Spirit Airlines 2013 Annual Report Download - page 75

Notes to Financial Statements—(Continued)
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respectively. Supplemental rent is made up of maintenance reserves paid or to be paid to aircraft lessors in advance of the
performance of major maintenance activities that are not probable of being reimbursed and probable return condition
obligations. The Company expensed $5.2 million, $2.0 million and $1.5 million of supplemental rent recorded within aircraft
rent during 2013, 2012 and 2011, respectively.
Some of the Company’s master lease agreements provide that the Company pays maintenance reserves to aircraft lessors
to be held as collateral in advance of the Company’s required performance of major maintenance activities. Some maintenance
reserve payments are fixed contractual amounts, while others are based on actual flight hours. Fixed maintenance reserve
payments for these aircraft and related flight equipment, including estimated amounts for contractual price escalations, will be
approximately $7.4 million in 2014, $7.6 million in 2015, $8.0 million in 2016, $7.4 million in 2017, $5.8 million in 2018 and
$18.4 million in 2019 and beyond. These lease agreements provide that maintenance reserves are reimbursable to the Company
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. Some of the master lease agreements do not require that the Company pay maintenance
reserves so long as the Company's cash balance does not fall below a certain level. The Company is in full compliance with
those requirements and does not anticipate having to pay reserves related to these master leases in the future.
At lease inception and at each balance sheet date, the Company assesses 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 to the extent they are expected to be recoverable and are reflected as prepaid
maintenance deposits in the accompanying balance sheets. When it is not probable the Company will recover amounts currently
on deposit with a lessor, such amounts are expensed as supplemental rent. As of December 31, 2013 and 2012, the Company
had aircraft maintenance deposits of $220.7 million and $198.5 million, respectively, on its balance sheets of which $59.2
million and $76.1 million, respectively, are included within prepaid expenses and other current assets on its balance sheets. The
Company has 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.
The Company’s master lease agreements also provide that most 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 are not substantively related to the maintenance of the leased asset and
therefore are accounted for as contingent rent. The Company accrues for contingent rent beginning when it becomes probable
and reasonably estimable the Company will incur such nonrefundable maintenance reserve payments. 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 date
the aircraft is due to be returned to the lessor, and the number of flight hours the aircraft is estimated to be utilized before it is
returned to the lessor. The Company expensed $1.9 million, $2.0 million and $1.5 million of paid maintenance reserves as
supplemental rent during 2013, 2012 and 2011, respectively. Maintenance reserves held by lessors that are refundable to the
Company at the expiration of the lease are accounted for as prepaid maintenance deposits on the balance sheet when they are
paid.
At December 31, 2013, the Company had its entire fleet of 54 aircraft and nine spare engines financed under operating
leases with lease term expiration dates ranging from 2016 to 2025. Five of the leased aircraft have variable rent payments,
which fluctuate based on changes in LIBOR (London Interbank Offered Rate). During the second quarter of 2013, the
Company extended the operating leases on 14 of its Airbus A319 aircraft, which were previously set to expire in 2017 through
2019. The Company has the option to renew three leases for three-year periods with contractual notice required in the tenth
year. Twenty-three of the aircraft leases and all of the engine leases were the result of sale and leaseback transactions. Deferred
gains or losses from sale and leaseback transactions are amortized over the term of the lease as a reduction in rent or additional
rent, respectively. Losses are deferred when the fair value of the aircraft or engine is higher than the price it was sold for, which
is in substance, a prepayment of rent. A loss on disposal is recorded at the time of sale for the excess of the carrying amount
over the fair value of the aircraft or engine. The costs of returning aircraft to lessors, or lease return conditions, are accounted
for in a manner similar to the accounting for contingent rent. These costs are recognized over the remaining life of the lease as
aircraft hours accumulate, beginning from the time when the Company determines it is probable such costs will be incurred and
can generally be estimated. Such estimated costs exclude the costs of maintenance events that are covered by reserves on
deposit with the relevant lessor, or routine maintenance costs that are recorded in maintenance expense.