Leases and Capacity Purchase Agreements | NOTE 13 - LEASES AND CAPACITY PURCHASE AGREEMENTS United leases aircraft, airport passenger terminal space, aircraft hangars and related maintenance facilities, cargo terminals, other airport facilities, other commercial real estate, office and computer equipment and vehicles. At December 31, 2016, United’s scheduled future minimum lease payments under operating leases having initial or remaining noncancelable lease terms of more than one year, aircraft leases, including aircraft rent under CPAs and capital leases (substantially all of which are for aircraft) were as follows (in millions): Capital Leases Facility and Other Aircraft Operating 2017 $ 183 $ 1,256 $ 1,271 2018 170 1,106 1,074 2019 105 991 894 2020 85 1,104 669 2021 84 888 551 After 2021 915 6,702 2,049 Minimum lease payments $ 1,542 $ 12,047 $ 6,508 Imputed interest (604) Present value of minimum lease payments 938 Current portion (116) Long-term obligations under capital leases $ 822 As of December 31, 2016, United’s aircraft capital lease minimum payments relate to leases of 38 mainline and 29 regional aircraft as well as to leases of nonaircraft assets. Imputed interest rate ranges are 3.5% to 20.8%. Aircraft operating leases have initial terms of five to 26 years, with expiration dates ranging from 2017 through 2028. Under the terms of most leases, United has the right to purchase the aircraft at the end of the lease term, in some cases at fair market value, and in others, at fair market value or a percentage of cost. United has facility operating leases that extend to 2041. During 2015, the Company reached an agreement with AerCap Holdings N.V., a major aircraft leasing company, to lease used Airbus S.A.S (“Airbus”) A319s. Five such aircraft are expected to be delivered in 2017. In addition, up to 14 more aircraft may be delivered over the next four years subject to certain conditions. United is the lessee of real property under long-term operating leases at a number of airports where we are also the guarantor of approximately $1.4 billion of underlying debt and interest thereon as of December 31, 2016. These leases are typically with municipalities or other governmental entities, which are excluded from the consolidation requirements concerning a variable interest entity (“VIE”). To the extent United’s leases and related guarantees are with a separate legal entity other than a governmental entity, United is not the primary beneficiary because the lease terms are consistent with market terms at the inception of the lease and the lease does not include a residual value guarantee, fixed-price purchase option, or similar feature. In 2016, United signed a seven year lease extension through 2024 with the Metropolitan Washington Airports Authority to continue its use of terminals at Washington Dulles International Airport. United’s nonaircraft rent expense was approximately $1.2 billion, $1.3 billion and $1.4 billion for the years ended December 31, 2016, 2015 and 2014, respectively. In addition to nonaircraft rent and aircraft rent, which is separately presented in the consolidated statements of operations, United had aircraft rent related to regional aircraft operating leases, which is included as part of Regional capacity purchase expense in United’s consolidated statement of operations, of $439 million, $461 million and $442 million for the years ended December 31, 2016, 2015 and 2014, respectively. In connection with UAL Corporation’s and United Air Lines, Inc.’s fresh-start reporting requirements upon their exit from Chapter 11 bankruptcy protection in 2006 and the Company’s acquisition accounting adjustments related to the Company’s merger transaction in 2010, lease valuation adjustments for operating leases were initially recorded in the consolidated balance sheet, representing the net present value of the differences between contractual lease rates and the fair market lease rates for similar leased assets at the time. An asset (liability) results when the contractual lease rates are more (less) favorable than market lease terms at the valuation date. The lease valuation adjustment is amortized on a straight-line basis as an increase (decrease) to rent expense over the individual applicable remaining lease terms, resulting in recognition of rent expense as if United had entered into the leases at market rates. The related remaining lease terms, primarily related to aircraft which make up the majority of the fair value lease adjustment balance, are one to eight years for United. The lease valuation adjustments are classified within other noncurrent liabilities and the net accretion amounts are $82 million, $107 million and $160 million for the years ended December 31, 2016, 2015 and 2014, respectively. Regional CPAs United has CPAs with certain regional carriers. We purchase all of the capacity from the flights covered by the CPA at a negotiated price. We pay the regional carrier a predetermined rate, subject to annual inflation adjustments, primarily for block hours flown (the hours from gate departure to gate arrival) and other operating factors and reimburse the regional carrier for various pass-through expenses related to the flights. Under the CPAs, we are responsible for the cost of providing fuel for all flights and for paying aircraft rent for all of the aircraft covered by the CPAs. Generally, the CPAs contain incentive bonus and rebate provisions based upon each regional carrier’s operational performance. United’s CPAs are for 494 regional aircraft, and the CPAs have terms expiring through 2029. Aircraft operated under CPAs include aircraft leased directly from the regional carriers and those owned by United or leased from third-party lessors and operated by the regional carriers. See Part I, Item 2, “Properties” of this report for additional information. In 2016 and 2015, Republic Airline Inc. (“Republic”), a wholly-owned subsidiary of Republic Airways Holdings (“Republic Airways”), purchased and took delivery of 16 new 76-seat In 2016, United agreed to purchase 12 new Embraer E175 aircraft that were previously expected to be purchased by one of its United Express operators, and in the first quarter of 2017, United entered into a CPA amendment with Mesa Air Group, Inc. (“Mesa Air Group”) and Mesa Airlines, Inc. (“Mesa”), a wholly-owned subsidiary of Mesa Air Group, for Mesa to operate these 12 additional Embraer E175 aircraft under the United Express brand. As of December 31, 2016, all 12 of these aircraft are expected to be delivered in 2017. In 2015, United entered into amendments to the CPA with SkyWest Airlines, Inc. (“SkyWest”), a wholly-owned subsidiary of SkyWest, Inc., to operate an additional 25 new 76-seat 76-seat In 2015, United entered into a new CPA with Champlain Enterprises, LLC d/b/a CommutAir (“CommutAir”), pursuant to which CommutAir will operate 40 used Embraer ERJ145 aircraft under the United Express brand that are currently being operated by a different United Express regional carrier, with transfers that are continuing through 2018. As of December 31, 2016, 28 aircraft are still pending transfer. Our future commitments under our CPAs are dependent on numerous variables, and are therefore difficult to predict. The most important of these variables is the number of scheduled block hours. Although we are not required to purchase a minimum number of block hours under certain of our CPAs, we have set forth below estimates of our future payments under the CPAs based on our assumptions. United’s estimates of its future payments under all of the CPAs do not include the portion of the underlying obligation for any aircraft leased to a regional carrier or deemed to be leased from other regional carriers and facility rent that are disclosed as part of aircraft and nonaircraft operating leases. For purposes of calculating these estimates, we have assumed (1) the number of block hours flown is based on our anticipated level of flight activity or at any contractual minimum utilization levels if applicable, whichever is higher, (2) that we will reduce the fleet as rapidly as contractually allowed under each CPA, (3) that aircraft utilization, stage length and load factors will remain constant, (4) that each carrier’s operational performance will remain at historic levels and (5) an annual projected inflation rate. These amounts exclude variable pass-through costs such as fuel and landing fees, among others. Based on these assumptions as of December 31, 2016, our future payments through the end of the terms of our CPAs are presented in the table below (in billions): 2017 $ 1.9 2018 1.9 2019 1.3 2020 1.0 2021 1.0 After 2021 4.3 $ 11.4 The actual amounts we pay to our regional operators under CPAs could differ materially from these estimates. For example, a 10% increase or decrease in scheduled block hours for all of United’s regional operators (whether as a result of changes in average daily utilization or otherwise) in 2017 would result in a corresponding change in annual cash obligations under the CPAs of approximately $147 million. |