Frontier Group Holdings Inc

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”) and include the accounts of Frontier Group Holdings, Inc. (“FGHI” or the “Company”) and its wholly-owned direct and indirect subsidiaries, including Frontier Airlines Holdings, Inc. (“FAH”) and Frontier Airlines, Inc. (“Frontier”). All wholly-owned subsidiaries are consolidated, with all intercompany transactions and balances being eliminated.

The Company is an ultra low-cost, low-fare airline headquartered in Denver, Colorado that offers flights throughout the United States and to select international destinations in the Americas, serving approximately 90 airports.

The Company is managed as a single business unit that provides air transportation for passengers. Management has concluded there is onlyone reportable segment.

Certain reclassifications of previously reported amounts have been made to conform to the current year presentation within the effective income tax rate table in Note 15. Income Taxes. These reclassifications did not impact previously reported amounts on the Company’s audited consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income (loss), consolidated statements of cash flows or consolidated statements of stockholders’ equity.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.

Initial Public Offering

On March 31, 2021, the Company’s registration statement on Form S-1 relating to the Company’s initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (the “SEC”), and the Company’s common stock began trading on the NASDAQ Global Select Market on April 1, 2021 under the symbol “ULCC”. In April 2021, the Company received net proceeds of $266 million after deducting underwriting discounts and commissions of $14 million and offering costs of $5 million, which consisted of direct incremental legal, accounting, consulting and other fees relating to the IPO, and exclusive of any income tax benefits from the transaction.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of acquisition to be cash and cash equivalents. Additionally, any items with maturities greater than three months that are readily convertible to known amounts of cash are considered cash and cash equivalents. Investments included in this category primarily consist of money market funds and time deposits.

Restricted Cash

Restricted cash may include certificates of deposit that secure letters of credit issued for particular airport authorities as required in certain lease agreements. The Company holds restricted cash to secure medical claims paid. Restricted cash may also include funds held as collateral for future travel paid with a credit card. These funds may be held by credit card processors directly under contracts that require a holdback of funds equal to a certain percentage of the related air traffic liability. If the Company fails to maintain certain liquidity and other financial covenants, the credit card processors’ rights to holdback would apply, which would result in a decrease of unrestricted cash. Restricted cash is carried at cost, which management believes approximates fair value. As of December 31, 2023 and 2022, the Company had less than $1 million of restricted cash.

Accounts Receivable, net

Receivables primarily consist of amounts due from credit card receivables, amounts due from aircraft lessors for maintenance performed and amounts due from select airport locations under revenue share agreements. The Company records an allowance for credit losses for amounts not expected to be collected. The Company estimates the allowance based on expected credit losses. The allowance for doubtful accounts was $3 million and $4 million as of December 31, 2023 and 2022, respectively.

Supplies, net

Supplies consist of expendable aircraft spare parts, aircraft fuel and other supplies and are stated at the lower of cost or net realizable value. Supplies are accounted for on a first-in, first-out basis and are charged to expense as they are used. An allowance for obsolescence on expendable aircraft spare parts is provided over the remaining lease term or the estimated useful life of the related aircraft fleet to reduce the carrying cost of spare parts currently identified as excess to the lower of amortized cost or net realizable value. The allowance for obsolescence was $10 million and $8 million as of December 31, 2023 and 2022, respectively.

Property and Equipment, net

Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives to their estimated residual values. The Company capitalizes additions, modifications enhancing the operating performance of its assets and the interest related to payments used to acquire new aircraft and the construction of its facilities. The Company capitalizes interest attributable to pre-delivery deposit payments (“PDPs”) as an additional cost of the related asset beginning when activities necessary to get the asset ready for its intended use commence.

Estimated useful lives and residual values for the Company’s property and equipment are as follows:

The components of depreciation and amortization expense are as follows (in millions):

The Company capitalizes certain internal and external costs associated with the acquisition and development of internal-use software for new products and enhancements to existing products that have reached the application development stage and are deemed feasible. The Company depreciates these costs using the straight-line method over the estimated useful life of the software. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software, and labor cost for employees who are directly associated with, and devote time to, internal-use software projects. Capitalized computer software, net is included within ground and other equipment, which is a component of property and equipment, net on the Company’s consolidated balance sheets and totaled $13 million and $10 million as of December 31, 2023 and 2022, respectively.

Leases

The Company leases property and equipment under operating leases. For leases with initial terms greater than 12 months, the related operating lease right-of-use asset and corresponding operating lease liability are recorded at the present value of lease payments over the term on the Company’s consolidated balance sheets. Some leases include rental escalation clauses, renewal options, termination options and/or other items that cause variability that are factored into the determination of lease payments when appropriate. The Company does not separate lease and non-lease components of contracts, except for certain flight training equipment, for which consideration is allocated between lease and non-lease components.

When available, the rate implicit in the lease is used to discount lease payments to present value; however, most leases do not provide a readily determinable implicit rate. Therefore, the Company estimates its incremental borrowing rate (“IBR”) to discount the lease payments based on information available at lease commencement. The IBR utilized by the Company is first determined using an unsecured recourse borrowing rate over a tenor that matches the period of lease payments for each individual lease and then is adjusted to arrive at a rate that is representative of a collateralized rate (secured rate). Given the Company does not have an established unsecured public credit rating, the Company utilizes current period and projected financial information to simulate an unsecured credit rating. The Company then determines its secured IBR using a combination of several valuation methods that take into account the lower amount of risk of collateralized borrowings along with observable implied credit ratings from its current outstanding secured debt obligations.

Forgivable Loans

Since 2022, the Company has launched several programs geared at attracting and retaining highly skilled pilots and mechanics. As an incentive of these programs, the Company issues forgivable loans to cadets and mechanics who join the programs, which can include pre-employment incentives such as a sign-on bonus, a monthly stipend, or reimbursement of training costs incurred. The loans and related interest are forgiven after a predetermined stay period, typically three years. Principal and interest incurred is to be repaid to the Company if a cadet or a mechanic terminates prior to the stay period being completed.

As of December 31, 2023 and 2022, the Company had $13 million and less than $1 million, respectively, in current forgivable loans, included within other current assets on the Company’s consolidated balance sheets, and $16 million and $3 million, respectively, in long-term forgivable loans, included within other assets on the Company’s consolidated balance sheets. During the year ended December 31, 2023, the Company issued $35 million in new forgivable loans and received $3 million in repayments due to participant terminations. The expense associated with the forgiveness of the principal amount of the loans is amortized over the agreed upon stay period, within salaries, wages and benefits in the Company’s consolidated statements of operations. During the years ended December 31, 2023 and 2022, the Company recorded $7 million and less than $1 million, respectively, in forgivable loan amortization expense. As of December 31, 2023, the Company recorded $1 million due under these loans within accounts receivable, net on the Company’s consolidated balance sheet, and there wasno receivable balance as of December 31, 2022.

Asset Impairment

The Company applies a fair value-based impairment test to the carrying amount of indefinite-lived intangible assets annually, or more frequently if certain events or circumstances indicate impairment. The Company assesses the value of indefinite-lived assets under a qualitative and quantitative approach, as required. Under a qualitative approach, the Company considers various market factors, including applicable key assumptions listed below. These factors are analyzed to determine if events and circumstances indicate that it is more likely than not that an indefinite-lived intangible asset's fair value is less than its carrying value. The quantitative approach is used to assess the asset’s fair value and the amount of the impairment. If the asset’s carrying amount exceeds its fair value calculated using the quantitative approach, an impairment charge is recorded for the difference in fair value and carrying amount. Indefinite-lived intangible assets are comprised of certain landing slot rights and the trademark of the Company.

Factors that could result in future impairment of landing slot rights, holding other assumptions constant, include, but are not limited to: (i) significant reduction in demand for air travel, (ii) competitive activity in the slotted airport, (iii) anticipated changes to the regulatory environment such as diminished slot access and (iv) increased competition at a nearby airport. As part of this evaluation, the Company assesses whether changes in (i) macroeconomic conditions, (ii) industry and market conditions, (iii) cost factors, (iv) overall financial performance and (v) certain events specific to the Company, have occurred which would impact the use and/or fair value of these assets.

Based on the Company’s qualitative analysis performed during the fourth quarter of 2023, the Company concluded it is more likely than not that the fair values of its indefinite-lived intangible assets are greater than the carrying amount. Therefore, a quantitative assessment was not necessary. No impairments have been recorded in any periods presented. Finite-lived intangible assets are comprised of the Company’s affinity credit card program relationship recognized in connection with acquisition accounting and are amortized over their estimated economic useful life.

The Company records impairment charges on long-lived assets used in operations and finite-lived intangible assets when events and circumstances indicate that the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets, and the net book value of the assets exceeds their estimated fair value. In making these determinations, the Company uses certain assumptions, including, but not limited to: (i) estimated fair value of the assets; and (ii) estimated undiscounted future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization including macroeconomic factors impacting future demand, length of service the asset will be used in the Company’s operations and estimated salvage values.

Aircraft Maintenance

The Company accounts for heavy maintenance and major overhauls under the deferral method, whereby the cost of heavy maintenance and major overhauls is deferred and recorded as flight equipment and depreciated over the lesser of the remaining lease term or the period until the next scheduled heavy maintenance event. The Company has separate maintenance cost-per-hour contracts for the repair of certain rotable parts to support airframe and engine maintenance and repair. These agreements require monthly payments based upon utilization, such as flight hours, cycles and age of the aircraft. For the contracts in which risk has been determined to transfer to the service provider, expense is recognized based on the contractual terms of the cost-per-hour arrangement. For those contracts in which risk has not been determined to transfer to the service provider, the Company initially records monthly payments as a deposit included in other assets on the Company’s consolidated balance sheets and then accounts for the underlying maintenance event when it occurs, in accordance with the Company’s maintenance accounting policy.

Certain of the Company’s aircraft lease agreements require the Company to pay maintenance reserves to aircraft lessors to be held as collateral in advance of the Company’s required performance of major maintenance activities. At lease inception and at each balance sheet date, the Company assesses whether the maintenance reserve payments required by its leases are substantively and contractually related to the maintenance of the leased asset. Maintenance reserve payments that are determined to be related to the maintenance of the leased asset are accounted for as maintenance deposits, to the extent they are expected to be recoverable, and are reflected as aircraft maintenance deposits on the Company’s consolidated balance sheets. As the eligible maintenance is performed, the maintenance deposits are recorded in accounts receivable, net on the Company’s consolidated balance sheets. When it is not probable that the Company will recover amounts currently on deposit with a lessor, such amounts are expensed as supplemental rent within aircraft rent in the Company’s consolidated statements of operations. Maintenance reserve payments that are based on a utilization measure and are not probable of being recovered are considered variable lease payments and are not included within the right-of-use asset and respective lease liability.

The Company makes certain assumptions at the inception of the lease and at each balance sheet date to determine the recoverability of maintenance deposits. These assumptions are based on various factors, such as the estimated time between the maintenance events, the cost of such maintenance events, the date the aircraft is due to be returned to the lessor and the number of flight hours and cycles the aircraft is estimated to be utilized before it is returned to the lessor. Changes in estimates are accounted for on a cumulative catch-up basis. On a regular basis, the Company assesses the credit worthiness of the Company’s lessors to ensure deposits are collectible and, specifically, whether any credit losses exist for aircraft maintenance deposits. Based on these assessments, the Company determinedno allowance was necessary as of December 31, 2023 and 2022.

Certain of the Company’s historical lease agreements have provided, and future lease agreements may provide, that maintenance reserves held by the lessor at the expiration of the lease are nonrefundable to the Company and will be retained by the lessor. Consequently, any usage-based maintenance reserve payments after the last major maintenance event would not substantively be related to the maintenance of the leased asset and, therefore, would be accounted for as supplemental rent.

The Company’s aircraft lease agreements generally contain provisions that require the Company to return aircraft airframes and engines to the lessor in a specified condition or pay an amount to the lessor based on the airframe and engine’s actual return condition. Lease return costs include all costs that would be incurred at the return of the aircraft, including costs incurred to repair the airframe and engines to the condition required by the lease.

Lease return costs could include, but are not limited to, redelivery cost, redelivery crew cost, fuel, final inspections, reconfiguration of the cabin, repairs to the airframe, painting, overhaul of engines, replacement of components and checks. These return provisions are evaluated at inception of the lease and throughout the lease terms and are accounted for as either fixed or variable lease payments (depending on the nature of the lease return condition) when it is probable that such amounts will be incurred. When determining probability and estimated cost, there are various other factors which need to be considered such as current condition of the aircraft, the age of the aircraft at lease expiration, number of hours run on the engines, number of cycles run on the airframe, projected number of hours run on the engine at the time of return, the projected number of cycles run on the airframe at the time of return, the extent of repairs needed, if any, upon return, return locations, current configuration of the aircraft, current paint of the aircraft, estimated escalation of cost of repairs and materials at the time of return, current flight hour agreement rates and future flight hour agreement rates. In addition, typically near the lease return date, the lessors may allow maintenance reserves to be applied as return condition consideration or pass on certain return provisions if they do not align with their current plans to remarket the aircraft. As a result of the different factors listed above, management assesses the need to accrue lease return costs throughout the lease as facts and circumstances warrant an assessment. When costs become both probable and estimable, lease return costs are expensed as a component of aircraft rent in the Company’s consolidated statements of operations through the remaining lease term.

Aircraft and Spare Engine Purchase Hedging Activities

The Company is party to certain interest rate swaption agreements that are accounted for as cash flow hedges, as defined under ASC 815, Derivatives and Hedging. Some of the Company’s aircraft and spare engine sale-leaseback agreements can expose it to interest rate risk as, depending on the agreement, rental payments are adjusted and become fixed based on the swap rate at the time of delivery. The primary objective for interest rate derivatives is to hedge the portion of the estimated future monthly rental payments related to the associated agreement’s variable interest rate, primarily the Secured Overnight Financing Rate (“SOFR”). These swaption agreements provide for a single payment at maturity based upon the change in the applicable swap rate between the execution date and the termination date. For interest rate derivatives, the Company recognizes the associated gains or losses deferred in accumulated other comprehensive income/(loss) (“AOCI/L”), as well as amounts that are paid or received in connection with the purchase or sale of interest rate derivative instruments (i.e., premium costs of swaption contracts), as a component of aircraft rent expense within the Company’s consolidated statements of operations over the period of the related aircraft lease. Cash flows related to interest rate swaption agreements are classified as operating activities in the Company’s consolidated statements of cash flows. The Company presents its interest rate swaption derivative instruments gross on the consolidated balance sheets. The Company does not enter into derivative instruments for speculative purposes. Refer to Note 6 for additional information regarding the Company’s hedge accounting and derivative instruments.

Passenger Revenues

Fare revenues. Tickets sold in advance of the flight date are initially recorded as an air traffic liability on the Company’s consolidated balance sheets. Fare revenues are recognized in passenger revenues within the Company’s consolidated statements of operations at the time of departure when transportation is provided.

Non-fare passenger revenues. Certain ancillary items such as service fees, baggage and seat selection deemed part of providing passenger transportation are recognized to non-fare passenger revenues in passenger revenues within the Company’s consolidated statements of operations at the time of departure. Service fees include, among other things, convenience fees, charges for nonrefundable ticket expiration, cancellation charges and service charges assessed for itinerary changes made prior to the date of departure. Such change fees are recognized at the time of departure of the newly scheduled travel.

Passenger Taxes and Fees. The Company is required to collect certain taxes and fees from customers on behalf of government agencies and airports and remit these back to the applicable governmental entity or airport on a periodic basis. These taxes and fees include U.S. federal transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure taxes. These taxes and fees are collected from customers at the time they purchase their tickets but are not included in passenger revenues. The Company records a liability within other current liabilities on the consolidated balance sheets upon collection from the customer, and reduces the liability when payments are remitted to the applicable governmental agency or airport.

Other Revenues

Other revenues primarily consist of services not directly related to providing transportation, such as the advertising, marketing and brand elements of the FRONTIER Miles affinity credit card program and commissions revenue from the third-party sale of items such as rental cars and hotels.

Frequent Flyer Program

The Company’s FRONTIER Miles program provides frequent flyer travel awards to program members based on accumulated miles. Miles are generally accumulated as a result of travel, purchases using the co-branded credit card and purchases from other participating partners. The Company defers revenue for miles earned by passengers under its FRONTIER Miles program based on the equivalent ticket value a passenger receives by redeeming miles for a ticket rather than paying cash.

The Company has a credit card affinity agreement with its credit card partner, Barclays Bank Delaware (“Barclays”), through 2029, which provides for joint marketing, grants certain benefits to co-branded credit cardholders (“Cardholders”) and allows Barclays to market using the Company’s customer database. Cardholders earn miles under the FRONTIER Miles program and the Company sells miles at agreed-upon rates to Barclays and earns fees from Barclays for the acquisition, retention and use of the co-branded credit card by consumers.

Miles are also sold to participating companies, including credit card companies and other third parties. Sales to credit card companies include multiple promised goods and services, which the Company evaluates to determine whether they represent performance obligations. The Company determined these arrangements have three separate performance obligations: (i) miles to be awarded, (ii) licensing of brand and access to member lists and (iii) advertising and marketing efforts. Total arrangement consideration is allocated to each performance obligation on the basis of the deliverables relative standalone selling price. For miles, the Company considers a number of entity-specific factors when developing the best estimate of the standalone selling price, including the number of miles needed to redeem an award, average fare of comparable segments, breakage and restrictions. For licensing of brand and access to member lists, the Company considers both market-specific factors and entity-specific factors, including general profit margins realized in the marketplace and industry, brand power, market royalty rates and size of customer base. For the advertising and marketing performance obligation, the Company considers market-specific factors and entity-specific factors, including the Company’s internal costs of providing services, volume of marketing efforts and overall advertising plan.

Consideration allocated based on the relative standalone selling price to both the brand licensing and access to member lists and advertising and marketing elements is recognized as other revenue in the Company’s consolidated statements of operations over time as miles are delivered. The consideration allocated to the transportation portion of these mile sales is deferred and recognized as a component of passenger revenue in the Company’s consolidated statements of operations at the time of travel for miles redeemed. Miles that the Company estimates are not likely to be redeemed are subject to breakage and are recognized as a portion of passenger revenues in the Company’s consolidated statements of operations in proportion to the pattern of rights exercised by customers. Management uses statistical modeling to estimate breakage based on historical redemption patterns. A change in assumptions as to the period over which miles are expected to be redeemed, the actual redemption activity for miles or the estimated fair value of miles expected to be redeemed could have an impact on revenues in the year in which the change occurs and in future years. Redemptions are allocated between sold and flown miles based on historical patterns.

Aircraft Fuel

Aircraft fuel expense includes jet fuel and associated into-plane costs and federal and state taxes.

Sales and Marketing

Sales and marketing expense includes credit card processing fees, system booking fees and distribution costs such as the costs of the Company’s contact centers and advertising costs. Advertising and the related production costs are expensed as incurred, and for the years ended December 31, 2023, 2022 and 2021 represented $5 million, $9 million and $7 million, respectively, of sales and marketing expense reported within the Company’s consolidated statements of operations.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) Credits

The CARES Act became law on March 27, 2020, and provided the airline industry with up to $25 billion for a Payroll Support Program (the “PSP”) to be used for employee wages, salaries and benefits and up to $25 billion in loans. During 2020 and 2021, the Company participated in the PSP, as well as the second Payroll Support Program (the “PSP2”) and the third Payroll Support Program (the “PSP3,” and, together with the PSP and the PSP2, the “PSPs”) offered by the U.S. Department of the Treasury (the “Treasury”), each of which included both a grant and an unsecured 10-year, low-interest promissory note.

During the year ended December 31, 2021, the Company received $311 million in installment funding under the PSP2 and PSP3, comprised of $278 million in grants, and $33 million in unsecured 10-year, low-interest loans. The Company recognized the full $278 million of grant proceeds, net of deferred financing costs, over the period they were intended to support payroll, during the year ended December 31, 2021, within CARES Act credits in the Company’s consolidated statements of operations.

The CARES Act also provided for an employee retention credit (the “CARES Employee Retention Credit”), which is a refundable tax credit against certain employment taxes that the Company qualified for beginning on April 1, 2020. As a result of the increase in revenues after the first quarter of 2021, the Company was no longer eligible for future credits due to the provisions of the gross receipt test applicable to this program. During the year ended December 31, 2021, the Company recognized $17 million related to the CARES Employee Retention Credit within CARES Act credits in the Company’s consolidated statements of operations.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Deferred income taxes are recognized for the tax consequences of temporary differences between the tax and financial statement reporting bases of assets and liabilities. The Company periodically assesses whether it is more likely than not that sufficient taxable income will be generated to realize deferred income tax assets, and a valuation allowance is established if it is not likely that deferred income tax assets will be realized. The Company considers sources of taxable income from prior period carryback periods, future reversals of existing taxable temporary differences, tax planning strategies and future projected taxable income when assessing the future realization of deferred tax assets. In assessing the sources of income and the need for a valuation allowance, the Company considers all available positive and negative evidence, which includes a recent history of cumulative losses. Refer to Note 15 for additional information regarding the Company’s valuation allowance.

Stock-Based Compensation

The Company recognizes cost of employee services received in exchange for awards of equity instruments based on the fair value of each instrument at the date of grant. Compensation expense is recognized over the period during which an employee is required to provide service in exchange for an award, with forfeitures accounted for as they occur. The fair value of stock option awards is estimated on the date of grant using the Black-Scholes valuation model. Restricted stock units are valued at the fair value of the shares on the date of grant. The exercise price of all stock awards is determined by the Company’s board of directors based, in part, on the ending stock price on the grant date. Refer to Note 10 for additional disclosures regarding details of the Company’s stock-based compensation plans.

Gains on Sale-Leaseback Transactions

The Company enters into sale-leaseback transactions for its aircraft and spare engine assets, whereby the Company sells one or more aircraft or aircraft engine assets to a third-party and simultaneously enters into an operating lease for a right to use such assets for a fixed period of time. Gains on sale-leaseback transactions are recognized in the period in which title to the asset transfers to the buyer-lessor and the lease commences, as a component of other operating expenses within the Company’s consolidated statements of operations. Gains on sale-leaseback transactions are calculated as the excess of the sale price of the asset over its carrying value. The carrying value of the assets sold will generally include the price paid for the asset, net of the amount of cash or the fair value of non-cash credits and incentives received from equipment and component manufacturers and any liquidated damages received from the manufacturer, the costs associated with delivery of the asset including any taxes or tariffs, financing costs capitalized in connection with the construction of the asset, capitalized maintenance and other improvements, and accumulated depreciation. Gains on sale-leaseback transactions may also be adjusted if it is determined that the terms of the sale transaction or the lease agreement are at a price other than fair value.

Concentrations of Risk

The Company’s business has been, and may continue to be, adversely affected by increases in the price of aircraft fuel. Aircraft fuel represented approximately 31%,34% and 26% of total operating expenses for the years ended December 31, 2023, 2022 and 2021, respectively. Gulf Coast Jet and U.S. Gulf Coast indexed fuel are the Company’s basis for the majority of aircraft fuel purchases. Any disruption to the oil production or refinery capacity in the Gulf Coast or any other index, as a result of weather or any other disaster, or disruptions in the supply chain of jet fuel, dramatic escalations in the cost of jet fuel and/or the failure of fuel providers to perform under fuel arrangements for other reasons could have a material adverse effect on the Company’s financial condition and results of operations.

As of December 31, 2023, the Company hadseven union-represented employee groups that together represented approximately 86% of all employees. Additional disclosure relating to the Company’s union-represented employee groups is included in Note 12.

As of December 31, 2023, the Company had all capitalized maintenance deposits withone lessor, and all pre-delivery deposits for flight equipment withone vendor.

Recent Accounting Pronouncements

The Company did not adopt any previously issued accounting pronouncements during the year ended December 31, 2023.

In December 2023, the FASB issued ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures, which requires that an entity, on an annual basis, disclose additional income tax information, primarily related to the rate reconciliation and income taxes paid. The standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company’s results of operations or financial position.

2. Revenue Recognition

As of December 31, 2023 and 2022, the Company’s air traffic liability balance was $259 million and $328 million, respectively, which includes amounts classified as other long-term liabilities. During the year ended December 31, 2023, substantially all of the air traffic liability as of December 31, 2022 was recognized as passenger revenue within the Company’s consolidated statements of operations. Of the air traffic liability balances as of both December 31, 2023 and 2022, $60 million was related to unearned membership fees.

During the years ended December 31, 2023, 2022 and 2021, the Company recognized $44 million, $82 million and $58 million of revenue related to expected and actual expiration of customer rights to book future travel, respectively, in passenger revenues within the Company’s consolidated statements of operations.

Operating revenues are comprised of passenger revenues, which includes fare and non-fare passenger revenues, and other revenues. Disaggregated operating revenues are as follows (in millions):

The Company is managed as a single business unit that provides air transportation for passengers. Operating revenues by principal geographic region, as defined by the U.S. Department of Transportation (the “DOT”), are as follows (in millions):

The Company attributes operating revenues by geographic region based upon the origin and destination of each passenger flight segment. The Company’s tangible assets consist primarily of flight equipment, which are mobile across geographic markets. Accordingly, assets are not allocated to specific geographic regions.

3. Other Current Assets

Other current assets consist of the following (in millions):

4. Property and Equipment, Net

The components of property and equipment, net are as follows (in millions):

During the years ended December 31, 2023, 2022 and 2021 the Company deferred $77 million, $40 million and $18 million of costs for heavy maintenance, respectively.

The Company’s deferred heavy maintenance balance, net was $99 million and $46 million as of December 31, 2023 and 2022, respectively, and is included as a part of flight equipment within property and equipment, net on the Company’s consolidated balance sheets.

5. Intangible Assets, Net

The following table summarizes the Company’s intangible assets, net (in millions):

Expected future amortization expense of the Company’s finite-lived intangible asset is less than $1 million per year from 2024 through 2029.

6. Financial Derivative Instruments and Risk Management

The Company may be exposed to interest rate risk through aircraft and spare engine lease contracts for the time period between agreement of terms and commencement of the lease, when portions of rental payments can be adjusted and become fixed based on the swap rate. As part of its risk management program, the Company enters into contracts in order to limit the exposure to fluctuations in interest rates. During the year ended December 31, 2023, the Company didnot enter into any swaps and therefore, paidno upfront premiums for options. During the year ended December 31, 2022, the Company paid $19 million in upfront premiums for the option to enter into and exercise cash-settled swaps with a forward starting effective date for future deliveries of 14 aircraft and 4 engines. During the year ended December 31, 2021, the Company didnot enter into any swaps and, therefore, paidno upfront premiums for options. As of December 31, 2023, the Company hadno interest rate hedges outstanding.

Additionally, the Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments but does not expect that any of its counterparties will fail to meet their respective obligations. The amount of such credit exposure is generally the fair value of the Company’s outstanding contracts in a receivable position. To manage credit risks, the Company selects counterparties based on credit assessments and monitors the market position with each counterparty.

The assets associated with the Company’s derivative instruments are presented on a gross basis and include upfront premiums paid. These assets are recorded as a component of other current assets on the Company’s consolidated balance sheets. As of December 31, 2023 there wereno assets outstanding. As of December 31, 2022 there were $24 million of assets outstanding.

The following table summarizes the effect of interest rate derivative instruments reflected in rent expense within the Company’s consolidated statements of operations (in millions):

The following table presents the net of tax impact of the overall effectiveness of derivative instruments designated as cash flow hedging instruments within the Company’s consolidated statements of comprehensive income (loss) (in millions):

As of December 31, 2023, $7 million is included in AOCI/L related to interest rate hedging instruments that is expected to be reclassified into aircraft rent within the Company’s consolidated statements of operations over the aircraft or engine lease term.

7. Other Current Liabilities

Other current liabilities consist of the following (in millions):

8. Debt

The Company’s debt obligations are as follows (in millions):

(a)The Company, through an affiliate, entered into the PDP facility with Citibank, N.A., as facility agent, in December 2014 (as amended from time to time, the “PDP Financing Facility”). The PDP Financing Facility is collateralized by the Company’s purchase agreement for Airbus A320neo family aircraft deliveries (see Note 12) through the term of the facility, which extends through December 2026. In August 2023, the PDP Financing Facility was amended and restated to expand the number of financial institution participants as lenders and increase the total available capacity to $365 million, among other things. The Company capitalized $2 million in deferred financing costs related to the amendment during the year ended December 31, 2023, which reduced the carrying value of the loan on the Company’s consolidated balance sheet. These costs will be amortized on a straight-line basis over the life of the facility.

Interest is paid every 90 days based on the SOFR plus a margin for each individual tranche. The PDP Financing Facility consists of separate loans for each PDP aircraft. Each separate loan matures upon the earlier of (i) delivery of that aircraft to the Company by Airbus, (ii) the date one month following the last day of the scheduled delivery month of such aircraft and (iii) if there is a delay in delivery of aircraft, depending on the cause of the delivery delay, up to six months following the last day of the scheduled delivery month of such aircraft. The PDP Financing Facility will be repaid periodically according to the preceding sentence, with the PDP Financing facility maturing in December 2026.

(b)Represents a note with a commercial bank related to the Company’s headquarters building. Under the terms of the note, the Company began repaying the outstanding principal balance with quarterly payments beginning in January 2022 and continuing until the maturity date in June 2024, per the latest amendment. On the maturity date, one final balloon payment will be made to cover all unpaid principal, accrued unpaid interest and other amounts due. The interest rate of the one-month SOFR plus a margin is payable monthly.

(c)The Company entered into an agreement with Barclays in 2003 which, as amended, provides for joint marketing, grants certain benefits to Cardholders and allows Barclays to market using the Company’s customer database, through 2029. Cardholders earn miles under the FRONTIER Miles program and the Company sells miles at agreed-upon rates to Barclays and earns fees from Barclays for the acquisition, retention and use of the co-branded credit card by Cardholders. In addition, Barclays will pre-purchase miles if the Company so requests and meets certain conditions precedent. The pre-purchased miles facility amount available to the Company is to be reset on January 15 of each calendar year through, and including, January 15, 2028 based on the aggregate amount of fees payable by Barclays to the Company on a calendar year basis and subject to certain other conditions, up to an aggregate maximum facility amount of $200 million. The Company pays interest on a monthly basis, which is based on a one-month Effective Federal Funds Rate (“EFFR”) plus a margin. Beginning March 31, 2028, the facility is scheduled to be repaid in 12 equal monthly installments.

(d)As a result of the Company’s participation in the payroll support programs offered by the Treasury, the Company obtained a series of 10-year, low-interest loans from the Treasury (collectively, the “PSP Promissory Notes”) that are due between 2030 to 2031. The PSP Promissory Notes include an annual interest rate of 1.00% for the first five years and the SOFR plus 2.00% in the final five years, with bi-annual interest payments. The loans can be prepaid at par at any time without incurring a penalty.

In connection with the term loan facility entered into with the Treasury on September 28, 2020 (the “Treasury Loan”), which was repaid in full on February 2, 2022, and the PSP Promissory Notes, the Company issued to the Treasury warrants to purchase 3,117,940 shares of FGHI common stock at a weighted-average price of $6.95 per share. The initial fair value of these warrants upon issuance was treated as a loan discount, which reduced the carrying value of the related Treasury Loan and PSP Promissory Notes, and is amortized utilizing the effective interest method as interest expense in the Company’s consolidated statements of operations over the term of each loan. These awards were originally classified as liability-based awards within other current liabilities on the Company’s consolidated balance sheets, with periodic mark to market remeasurements included in interest expense in the Company’s consolidated statements of operations given the Company only had the option of settling in cash prior to being publicly traded. As a result of the IPO, the Company has the intent and ability to settle the warrants issued to the Treasury in shares and, as a result, as of April 6, 2021, the Company reclassified the warrant liability to additional paid-in capital on the Company’s consolidated balance sheets and is no longer required to mark to market the warrants. The Company recordedno mark to market adjustments during the years ended December 31, 2023 and 2022, and $22 million in mark to market adjustments during the year ended December 31, 2021, to interest expense within the Company’s consolidated statements of operations. The Treasury hasnot exercised any warrants as of December 31, 2023.

Cash payments for interest related to debt were $28 million, $14 million and $9 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The Company has caused standby letters of credit and surety bonds to be issued to various airport authorities and vendors that are collateralized by a portion of the Company’s property and equipment and, as of December 31, 2023 and 2022, the Company did not have any outstanding letters of credit that were drawn upon.

As of December 31, 2023, future maturities of debt are payable as follows (in millions):

The Company continues to monitor covenant compliance with various parties, including, but not limited to, its lenders and credit card processors, and as of December 31, 2023, the Company was in compliance with all of its covenants.

9. Operating Leases

Aircraft

As of December 31, 2023, the Company leased 136 aircraft with remaining terms ranging from 1 year to 12 years, all of which are under operating leases and are included within operating lease right-of-use assets and operating lease liabilities on the Company’s consolidated balance sheets. In addition, as of December 31, 2023, the Company leased 35 spare engines which are all under operating leases, with the remaining term ranging from 1 month to 12 years. As of December 31, 2023, the lease rates for 14 of the engines depend on usage-based metrics which are variable and, as such, these leases are not recorded on the Company’s consolidated balance sheets as operating lease right-of-use assets or as operating lease liabilities.

During the years ended December 31, 2023, 2022 and 2021, the Company executed sale-leaseback transactions with third-party lessors for 11,13, and 13 new Airbus A320neo family aircraft, respectively, and also entered into direct leases for 10 new Airbus A320neo family aircraft during the year ended December 31, 2023. The Company didnot enter into any direct leases during the years ended December 31, 2022 and 2021. Additionally, the Company completed sale-leaseback transactions forfour engines during each of the years ended December 31, 2023 and 2022, andtwo engines during the year ended December 31, 2021. The Company recognized net sale-leaseback gains from those sale-leaseback transactions of $147 million, $87 million and $60 million during the years ended December 31, 2023, 2022 and 2021, respectively, which are included as a component of other operating expenses within the Company’s consolidated statements of operations.

In May 2021, the Company entered into an early termination and buyout agreement with one of its lessors forsix aircraft previously owned by the Company. Of thefour A319 aircraft originally scheduled to be returned in December 2021, two were returned during the second quarter of 2021 andtwo were returned during the third quarter of 2021. Additionally, two A320ceo aircraft were returned as scheduled during the fourth quarter of 2021. The early returns of these aircraft retired the remaining A319 aircraft in the Company’s fleet. As a result of this early termination and buyout arrangement, the Company recorded a $10 million charge included as a component of aircraft rent within the Company’s consolidated statements of operations for the year ended December 31, 2021 related to the accelerated rent and lease return obligations of the A319 aircraft returned early.

Aircraft Rent Expense and Maintenance Obligations

During the years ended December 31, 2023, 2022 and 2021, aircraft rent expense was $554 million, $556 million and $530 million, respectively. Aircraft rent expense includes supplemental rent, which is made up of maintenance reserves paid or to be paid that are not probable of being reimbursed and probable lease return condition obligations. Supplemental rent expense (benefit) for maintenance-related reserves that were deemed non-recoverable, and any impact from changes in those estimates, was $(2) million, $(1) million and $(3) million for the years ended December 31, 2023, 2022 and 2021, respectively. The portion of supplemental rent expense related to probable lease return condition obligations was $20 million, $90 million and $61 million for the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023 and 2022, the Company’s total leased aircraft return cost liability was $26 million and $102 million, respectively, and are reflected in other current liabilities and other long-term liabilities on the Company’s consolidated balance sheets.

Additionally, certain of the Company’s aircraft lease agreements require the Company to pay maintenance reserves to aircraft lessors to be held as collateral in advance of the Company’s required performance of major maintenance activities. As of December 31, 2023 and 2022, the Company had aircraft maintenance deposits that are expected to be recoverable of $96 million and $117 million, respectively, on the Company’s consolidated balance sheets of which $12 million was included in accounts receivable as of December 31, 2023 and 2022, net on the Company’s consolidated balance sheets as the eligible maintenance has been performed. The remaining $84 million and $105 million are included within aircraft maintenance deposits on the Company’s consolidated balance sheets as of December 31, 2023 and 2022, respectively.

A majority of these maintenance reserve payments are calculated based on a utilization measure, such as flight hours or cycles. Maintenance reserves collateralize the lessor for maintenance time run off the aircraft until the completion of the maintenance of the aircraft. As of December 31, 2023, fixed maintenance reserve payments for aircraft and spare engines, including estimated amounts for contractual price escalations, were expected to be $3 million per year for the years 2024 through 2026, $4 million for 2027 through 2028 and $1 million thereafter, before consideration of reimbursements.

In 2023, the Company extended the term for certain aircraft and spare engine operating leases that were slated to expire in 2023 and 2024, respectively. As a result ofsix aircraft andfive engine extension events, for the year ended December 31, 2023, the Company recorded a benefit of $53 million to aircraft rent in the Company’s consolidated statement of operations related to previously accrued lease return costs that were variable in nature and associated with the anticipated utilization and condition of the airframes and engines at the original return date. Given the extension of these aircraft and engine operating leases, such variable return costs are no longer probable of occurring.

Airport Facilities

The Company’s facility leases are primarily for space at approximately 90 airports that are primarily located in the United States. These leases are classified as operating leases and reflect the use of airport terminals, ticket counters, office space, and maintenance facilities. Generally, this space is leased from government agencies that control the use of the airport. The majority of these leases are short-term in nature and renew on an evergreen basis.

For these leases, the contractual term is used as the lease term. As of December 31, 2023, the remaining lease terms vary fromone month toeleven 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, and because of the variable nature of the rates, these leases are not recorded on the Company’s consolidated balance sheets as a right-of-use assets and lease liabilities.

Other Property and Equipment

The Company leases certain other assets such as flight training equipment, building space, and various other equipment. Certain of the Company’s leases for other assets are deemed to contain fixed rental payments and, as such, are classified as operating leases and are recorded on the Company’s consolidated balance sheets as a right-of-use asset and liability. The remaining lease terms ranged fromone month toeight years as of December 31, 2023.

Lessor Concessions

In response to the COVID-19 pandemic, beginning in 2020, the Company was granted payment deferrals on leases included in the Company’s right-of-use assets for certain aircraft and engines from lessors along with airport facilities and other vendors that are not included in the Company’s right-of-use assets. As these deferred payments are made, the Company will recognize the deferred payments in aircraft rent or station operations, as applicable, in the Company’s consolidated statements of operations. The payback of all previous aircraft and engine rent deferrals was completed as of December 31, 2021, and, therefore, there wasno impact to aircraft rent in the Company’s consolidated statement of operations for the years ended December 31, 2023 and 2022. The payback of station deferrals decreased operating cash flows and unfavorably impacted station operations within the Company’s results of operations by $2 million and $3 million for the years ended December 31, 2023 and 2022, respectively. The deferrals for the year ended December 31, 2021 decreased operating cash flows and unfavorably impacted the Company’s results of operations by $22 million, including a $31 million unfavorable impact to aircraft rent and a $9 million favorable impact to station operations in the Company’s consolidated statement of operations. As of December 31, 2023, the Company had $6 million in station deferrals which will be recognized to station operations within the Company’s consolidated statements of operations in future periods as the deferrals are repaid.

Lease Position

The table below presents the lease-related assets and liabilities recorded on the Company’s consolidated balance sheets as of December 31, 2023 and 2022 (in millions):

Lease Costs

The table below presents certain information related to lease costs for operating leases during the years ended December 31, 2023, 2022 and 2021 (in millions):

(a) Expenses are included within aircraft rent, station operations, maintenance, materials and repairs and other operating within the Company’s consolidated statements of operations.

Undiscounted Cash Flows

The table below reconciles the undiscounted cash flows as of December 31, 2023 (in millions) for each of the next five years and total of the remaining years to the operating lease liability recorded on the Company’s consolidated balance sheet:

During the years ended December 31, 2023 and 2022, the Company acquired, through new operating leases, operating lease assets totaling $864 million and $405 million, respectively, which are included in operating lease right-of-use assets on the Company’s consolidated balance sheets. During the years ended December 31, 2023, 2022 and 2021, the Company paid cash of $535 million, $464 million and $461 million net of lessor incentives received, respectively, for amounts included in the measurement of lease liabilities.

10. Stock-Based Compensation

During the years ended December 31, 2023, 2022 and 2021, the Company recognized $14 million,$15 million and $11 million, respectively, in stock-based compensation expense, which is included as a component of salaries, wages and benefits within the Company’s consolidated statements of operations. The stock-based compensation expense is related to stock options and restricted stock units. The total income tax benefit recognized in the income statement for stock-based compensation expenses was $3 million for each of the years ended December 31, 2023 and 2022, and $2 million for the year ended December 31, 2021. The Company also recognized additional income tax benefits of $5 million, $1 million, and $8 million for each of the years ended December 31, 2023, 2022, and 2021, respectively, for which options were exercised or restricted shares vested.

Stock Options and Restricted Stock Units

In April 2014, FGHI approved the 2014 Equity Incentive Plan (the “2014 Plan”). Under the terms of the 2014 Plan,38 million shares of FGHI common stock were reserved for issuance. Concurrently with the Company’s IPO, on April 1, 2021 the Company approved the 2021 Incentive Award Plan (the “2021 Plan”), which reserved 7 million shares of FGHI common stock, as well as the 11 million issued awards from the 2014 Plan that were still outstanding plus any subsequently forfeited awards or awards that lapse unexercised after April 1, 2021, to be available for future issuances of stock-based compensation awards to be granted to members of the Board of Directors and certain employees and consultants. Additionally, shares available for issuance under the 2021 Plan will be subject to an annual increase on the first day of each fiscal year beginning in 2022 and ending in 2031, equal to the lesser of (i) one percent (1%) of the shares of stock outstanding on the last day of the immediately preceding fiscal year and (ii) such smaller number of shares of stock as determined by the Company’s Board of Directors; provided, however, that no more than 30 million shares of stock may be issued upon the exercise of incentive stock options. On January 1, 2023,2,178,758 shares were added to the 2021 Plan as a result of the annual increase. As of December 31, 2023, there were 5 million shares available for issuance.

Stock Options

Stock option awards are granted with an exercise price equal to the fair market value of FGHI’s common stock on the date of grant, and generally vest evenly over four years of continuous service. Compensation expense related to stock options is recognized on a straight-line basis over the requisite service period, net of forfeitures, which are recognized on a specific-identification basis.

A summary of stock option activity during the year ended December 31, 2023 is presented below:

There wereno stock options granted during the years ended December 31, 2023, 2022, and 2021. During the years ended December 31, 2023, 2022, and 2021,4,322,711,277,729 and 2,202,895 vested stock options were exercised, respectively, with an intrinsic value of $26 million, $3 million and $32 million, respectively. As of December 31, 2023, the aggregate intrinsic value of outstanding options was $6 million.

As of December 31, 2023, there wereno unvested options remaining and therefore, there wasno unrecognized compensation costs related to options. Additionally, as of December 31, 2023, exercisable options and outstanding options both have a remaining weighted-average contractual term of 2.4 years.

Restricted Stock Units

Restricted stock units (“RSUs”) in FGHI are valued at the fair value of FGHI’s common stock on the date of grant. Each RSU represents the right to receive one share of common stock upon vesting of such RSU. Vesting of RSUs is based on time-based service conditions, approximatelyone year of continuous service for the Company’s Board of Directors andthree tofour years of continuous service for all other employees. In order to vest, the participant must still be employed by the Company, with certain contractual exclusions, at each vesting event. Generally, within 30 days after the vesting date, the shares underlying the RSU will be issued to the participant. Compensation expense, net of forfeitures as incurred on a specific identification basis, is recognized on a straight-line basis over the requisite service period.

A summary of RSU activity during the years ended December 31, 2023, 2022 and 2021 is presented below:

(a) Represents withholdings to cover tax obligations on vested shares when applicable.

The total fair value of RSUs vested was $13 million, $10 million and $11 million, during theyears ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, there was $33 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted-average period of 2.5 years.

Liability-Classified Awards

On December 3, 2013, to give effect to the reorganization of the Company’s corporate structure, an agreement was reached to amend and restate a phantom equity agreement with the Company’s pilots. Under the terms of this agreement, when an amendment to the underlying collective bargaining agreement was approved, the Company’s pilots employed by Frontier in June 2011, (the “Participating Pilots”), through their agent, FAPAInvest, LLC, received phantom equity units. Each unit represented the right to receive common stock or cash in connection with certain events, including a qualifying initial public offering, such stock to be distributed or cash paid to the Participating Pilots in 2020 and 2022 based on a predetermined formula. In accordance with the amended and restated phantom equity agreement, the obligation became fixed as of December 31, 2019 and was no longer subject to valuation adjustments. As of December 31, 2019, the final associated liability was $137 million, of which $111 million was paid during the year ended December 31, 2020 and the remaining $26 million was paid during the year ended December 31, 2022.

11. Employee Retirement Plans

The Company recorded $65 million, $56 million and $46 million in expense related to matching contributions to employee retirement plans for the years ended December 31, 2023, 2022 and 2021, respectively. This is recorded as a component of salaries, wages and benefits in the Company’s consolidated statements of operations.

Frontier 401(k) Plan

The Company sponsors The Frontier Airlines, Inc. 401(k) Retirement Plan (the “Frontier 401(k) Plan”) under Section 401(k) of the Internal Revenue Code. This plan excludes pilots, who are covered under a separate plan discussed below. Under the Frontier 401(k) Plan, the Company matches 50% of each eligible participant’s contribution, up to 2% of their compensation for maintenance employees and up to 6% of their compensation for all other employees, excluding flight attendants and dispatchers, whose contributions are matched at 100% of up to 6% of their compensation. Contributions for employees begin after 60 days of employment and vest 25% per year over four years. Participants are entitled to receive distributions of all vested amounts beginning at age 59 1/2. The plan is subject to the annual IRS elective deferral limit of $22,500 for 2023, $20,500 for 2022 and $19,500 for 2021.

FAPA Plan

The Company also established the Frontier Airlines, Inc. Pilots Retirement Plan (the “FAPA Plan”), a defined contribution retirement plan for pilots covered under the collective bargaining agreement with the Frontier Airlines Pilots Association (“FAPA”). Effective September 1, 2016, pilots are no longer represented by FAPA and are represented by the Air Line Pilots Association (“ALPA”), however the FAPA Plan remained in effect under the collective bargaining agreement with ALPA. Under the latest collective bargaining agreement with the pilots, effective as of January 2019 for afive year period, the Company match no longer occurs under this plan, and instead, the Company makes nonelective contributions on behalf of each eligible pilot equal to a percentage of the pilot’s compensation, ranging from 12% to 15% over the term of the collective bargaining agreement (see Note 12). The nonelective contributions are subject to vesting based on years of service. Participants are entitled to receive distributions of all vested amounts beginning at age 59 1/2. The plan is subject to the annual IRS elective deferral limit of $22,500 for 2023, $20,500 for 2022 and $19,500 for 2021.

12. Commitments and Contingencies

Flight Equipment Commitments

As of December 31, 2023, the Company’s firm aircraft and engine purchase orders consisted of the following:

(a) While the schedule presented reflects the contractual delivery dates as of December 31, 2023, the Company has recently experienced delays in the deliveries of Airbus aircraft which may persist in future periods.

The Company is party to certain aircraft purchase agreements with Airbus (as amended from time to time, the “Airbus Purchase Agreements”) pursuant to which, as of December 31, 2023, the Company had commitments to purchase an aggregate of 67 A320neo and 143 A321neo aircraft, with deliveries expected through 2029 per the latest delivery schedule. The Company has the option to convert 18 A320neo aircraft to A321XLR aircraft under certain terms and conditions. Since the option has not been exercised, this conversion right is not reflected in the table above.

The Airbus Purchase Agreements also provide for, among other things, varying purchase incentives for each aircraft type (e.g., A320neo versus A321neo), which are allocated proportionally by aircraft type over the remaining aircraft to be delivered so that each aircraft’s capitalized cost upon induction would be equal. Therefore, as cash paid for deliveries is greater than the capitalized cost due to the allocation of these purchase incentives, a deferred purchase incentive is recognized within other assets on the Company’s consolidated balance sheets, which will ultimately be offset by future deliveries of aircraft with lower cash payments than their associated capitalized cost.

As of December 31, 2023, purchase commitments for these aircraft and engines, including estim ated amounts for contractual price escalations and PDPs, consisted of the following (in millions):

Litigation and Other Contingencies

The Company is subject to commercial litigation claims and to administrative and regulatory proceedings and reviews that may be asserted or maintained from time to time. In December 2023, the DOT sent the Company a request for information to assist its investigation into whether the Company cared for its customers as required by law during Winter Storm Elliott, which caused significant operational disruptions and spanned from December 21, 2022 to January 2, 2023, which included providing adequate customer service assistance, prompt flight status notifications, and proper and timely refunds. The Company is fully cooperating with the DOT request.

The Company regularly evaluates the status of such matters to assess whether a loss is probable and reasonably estimable in determining whether an accrual is appropriate. Furthermore, in determining whether disclosure is appropriate, the Company evaluates each matter to assess if there is at least a reasonable possibility that a loss or additional losses may have been incurred and whether an estimate of possible loss or range of loss can be made.

The ultimate outcome of legal actions is unpredictable and can be subject to significant uncertainties, and it is difficult to determine whether any loss is probable or even possible. Additionally, it is also difficult to estimate the amount of loss and there may be matters for which a loss is probable or reasonably possible but not currently estimable. Thus, actual losses may be in excess of any recorded liability or the range of reasonably possible loss. The Company believes the ultimate outcome of any potential lawsuits, proceedings and reviews will likely not, individually or in the aggregate, have a material adverse effect on its consolidated financial position, liquidity or results of operations and that the Company’s current accruals cover matters where loss is deemed probable and can be reasonably estimated.

Employees

The Company hasseven union-represented employee groups that together represented approximately 86% of all employees as of December 31, 2023. The table below sets forth the Company’s employee groups and status of the collective bargaining agreements as of December 31, 2023:

(a)Subject to standard early opener provisions.

(b)ALPA filed for meditation through the National Mediation Board in January 2024 and the first mediation session is scheduled for March 2024.

(c)In November 2023, AFA-CWA exercised their contractual right to open negotiations early. Negotiations are currently ongoing.

(d)The Company’s collective bargaining agreements with its aircraft appearance agents, material specialists, and maintenance controllers, each represented by IBT, were still amendable as of December 31, 2023, and negotiations are ongoing; however, the agreements are operating under their current arrangements until amendments have been reached.

(e)On August 4, 2023, the Company finalized a collective bargaining agreement with its dispatchers, represented by TWU, which will be amendable in August 2028.

The Company is self-insured for health care claims, subject to a stop-loss policy, for eligible participating employees and qualified dependent medical and dental claims, subject to deductibles and limitations. The Company’s liabilities for claims incurred but not reported are determined based on an estimate of the ultimate aggregate liability for claims incurred. The estimate is calculated from actual claim rates and adjusted periodically as necessary. The Company had accrued $5 million for health care claims estimated to be incurred but not yet paid as of December 31, 2023 and 2022, which are included as a component of other current liabilities on the Company’s consolidated balance sheets.

General Indemnifications

The Company has various leases with respect to real property as well as various agreements among airlines relating to fuel consortia or fuel farms at airports. Under some of these contracts, the Company is party to joint and several liability regarding environmental damages. Under others, where the Company is a member of an LLC or other entity that contracts directly with the airport operator, liabilities are borne through the fuel consortia structure.

The Company’s aircraft, services, equipment lease and sale and financing agreements typically contain provisions requiring the Company, as the lessee, obligor or recipient of services, to indemnify the other parties to those agreements, including certain of those parties’ related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or such other equipment. The Company believes that its insurance would cover most of its exposure to liabilities and related indemnities associated with the commercial real estate leases and aircraft, services, equipment lease and sale and financing agreements described above.

Certain of the Company’s aircraft and other financing transactions include provisions that require payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or regulations. In certain of these financing transactions and other agreements, the Company also bears the risk of certain changes in tax laws that would subject payments to non-U.S. entities to withholding taxes.

Certain of these indemnities survive the length of the related financing or lease. The Company cannot reasonably estimate the potential future payments under the indemnities and related provisions described above because it cannot predict (i) when and under what circumstances these provisions may be triggered, and (ii) the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time.

13. Stockholders’ Equity

Common Stock

As of December 31, 2023, the Company had authorized common stock (voting), common stock (non-voting) and preferred stock of 750,000,000,150,000,000 and 10,000,000 shares, respectively, of which only common stock (voting) were issued and outstanding. All classes of equity have a par value of $0.001 per share.

The Company had 222,998,790 and 217,875,890 shares of common stock outstanding as of December 31, 2023 and 2022, respectively. All of the Company’s issued and outstanding shares of common stock are duly authorized, validly issued, fully paid and nonassessable. Each holder of the Company’s common stock is entitled toone vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Holders of the Company’s common stock have no preemptive, subscription or other rights, and no redemption or sinking fund provisions applicable to the Company’s common stock exist.

During each of the years ended December 31, 2023, 2022 and 2021, there wereno dividends declared. There wereno dividends paid for the year ended December 31, 2023 and less than $1 million was paid in distributions to those with other participating rights for each of the years ended December 31, 2022 and 2021. There wereno dividends payable as of December 31, 2023 and 2022.

14. Net Earnings (Loss) per Share

Basic and diluted earnings (loss) per share are computed pursuant to the two-class method. Under the two-class method, the Company attributes net income to common stock and other participating rights (including those with vested share-based awards). Basic net earnings per share is calculated by taking net income, less earnings allocated to participating rights, divided by the basic weighted-average common stock outstanding. Net loss per share is calculated by taking net loss divided by basic weighted-average common stock outstanding as participating rights do not share in losses. In accordance with the two-class method, diluted net earnings per share is calculated using the more dilutive impact of the treasury-stock method or from reducing net income for the earnings allocated to participating rights.

The following table sets forth the computation of net earnings (loss) per share on a basic and diluted basis pursuant to the two-class method for the periods indicated (in millions, except for share and per share amounts):

Due to the net loss for the years ended December 31, 2023, 2022 and 2021, diluted weighted-average shares outstanding are equal to basic weighted-average shares outstanding because the effect of all equity awards is anti-dilutive.

15. Income Taxes

The components of income tax expense are as follows (in millions):

The income tax provision differs from that computed at the federal statutory corporate tax rate as follows:

The effective tax rate for the year ended December 31, 2023 is higher than the statutory rate, primarily due to the establishment of valuation allowances against the Company’s U.S. Federal and State net operating loss (“NOL”) carryforwards and limitations on the deductibility of employee benefits and compensation provided to certain executives pursuant to Internal Revenue Code section 162(m), partially offset by windfall benefits recognized on the exercise of stock options. The effective tax rate for the year ended December 31, 2022 is lower than the statutory rate, primarily due to limitations on compensation provided to certain executives pursuant to Internal Revenue Code section 162(m) and return to provision adjustments, partially offset by state taxes, net of federal benefit and excess tax benefits of stock-based compensation. The effective tax rate for the year ended December 31, 2021 was greater than the statutory rate, primarily attributable to the release of the reserves related to uncertain tax positions for which the statute of limitations has expired and excess tax benefits associated with the Company’s stock-based compensation arrangements, partially offset by non-deductible interest from the mark to market adjustments from the warrants issued to the Treasury as part of the Company’s participation in the PSPs and the Treasury Loan.

The Company had net tax payments/(refunds) of less than $1 million, less than $1 million and $(158) million for the years ended December 31, 2023, 2022 and 2021, respectively.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial statement and income tax purposes. The following table shows the components of the Company’s deferred tax assets and liabilities (in millions):

As of December 31, 2023, the Company’s net deferred tax liability balance was $8 million, and was classified within other long-term liabilities on the Company’s consolidated balance sheet. This balance included $75 million of deferred tax assets related to NOL carry forwards which are made up of $53 million of federal NOLs, which do not expire, $11 million of state NOLs, which expire fromone year to having no expiration, and $11 million of foreign NOLs, which expire inseven years. The Company recognizes a valuation allowance when it is more likely than not that some portion, or all, of the Company’s deferred tax assets, will not be realized. The Company considers sources of taxable income from prior period carryback periods, future reversals of existing taxable temporary differences, tax planning strategies and future taxable income when assessing the future utilization of deferred tax assets.

The Company considers all available positive and negative evidence in determining the need for a valuation allowance. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future profitability to utilize deferred tax assets.

The Company concluded that as of December 31, 2023, it is more likely than not that the benefit from a portion of its federal, state and foreign deferred tax assets will not be realized. Accordingly, the Company recorded a valuation allowance of $37 million against its deferred tax assets for U.S. Federal and State NOL carryforwards, which reflects the impact of expected income generated as a result of future reversals of existing taxable temporary differences. Further, the Company recorded a valuation allowance of $3 million related to its foreign deferred tax asset NOLs during 2023, which was fully offset by a corresponding reversal of a U.S. federal deferred tax liability.

The following table shows the components of the Company’s unrecognized tax benefits related to uncertain tax positions (in millions):

In December of 2021, the Company received its federal tax refund related to the Company carrying back its 2020 losses to previous year’s tax returns that included certain unrecognized tax positions. Upon receipt of the 2020 tax year refund, the previous year’s tax returns effectively are considered closed and, as the statute of limitations reverted back at that time to its original expiry, the Company released any reserve related to tax periods where the statute of limitations would have lapsed.

It is reasonably possible that the amount of unrecognized tax benefit could change within the next 12 months, as the statute of limitations remains open for three preceding tax years; however, the Company hasnot identified any unrecognized tax benefits as of December 31, 2023. Should the amount of unrecognized tax benefit change, the Company will accrue interest related to unrecognized tax benefits in its provision for income taxes, and any associated penalties in other operating expenses. The amounts recorded in the Company’s consolidated financial statements related to interest and penalties were less than $1 million for each of the years ended December 31, 2023, 2022 and 2021.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates yearly. The Company's federal income tax returns for tax years 2020 and forward remain open. Additionally, various tax years remain open to examination by state and local taxing jurisdictions.

16. Fair Value Measurements

Under ASC 820, Fair Value Measurements and Disclosures, disclosures relating to how fair value is determined for assets and liabilities are required, and a hierarchy for which these assets and liabilities must be grouped is established, based on significant levels of inputs, as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes several valuation techniques in order to assess the fair value of its financial assets and liabilities.

Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash are comprised of liquid money market funds, time deposits and cash, and are categorized as Level 1 instruments. The Company maintains cash with various high-quality financial institutions and holds restricted cash to secure medical claims paid. Cash, cash equivalents and restricted cash are carried at cost, which management believes approximates fair value. As of December 31, 2023 and 2022, the Company had less than $1 million of restricted cash.

Interest Rate Derivative Contracts

Interest rate derivative contracts are valued under an income approach based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets and, therefore, they are classified as Level 2 inputs. Given the interest rate derivative contracts will be cash-settled upon exercise and that the market value will be done using overnight indexed swap (OIS) discounting, OIS discounting is applied to the income approach valuation.

Debt

The estimated fair value of the Company’s debt agreements has been determined to be Level 3 measurement, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes a discounted cash flow method to estimate the fair value of the Level 3 debt.

The carrying amounts and estimated fair values of the Company’s debt are as follows (in millions):

The tables below present disclosures about the fair value of assets and liabilities measured at fair value on a recurring basis in the Company’s consolidated financial statements (in millions):

The Company had no transfers of assets or liabilities between fair value hierarchy levels during the years ended December 31, 2023 and 2022.

17. Related Parties

Management Services

Indigo Partners, LLC (“Indigo Partners”) manages an investment fund that is the controlling stockholder of the Company. The Company is assessed a quarterly fee by Indigo Partners for management services. The Company recorded $2 million for each of the years ended December 31, 2023, 2022 and 2021 for these fees, which are included as other operating expenses within the Company’s consolidated statements of operations.

Codeshare Arrangement

The Company entered into a codeshare agreement with Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (an airline based in Mexico doing business as “Volaris”) during 2018. Two of the Company’s directors are members of the board of directors of Volaris andone is an honorary director. As of December 31, 2023, Indigo Partners holds approximately 18% of the total outstanding common stock of Volaris.

In August 2018, the Company and Volaris began operating scheduled codeshare flights. Each party bears its own costs and expenses of performance under the codeshare agreement. The codeshare agreement is subject to automatic renewals and may be terminated by either party at any time upon the satisfaction of certain conditions.

18. The Proposed Merger with Spirit Airlines, Inc. (“Spirit”)

On February 5, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Top Gun Acquisition Corp. (“Merger Sub”), a direct wholly-owned subsidiary of the Company, and Spirit. The Merger Agreement provided that, among other things, the Merger Sub would be merged with and into Spirit (the “Merger”), with Spirit surviving the Merger and continuing as a wholly-owned subsidiary of the Company. On July 27, 2022, the Company and Spirit mutually terminated the Merger Agreement.

During the year ended December 31, 2023, the Company recorded $1 million in expenses related to the proposed Merger within transaction and merger-related costs, net in the Company’s consolidated statement of operations, which included merger-related retention bonus expense for all eligible employees who were subject to CARES Act compensation restrictions. During the year ended December 31, 2022, the Company recorded $10 million in net expenses related to the proposed Merger within transaction and merger-related costs, net in the Company’s consolidated statement of operations. These costs included $19 million in retention bonus expense and $16 million in transaction costs, which were made up of banking, legal and accounting fees, among others, offset by $25 million received from Spirit for reimbursement of incurred Merger-related expenses in accordance with the termination provisions set forth in the Merger Agreement.

The Merger Agreement provides that in the event that Spirit, within twelve months following the termination of the Merger Agreement, consummates an acquisition with another acquiror or enters into a definitive written agreement providing for an acquisition with another acquiror, which is ultimately consummated, the Company will be owed an additional $69 million. Although Spirit entered into a definitive written agreement providing for an acquisition with another acquiror within this twelve-month period ending July 27, 2023, the acquisition has not been consummated and therefore no amounts have been recognized on the consolidated balance sheets and in the statements of operations for the year ended December 31, 2023 and 2022.