WORLDWIDE PANDEMIC

3 Months Ended

Mar. 31, 2020

Worldwide Pandemic [Abstract]

Worldwide Pandemic

WORLDWIDE PANDEMIC

As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization (“WHO”) classified the virus as a pandemic. The speed with which the effects of the COVID-19 pandemic have changed the U.S. economic landscape, outlook, and in particular the travel industry, has been swift and unexpected. The Company began to see a negative impact on bookings for future travel in late February 2020, which quickly accelerated into and throughout March. January and February operating revenues were generally in line with the Company’s expectations, but March results were significantly below expectations due to the sharp decline in Passenger demand and bookings, combined with an unprecedented level of close-in trip cancellations (Customers canceling close to scheduled flight times). On March 22, the Company began proactively canceling a significant portion of its scheduled flights, and increased those cancellations further beginning on March 27, 2020. In addition, the cancellation of flights, both in March 2020 and for future periods, has resulted in a significant amount of cash refunds and issuance of travel credits to Customers. Further, due to the fears and restrictions involved with travel in the near term, sales of tickets for future travel have been well below the Company’s expectations. These events have created a liquidity risk, and the Company reacted quickly by taking the following steps to better enable it to meet all financial obligations as they become due.

In mid-March, the Company closed a transaction to obtain $1.0 billion under the 364-Day Credit Agreement (defined below) from the syndicate of lenders named therein, and also drew down an available $1.0 billion under the Revolving Credit Agreement (defined below). Subsequently, on March 30, 2020, the Company executed an agreement to increase the commitments under the 364-Day Credit Agreement to $3.3 billion, add an uncommitted accordion provision to permit additional term loans in an aggregate amount not to exceed $417 million, and secured the 364-Day Credit

Agreement with aircraft. This transaction was funded on April 1, 2020. On March 30, 2020, the Company also executed an agreement to secure the Revolving Credit Agreement with aircraft. See Note 8 for further information on these transactions as well as Note 13 for actions taken subsequent to March 31, 2020.

Given the current capital market environment, the Company has been pursuing opportunities for additional financing transactions. The Company has also taken swift actions to preserve cash, including reducing named executive officer salaries and Board of Director cash retainer fees by 20 percent; suspending all hiring and non-contract salary increases; implementing voluntary time-off programs; canceling or deferring hundreds of capital spending projects; modifying vendor and supplier payment terms; and cutting all non-essential spending. The Company has also significantly reduced its published flight schedule through June 2020, and will continue evaluating the need for further flight schedule adjustments.

In response to flight schedule adjustments due to the effects of the COVID-19 pandemic, a number of aircraft were taken out of the Company’s schedule beginning in late March. As of March 31, a portion of the Company's fleet had been placed in temporary storage and the Company was actively canceling a significant portion of its previously scheduled flying. Given the current expectation that these aircraft have been grounded temporarily, the Company has continued to record depreciation expense associated with them.

As a result of the events and impacts surrounding the COVID-19 pandemic, including the Company's net loss incurred in first quarter 2020, and the significant number of aircraft that have been placed in temporary storage, the Company considered whether these conditions indicated that it was more likely than not that the Company’s $970 million in Goodwill and its $295 million in indefinite-lived intangible assets were impaired. However, upon review, the Company determined that, based on the facts and circumstances in existence as of March 31, 2020, the fair values more likely than not exceeded book values of both its reporting unit and its indefinite-lived intangible assets and therefore, no quantitative test was required.

In addition, the Company has assessed whether any impairment of its amortizable assets existed, and has determined that no charges were deemed necessary under applicable accounting standards as of March 31, 2020.

The Company’s assumptions about future conditions important to its assessment of potential impairment of its amortizable assets, indefinite-lived intangible assets, and goodwill, including the impacts of the COVID–19 pandemic and other ongoing impacts to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.

The Company's income tax benefit recorded for first quarter 2020 was at a rate of 34.3 percent, which is higher than its first quarter 2019 rate of 23.1 percent. The higher effective tax rate in 2020 reflects the anticipated benefit of carrying back full year 2020 projected net losses to claim tax refunds against previous cash taxes paid relating to tax years 2015 through 2019, some of which were at higher rates than the current year.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “the Act”), a stimulus bill designed to provide relief for the actual and anticipated devastating economic impacts of the COVID-19 pandemic on the U.S. economy, businesses, and citizens. The airline industry is one of the targeted areas of the CARES Act, which has provided the opportunity for U.S. passenger and cargo airlines to apply for various forms of assistance, including, among others, a payroll support program and loan opportunities. The CARES Act also provides a temporary tax “holiday” from collecting and remitting certain government–imposed ticket taxes, as well as a deferral on payment of certain 2020 Company funded federal employment taxes to future years. The assistance offered to airlines includes significant stipulations and restrictions, as determined by the United States Department of the Treasury (the "Treasury"). See Note 13 for further information on the CARES Act.