Spirit Airlines 2013 Annual Report Download - page 42

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fluctuations of costs) of providing services, volume of marketing efforts and overall advertising plan. Consideration allocated
based on the relative selling price to both brand licensing and advertising elements is recognized as revenue when earned and
recorded in non-ticket revenue. Consideration allocated to award miles is deferred and recognized ratably as passenger revenue
over the estimated period the transportation is expected to be provided which is currently estimated at 16 months. We used
entity-specific assumptions coupled with the various judgments necessary to determine the selling price of a deliverable in
accordance with the required selling price hierarchy. Changes in these assumptions could result in changes in the estimated
selling prices. Determining the frequency to reassess selling price for individual deliverables requires significant judgment. For
additional information, please see “Notes to Financial Statements—1. Summary of Significant Accounting Policies—Frequent
Flier Program”.
Aircraft Maintenance, Materials, Repair Costs and Related Heavy Maintenance Amortization. We account for heavy
maintenance under the deferral method. Under the deferral method the cost of heavy maintenance is capitalized and amortized
as a component of depreciation and amortization expense until the earlier of the next estimated heavy maintenance event or the
aircraft's return at the end of the lease term. Amortization of engine and aircraft overhaul costs was $23.6 million, $9.1 million
and $2.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. If heavy maintenance costs were
amortized within maintenance, material and repairs expense in the statement of operations, our maintenance, material and
repairs expense would have been $83.8 million, $58.6 million and $36.6 million for the years ended December 31, 2013, 2012
and 2011, respectively. During the years ended December 31, 2013, 2012 and 2011, we capitalized $70.8 million, $61.6 million
and $22.1 million of costs for heavy maintenance, respectively. The timing of the next heavy maintenance event is estimated
based on assumptions including estimated usage, FAA-mandated maintenance intervals and average removal times as
suggested by the manufacturer. These assumptions may change based on changes in our utilization of our aircraft, changes in
government regulations and suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by
unplanned incidents that could damage an airframe, engine or major component to a level that would require a heavy
maintenance event prior to a scheduled maintenance event. To the extent our planned usage increases, the estimated life would
decrease before the next maintenance event, resulting in additional expense over a shorter period. Heavy maintenance events
are our 6-year and 12-year airframe checks (HMV4 and HMV8, respectively), engine overhauls and overhauls to major
components. Certain maintenance functions are outsourced under contracts that require payment based on a performance
measure such as flight hours. Costs incurred for maintenance and repair under flight hour maintenance contracts, where labor
and materials price risks have been transferred to the service provider, are accrued based on contractual payment terms. Routine
cost for maintaining the airframes and engines and line maintenance are charged to maintenance, materials and repairs expense
as performed.
Maintenance Reserves. Some of our master lease agreements provide that we pay maintenance reserves to aircraft lessors
to be held as collateral in advance of our performance of major maintenance activities. These lease agreements provide that
maintenance reserves are reimbursable to us upon completion of the maintenance event in an amount equal to the lesser of (1)
the amount of the maintenance reserve held by the lessor associated with the specific maintenance event or (2) the qualifying
costs related to the specific maintenance event. Substantially all of these maintenance reserve payments are calculated based on
a utilization measure, such as flight hours or cycles and are used solely to collateralize the lessor for maintenance time run off
the aircraft until the completion of the maintenance of the aircraft.
At lease inception and at each balance sheet date, we assess whether the maintenance reserve payments required by the
master lease agreements are substantively and contractually related to the maintenance of the leased asset. Maintenance reserve
payments that are substantively and contractually related to the maintenance of the leased asset are accounted for as
maintenance deposits. Maintenance deposits expected to be recovered from lessors are reflected as prepaid maintenance
deposits in the accompanying balance sheets. When it is not probable we will recover amounts currently on deposit with a
lessor, such amounts are expensed as supplemental rent. Because we are required to pay maintenance reserves for our operating
leased aircraft, and we choose to apply the deferral method for maintenance accounting, management expects that the final
heavy maintenance events will be amortized over the remaining lease term rather than over the next estimated heavy
maintenance event. As a result, our maintenance costs in the last few years of leases could be significantly in excess of the costs
in earlier periods. In addition, these late periods could include additional costs from unrecoverable maintenance reserve
payments required in the late years of the lease. We expensed $1.9 million, $2.0 million and $1.5 million of paid maintenance
reserves as supplemental rent during 2013, 2012 and 2011, respectively.
As of December 31, 2013 and 2012, we had prepaid maintenance deposits of $220.7 million and $198.5 million,
respectively, on our balance sheets. We have concluded that these prepaid maintenance deposits are probable of recovery
primarily due to the rate differential between the maintenance reserve payments and the expected cost for the related next
maintenance event that the reserves serve to collateralize.
These master lease agreements also provide that most maintenance reserves held by the lessor at the expiration of the
lease are nonrefundable to us and will be retained by the lessor. Consequently, we have determined that any usage-based