$	111,455		$	728

As of December 31, 2018, annual future minimum obligations for operating leases for each of the next five years and thereafter, were as follows (

in thousands

	Operating Leases
Years ending December 31,
2019	$	21,902
2020	$	19,867
2021	$	19,742
2022	$	18,420
2023	$	14,826
Thereafter	$	78,100

Arrangements with Commercial Airlines

— Pursuant to contractual agreements with our airline partners, we place our equipment on commercial aircraft operated by the airlines for the purpose of delivering our service to passengers on the aircraft. There are currently two types of commercial airline arrangements: turnkey and airline-directed.

Under the turnkey model, we account for equipment transactions as operating leases of space for our equipment on the aircraft. We may be responsible for the costs of installing and/or deinstalling the equipment. Under the turnkey model, the equipment transactions involve the transfer of legal title but do not meet sales recognition for accounting purposes because the risks and rewards of ownership are not fully transferred due to our continuing involvement with the equipment, the length of the term of our agreements with the airlines, and restrictions in the agreements regarding the airlines’ use of the equipment. Under the turnkey model, we refer to the airline as a “partner.”

Under the turnkey model, the assets are recorded as airborne equipment on our unaudited condensed consolidated balance sheets, as noted in Note 6, “Composition of Certain Balance Sheet Accounts.” Any upfront equipment payments are accounted for as lease incentives and recorded as deferred airborne lease incentives on our unaudited condensed consolidated balance sheets and are recognized as a reduction of the cost of service revenue on a straight-line basis over the term of the agreement with the airline. We recognized $9.0 million and $7.6 million, respectively, for the three month periods ended March 31, 2019 and 2018 as a reduction to our cost of service revenue in our unaudited condensed consolidated statements of operations. As of March 31, 2019, deferred airborne lease incentives of $22.7 million and $131.7 million, respectively, are included in current and non-current liabilities in our unaudited condensed consolidated balance sheet. As of December 31, 2018, deferred airborne lease incentives of $24.1 million and $129.1 million, respectively, are included in current and non-current liabilities in our unaudited condensed consolidated balance sheet. The decrease in our deferred airborne lease incentives and the amortization of the deferred airborne lease incentives relate to the accounting impact of the transition of one of our airline agreements to the airline-directed model. See Note 1, “Basis of Presentation,” for additional information.

Under the turnkey model, the revenue share paid to our airline partners represents operating lease payments. They are deemed to be contingent rental payments, as the payments due to each airline are based on a percentage of our CA-NA and CA-ROW service revenue generated from that airline’s passengers, which is unknown until realized. Therefore, we cannot estimate the lease payments due to an airline at the commencement of our contract with such airline. This rental expense is included in cost of service revenue and is partially offset by the amortization of the deferred airborne lease incentives discussed above. Such rental expenses totaled a net charge of $3.7 million and $6.4 million, respectively, for the three month periods ended March 31, 2019 and 2018. The decrease in rental expense was due to the transition of one of our airline agreements to the airline-directed model. See Note 1, “Basis of Presentation,” for additional information.