WORLDWIDE PANDEMIC

6 Months Ended

Jun. 30, 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 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 during the remainder of first quarter and into second quarter, when trip cancellations outpaced new passenger bookings during the majority of March and April 2020. The Company began proactively canceling a significant portion of its scheduled flights in March, and continued making cancellations throughout second quarter, as the Company grounded a significant portion of its fleet and operated a fraction of its previously scheduled capacity. The Company continued to experience significant negative impacts to passenger demand and bookings in second quarter 2020 due to the pandemic.

Based on these events and the uncertainty they created, the Company immediately began to focus on its liquidity, including quickly and substantially enhancing its cash holdings. Since the beginning of 2020, the Company has raised a total of $17.3 billion, net of fees.

On April 20, 2020, the Company entered into definitive documentation with the United States Department of Treasury (the "Treasury") with respect to funding support pursuant to the Payroll Support Program ("Payroll Support") under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Payroll Support funds must be used to pay employee wages and benefits through at least September 30, 2020. The Company's expected aggregate receipts under the Payroll Support total approximately $3.3 billion. As consideration for the Payroll Support, 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. The Note was issued in an initial amount of $459 million, and the Company issued an initial Warrant to purchase up to 1.3 million shares of the Company's common stock. In accordance with the terms of the Note and the Warrant Agreement, upon each subsequent disbursement of Payroll Support to the Company (i) the principal amount of the Note will automatically be increased in an amount equal to 30 percent of any such disbursement and (ii) the Company will issue an additional 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).

Through June 30, 2020, the Company has received three of four expected installments of Payroll Support, representing 90 percent of the expected Payroll Support from the Treasury. These cumulative amounts totaled $2.9 billion, including $1.6 billion received in April and $652 million received in both May and June 2020. As of June 30, 2020, the Company has provided a Note in the aggregate amount of $850 million and issued Warrants valued at a total of $35 million to purchase up to an aggregate of 2.3 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the Warrants. Pursuant to the terms of the Payroll Support Program agreement and the CARES Act, the Payroll Support funds may only be utilized to pay qualifying salaries, wages, and benefits, as defined in the CARES Act. As of June 30, 2020, excluding the $850 million Note and the $1.1 billion in Payroll Support already allocated to reduce eligible costs in second quarter 2020, approximately $957 million in Payroll Support funds remain to be allocated during third quarter 2020 and were within Accrued liabilities in the accompanying unaudited Condensed Consolidated Balance Sheet. Such funds are included as part of Cash and cash equivalents in the accompanying unaudited Condensed Consolidated Balance Sheet as of June 30, 2020. The Company expects the final 10 percent, or $326 million, of Payroll Support to be received in late July 2020, for which the Company expects to provide consideration in the form of an increase of the Note in an amount of $98 million and issue a Warrant to purchase up to 268 thousand shares of the Company's common stock, subject to adjustment pursuant to the terms of the Warrant.

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 the Secured Overnight Financing Rate or other benchmark replacement rate consistent with customary market conventions plus a 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.

Although the Company has not yet decided whether it will participate in the separate secured loan program established under the CARES Act, it did sign a non-binding letter of intent, effective in June, with the Treasury with respect to a potential loan with an estimated principal amount of approximately $2.8 billion. This was the next step in the loan application process, and the Company expects to receive further information about the secured loan program in third quarter 2020.

In addition to obtaining financing under the CARES Act as well as accessing the capital markets, the Company believes it has made significant progress on bolstering its liquidity through cost reductions. These efforts include aggressively evaluating all capital spending, discretionary spending, and non-essential costs for near-term cost reductions or deferrals; reducing the Company's published flight schedule; placing a significant number of aircraft in storage; implementing voluntary time-off programs for Employees; suspending all hiring and non-contract salary increases; reducing named executive officer salaries and Board of Director cash retainer fees by 20 percent; and modifying vendor and supplier payment terms. The Company will continue evaluating the need for further flight schedule adjustments. To support physical-distancing, the Company is currently limiting the number of seats sold on each flight to allow for middle seats to remain open for Customers who are not traveling together through at least October 2020, and will evaluate the possibility of extending this policy beyond October.

On June 1, 2020, the Company announced Voluntary Separation Program 2020, a voluntary separation program that allowed eligible Employees the opportunity to voluntarily separate from the Company in exchange for severance, medical/dental coverage for a specified period of time, and travel privileges based on years of service. Virtually all of the Company’s Employees hired before June 1, 2020 were eligible to participate in the Voluntary Separation Program 2020. Employees electing to participate in Voluntary Separation Program 2020 were required to notify the Company of their election no later than July 15, 2020--with the stipulation that all Employees electing to participate had a total of seven days from their date of initial election to rescind their election and remain employed by the Company. Following the deadline to rescind such election, a total of over 4,200 Employees have elected to participate in Voluntary Separation Program 2020, consisting of the following breakdown among workgroups: 390 from Customer Support and Services, 1,060 from Ground Operations and Provisioning, 725 Flight Attendants, 640 Pilots, 185 from Maintenance, 90 from other Contract groups, and 1,145 Managerial and Administrative Employees. Voluntary Separation Program 2020 participants’ last day of work will fall between August 15, 2020 and September 30, 2020, as assigned by the Company based on the operational needs of particular work locations and departments, determined on an individual-by-individual basis.

In conjunction with Voluntary Separation Program 2020, the Company also offered certain contract Employees the option to take voluntary Extended Emergency Time Off ("Extended ETO"), for periods between six and 18 months, with the exception of Pilots, who could elect to take Extended ETO for periods up to five years. Employees taking Extended ETO do not perform any work for the Company, but do get paid a portion of their wages and continue to receive all associated benefits, as well as accrue service credit for all benefits.

The purpose of the Voluntary Separation Program 2020 and Extended ETO is to maintain a suitable sized workforce to operate at reduced capacity relative to the Company's operations prior to the COVID-19 pandemic. In accordance with the accounting guidance in ASC Topic 712 (Compensation — Nonretirement Postemployment Benefits), the

Company accrued a charge related to the special termination benefits described above associated with Employees who had accepted the Voluntary Separation Program 2020 offer at June 30, 2020 of $307 million during second quarter 2020, all of which will be paid out in subsequent periods to these Employees. Costs incurred for Voluntary Separation Program 2020 and Extended ETO are recorded as a component of Payroll support, voluntary separation, net. The Company will record the additional special termination benefits charge associated with the Employees whose voluntary separation and Extended ETO elections were finalized during July, and were subsequently accepted by the Company, during third quarter 2020, and expects this charge to be material to third quarter results.

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 June 30, 2020, a portion of the Company's fleet had been placed in temporary storage, as well as some in a longer term storage program. 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 during the six months ended June 30, 2020, and the significant number of aircraft that have been placed in 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. Upon review, the Company determined that, based on the facts and circumstances in existence as of June 30, 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 June 30, 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 the first six months of 2020 was at a rate of 27.0 percent, which is higher than the first six months of 2019 tax rate of 23.4 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.