SUBSEQUENT EVENTS

3 Months Ended

Mar. 31, 2020

SUBSEQUENT EVENTS

In April 2020, the Company reached an agreement in principle with the Treasury with respect to funding support pursuant to the Payroll Support Program under the CARES Act. See Note 2 for further information on the CARES Act. Funds received under the Payroll Support Program are expected to be used to pay Employee wages and benefits through September 30, 2020. The Company's expected aggregate receipts under the Payroll Support Program total approximately $3.3 billion (the "Payroll Support"), for which the Company expects to provide the Treasury consideration in the form of a promissory note representing a $948 million unsecured term loan to the Company and of warrants to purchase up to an aggregate of 2.6 million shares of the Company’s common stock, subject to adjustment by the Treasury in each case.

On April 21, 2020, the Company received the first installment of approximately $1.6 billion of expected proceeds, or 50 percent, for which the Company provided consideration in the form of a promissory note representing a $459 million unsecured term loan and of warrants to purchase up to an aggregate of 1.3 million shares of the Company’s common stock. The remainder of the funds are expected to be disbursed to the Company, and the additional warrants are expected to be issued, in three installments from May to July 2020.

As consideration for Payroll Support, on April 20, 2020, the Company issued a promissory note (the “Note”) in favor of the Treasury and entered into a warrant agreement with the Treasury (the “Warrant Agreement”), pursuant to which the Company agreed to issue warrants (each, a “Warrant”) to purchase common stock of the Company to the Treasury. In connection with the initial disbursement on April 21, 2020, the Note was issued at an initial amount of $459 million. Upon each subsequent disbursement of Payroll Support to the Company after April 21, 2020, (i) the principal amount of the Note will be increased in an amount equal to 30 percent of any such disbursement and (ii) the Company will issue a Warrant to the Treasury in an amount equal to 10 percent of the principal amount of the increase to the Note in connection with such disbursement of Payroll Support, divided by the strike price of $36.47 (which was the closing price of the Company’s common stock on April 9, 2020).

The Note matures in full on April 19, 2030, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. The Company has an option to prepay the Note at any time without premium or penalty. Amounts outstanding under the Note bear interest at a rate of 1.00 percent before April 20, 2025 and, afterwards, at a rate equal to Secured Overnight Financing Rate or other benchmark replacement rate consistent with customary market conventions plus margin of 2.00 percent. The Note contains customary representations and warranties and events of default.

The Warrant Agreement sets out the Company’s obligations to issue Warrants in connection with disbursements of Payroll Support and to file a resale shelf registration statement for the Warrants and the underlying shares of common stock. The Company has also granted the Treasury certain demand underwritten offering and piggyback registration rights with respect to the Warrants and the underlying common stock. Each Warrant is exercisable at a strike price of $36.47 per share of common stock and will expire on the fifth anniversary of the issue date of such Warrant. The Warrants will be settled through net share settlement or net cash settlement, at the Company’s option. The Warrants include adjustments for below market issuances, payment of dividends and other customary anti-dilution provisions. The Warrants do not have voting rights.

By accepting financing under the CARES Act, the Company has agreed to certain restrictions on its business, including:


•	The Company is prohibited from repurchasing its common stock and from paying dividends or making capital contributions with respect to its common stock until September 30, 2021.


•	The Company must place certain restrictions on certain higher-paid employee and executive pay, including limiting pay increases and severance pay or other benefits upon terminations, until March 24, 2022.


•	The Company is prohibited from involuntary terminations or furloughs of its Employees (except for death, disability, cause, or certain disciplinary reasons) until September 30, 2020.


•	The Company may not reduce the salary, wages, or benefits of its Employees (other than its Executive Officers or independent contractors, or as otherwise permitted under the terms of the Payroll Support Program) until September 30, 2020.


•	Until March 1, 2022, the Company must comply with any requirement issued by the Department of Transportation (“DOT”) that the Company maintain certain scheduled air transportation service as DOT deems necessary to ensure services to any point served by the Company before March 1, 2020.


•	The Company must maintain certain internal controls and records relating to the CARES Act funds, and is subject to additional reporting requirements.

The Payroll Support will be recorded upon initial receipt of the cash as a deferred expense in the unaudited Condensed Consolidated Balance Sheet, and subsequently reclassified as a contra-expense in the unaudited Condensed Consolidated Statement of Income in second and third quarters 2020-relative to the salaries and wages expected to be incurred by the Company in those periods. At the Company’s election, approximately 90 percent of the total $3.3 billion in assistance is expected to be received in second quarter 2020, with the remainder to be received in third quarter 2020. The Company will allocate the proceeds received from the Treasury in accordance with applicable accounting guidance, and based on the consideration provided in the transaction.

The Company has also been notified of general terms associated with the Loan program available to U.S. carriers through the Treasury under the CARES Act. The Company has the opportunity to apply for a 5-year senior secured term loan (the “secured term loan”) up to $2.8 billion as of April 20, 2020, that would be collateralized by certain assets of the Company. Interest on the secured term loan would be at LIBOR plus 250 basis points, would be prepayable at any time, and would contain restrictions similar to those noted above associated with the Payroll Support Program. If it agrees to take the secured term loan, the Company would have to provide approximately 7.6 million warrants to the Treasury. The Company plans to apply for the secured term loan by the April 30, 2020 deadline, but is currently undecided as to whether it would agree to draw down on the loan. The deadline for the Company to decide whether to take the loan is currently September 30, 2020. In connection with the secured term loan, should the Company accept the loan, the Company will be 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, as well as those restricting

the payment of certain executive compensation. Under the CARES Act, these restrictions will apply until one year after the secured term loan is repaid in full.

The terms of the CARES Act represent just one component of the Company’s actions to address the liquidity risks presented by the impacts of the COVID-19 pandemic to its business. Commercial air travel in the U.S. and Company Passenger revenues for most of April 2020 have been at levels of less than five percent of comparable amounts experienced in April of 2019. However, much of the Company’s operating expenses have not declined at a commensurate amount, leading to significant operating cash outflows. Although the Company has canceled a significant portion of its originally scheduled flights for April, May, June, and July 2020, only a portion of the Company’s operating cost structure is variable, and the savings from less fuel consumption, landing fees, and certain other expenses will likely only cover a portion of the lost revenue during this period of time.

The Company believes it has taken appropriate measures to address the significant cash outflows experienced thus far, and continues to evaluate options, should the lack of demand for air travel continue beyond the near term. In addition to the significant reductions in the Company’s flight schedule, various voluntary leave options have been offered to the Company’s 60,000 plus Employees (including time off without pay and extended time off with partial pay), hundreds of capital spending projects have been canceled or deferred, all non-essential spending has been cut, and existing contracts and payment terms with the majority of its vendors have been evaluated for further savings opportunities.

The Company believes its financial position and preparation prior to the impact of the COVID-19 pandemic have allowed it to react quickly and sensibly in the steps it has taken so far to raise cash and increase its liquidity. Given the Company’s continued current access to capital markets, investment grade credit rating, and unencumbered assets (including a significant number of aircraft), it believes it has opportunities and options to raise additional liquidity at reasonable terms. Thus, the Company believes it is probable that the plans it has in place, or that it has the ability to execute as of the date of this filing, when fully implemented, will sufficiently mitigate the present conditions and allow the Company to reasonably handle the liquidity risks presented by the current climate.

The Company drew approximately $2.3 billion under the Amended and Restated 364-Day Credit Agreement on April 1, 2020. On April 24, 2020, the Company also drew an additional $350 million under the $417 million accordion feature that allows the total borrowing capacity under the Amended and Restated 364-Day Credit Agreement to increase to $3.75 billion. As of the date hereof, there is approximately $3.68 billion outstanding under the Amended and Restated 364–Day Credit Agreement.