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Leases

12 Months Ended

Dec. 31, 2019

LEASES

During 2018, we adopted ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet. We adopted the standard using the modified retrospective approach with an effective date of January 1, 2018. Prior year financial statements were not recast under the new standard. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Many of our leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate. We do not separate lease and nonlease components of contracts, except for regional aircraft and information technology ("IT") assets as discussed below.

When available, we use the rate implicit in the lease to discount lease payments to present value; however, we have an insignificant number of leases representing an immaterial portion of our lease liability that provide readily determinable implicit rates. When the rate implicit in the lease is not available, we use our incremental borrowing rate, which is based on the estimated interest rate for collateralized borrowing over a similar term of the lease at commencement date.

Some of our aircraft lease agreements include provisions for residual value guarantees. These provisions primarily relate to our regional aircraft and the amounts are not significant. We do not have other forms of variable interests with the lessors of our leased assets, other than at New York-JFK, in which we are not the primary beneficiary as discussed in Note 9, "Airport Redevelopment," and one lessor, in which we have a variable interest in certain immaterial aircraft leases, that we have consolidated.

Aircraft

As of December 31, 2019, including aircraft operated by our regional carriers, we leased 343 aircraft, of which 130 were under finance leases and 213 were operating leases. Our aircraft leases had remaining lease terms of one month to 12 years. Aircraft finance leases continue to be reported on our balance sheet, while operating leases were added to the balance sheet in 2018 with the adoption of the new standard.

In addition, we have regional aircraft leases that are embedded within our capacity purchase agreements and included in the right-of-use ("ROU") asset and lease liability. We allocated the consideration in each capacity purchase agreement to the lease and nonlease components based on their relative standalone value. Lease components of these agreements consist of 162 aircraft as of December 31, 2019 and nonlease components primarily consist of flight operations, in-flight and maintenance services. We determined our best estimate of the standalone value of the individual components by considering observable information including rates paid by our wholly owned subsidiary, Endeavor Air, Inc., and rates published by independent valuation firms. See Note 11, "Commitments and Contingencies," for additional information about our capacity purchase agreements.

With the adoption of the new lease standard in 2018, we determined that the CRJ-200 fleet operated by our wholly-owned subsidiary, Endeavor, was impaired due to insufficient future cash flows projected for the fleet. Therefore, we recorded a transition adjustment that reduced equity by $284 million (net of tax) as of January 1, 2018, which reflects the difference in fair value compared to the basis of the ROU asset.

Airport Facilities

Our facility leases are primarily for space at approximately 300 airports around the world that we serve. These leases are classified as operating leases and reflect our use of airport terminals, office space, cargo warehouses and maintenance facilities. We generally lease space from government agencies that control the use of the airport. The remaining lease terms vary from one month to 31 years. At the majority of the U.S. airports, the lease rates depend on airport operating costs or use of the facilities and are reset at least annually. Because of the variable nature of the rates, these leases are not recorded on our balance sheet as a ROU asset and lease liability.

Some airport facilities have fixed payment schedules, the most significant of which are New York-LaGuardia and New York-JFK. For those airport leases, we have recorded a ROU asset and lease liability representing the fixed component of the lease payment. See Note 9, "Airport Redevelopment," for more information on our significant airport redevelopment projects.

Other Ground Property and Equipment

We lease certain IT assets (including servers, mainframes, etc.), ground support equipment (including tugs, tractors, fuel trucks and de-icers), and various other equipment. The remaining lease terms range from one month to seven years. Certain leased IT assets are embedded within various service agreements. The lease components included in those agreements are included in the ROU asset and lease liability, and the amounts are not significant.

Lease Position

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


		December 31,
(in millions)	Classification on the Balance Sheet	2019			2018
Assets
Operating lease assets	Operating lease right-of-use assets	$	5,627		$	5,994
Finance lease assets	Property and equipment, net	1,062			490
Total lease assets		$	6,689		$	6,484

Liabilities
Current
Operating	Current maturities of operating leases	$	801		$	955
Finance	Current maturities of debt and finance leases	233			109
Noncurrent
Operating	Noncurrent operating leases	5,294			5,801
Finance	Debt and finance leases	821			294
Total lease liabilities		$	7,149		$	7,159

Weighted-average remaining lease term
Operating leases		12 years			12 years
Finance leases		5 years			7 years
Weighted-average discount rate
Operating leases⁽¹⁾		3.73		%	3.69		%
Finance leases		3.46		%	5.23		%

⁽¹⁾Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2018.

Lease Costs

The table below presents certain information related to the lease costs for finance and operating leases.


	Year Ended December 31,
(in millions)	2019		2018
Finance lease cost
Amortization of leased assets	$	110	$	100
Interest of lease liabilities	29		22
Operating lease cost⁽¹⁾	1,013		994
Short-term lease cost⁽¹⁾	500		458
Variable lease cost⁽¹⁾	1,456		1,427
Total lease cost	$	3,108	$	3,001

⁽¹⁾Expenses are classified within aircraft rent, landing fees and other rents and regional carriers expense, excluding fuel on the income statement. For the year ended December 31, 2019, $174 million and $64 million of the operating and variable lease costs, respectively, and for the year ended December 31, 2018, $150 million, $18 million and $48 million of the operating, short-term and variable lease costs, respectively, are attributable to our regional carriers.

In 2017, operating lease expense, excluding landing fees, was approximately $1.6 billion, which includes leases of certain aircraft under capacity purchase agreements. Expenses were primarily classified within aircraft rent, landing fees and other rents and regional carriers expense.

Other Information

The table below presents supplemental cash flow information related to leases.


	Year Ended December 31,
(in millions)	2019		2018
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating leases	$	1,166	$	1,271
Operating cash flows for finance leases	27		22
Financing cash flows for finance leases	192		108

Undiscounted Cash Flows

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the balance sheet.


(in millions)	Operating Leases		Finance Leases
2020	$	1,003	$	264
2021	836		239
2022	729		174
2023	698		124
2024	628		180
Thereafter	3,821		179
Total minimum lease payments	7,715		1,160
Less: amount of lease payments representing interest	(1,620)		(106)
Present value of future minimum lease payments	6,095		1,054
Less: current obligations under leases	(801)		(233)
Long-term lease obligations	$	5,294	$	821

As of December 31, 2019, we had additional leases that had not yet commenced of $888 million. These leases will commence in 2020 to 2024 with lease terms of 5 to 12 years.

Leases

. LEASES