LEASES

The Company's fleet includes 16 aircraft on capital lease, including two B717s, as of December 31, 2014, compared with four aircraft on capital lease as of December 31, 2013. Amounts applicable to these aircraft that are included in property and equipment were:



(in millions)	2014		2013
Flight equipment	$	214	$	69
Less: accumulated amortization	22		12
	$	192	$	57

Total rental expense for operating leases, both aircraft and other, charged to operations in 2014, 2013, and 2012 was $931 million, $997 million, and $943 million, respectively. The majority of the Company’s terminal operations space, as well as 174 aircraft, which includes 76 B717s, were under operating leases at December 31, 2014. For aircraft operating leases and for terminal operations leases, expense is included in Aircraft rentals and in Landing fees and other rentals, respectively, in the Consolidated Statement of Income. Future minimum lease payments under capital leases and noncancelable operating leases and rentals to be received under subleases with initial or remaining terms in excess of one year at December 31, 2014, were:



(in millions)	Capital leases		Operating leases		Subleases			LFMP facility lease*		Operating leases, net
2015	$	33	$	753	$	(93	)	$	24	$	684
2016	42		715		(103		)	24		636
2017	45		671		(103		)	24		592
2018	44		573		(102		)	25		496
2019	43		502		(97		)	25		430
Thereafter	202		1,802		(144		)	659		2,317
Total minimum lease payments	$	409	$	5,016	$	(642	)	$	781	$	5,155
Less amount representing interest	75
Present value of minimum lease payments	334
Less current portion	23
Long-term portion	$	311
* See Note 4 for further details

The aircraft leases generally can be renewed for one to five years at rates based on fair market value at the end of the lease term. Most aircraft leases have purchase options at or near the end of the lease term at fair market value, generally limited to a stated percentage of the lessor’s defined cost of the aircraft.

During fourth quarter 2013, the Company entered into sale and leaseback transactions with a third party aircraft lessor for the sale and leaseback of two Boeing 737-800 aircraft. The transactions were closed on the date of delivery from Boeing, and resulted in the delivery payments being made by the aircraft lessor directly to Boeing, and Southwest being refunded the $12 million in progress payments it had previously made to Boeing during the period the aircraft was being constructed. These transactions resulted in deferred gains that are not material, which are being amortized over the terms of the respective leases, which are both 11 years. Both of the leases from these sale and leaseback transactions are accounted for as operating leases. Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under the lease agreements are fixed. The lease agreements contain standard termination events, including termination upon a breach of the Company's obligations to make rental payments and upon any other material breach of the Company's obligations under the leases, and standard maintenance and return condition provisions. Upon a termination of the lease due to a breach by the Company, the Company would be liable for standard contractual damages, possibly including damages suffered by the lessor in connection with remarketing the aircraft or while the aircraft is not leased to another party.

On July 9, 2012, the Company signed an agreement with Delta Air Lines, Inc. and Boeing Capital Corp. to lease or sublease all 88 of AirTran's B717s to Delta at agreed-upon lease rates. The first converted B717 was delivered to Delta in September 2013, and as of December 31, 2014, the Company had delivered a total of 52 B717s to Delta. Over the expected term of the transition period for all B717s, the Company expects to average approximately three B717 conversions per month; however, as the Company previously announced, all B717s remaining at Southwest were grounded on December 28, 2014. A portion of the B717 fleet that will not be delivered to Delta until the second half of 2015 has been placed in storage until each aircraft is ready to be converted. A total of 76 of the B717s are on operating lease, ten are owned, and two are on capital lease.

The Company has paid and will continue to pay the majority of the costs to convert the aircraft to the Delta livery and perform certain maintenance checks prior to the delivery of each aircraft. The agreement to pay these conversion and maintenance costs is a “lease incentive” under applicable accounting guidance. The sublease terms for the 76 B717s on operating lease and the two B717s on capital lease coincide with the Company's remaining lease terms for these aircraft from the original lessor, which range from approximately three to nine years. The leasing of the ten B717s that are owned by the Company is subject to certain conditions, and the lease terms are for seven years, after which Delta will have the option to purchase the aircraft at the then-prevailing market value. The Company accounts for the lease and sublease transactions with Delta as operating leases, except for the two aircraft classified by the Company as capital leases. The subleases of the two capital lease aircraft are accounted for as direct financing leases. There are no contingent payments and no significant residual value conditions associated with the transaction.

The accounting for this transaction is based on the guidance provided for lease transactions. For the components of this transaction finalized in third quarter 2012 and with respect to which the lease inception has been deemed to occur, the Company recorded a charge of approximately $137 million during third quarter 2012. The charge represents the remaining estimated cost, at the scheduled date of delivery of each B717 to Delta (including the conversion, maintenance, and other contractual costs to be incurred), of the Company's lease of the 76 B717s that are accounted for as operating leases, net of the future sublease income from Delta and the remaining unfavorable aircraft lease liability established as of the acquisition date. During 2014, the Company recorded an additional $22 million in expense for its revised estimate of conversion costs for these B717s. The charges recorded by the Company for this transaction were included as a component of Acquisition and integration costs in the Company's Consolidated Statement of Income and were included as a component of Other, net in Cash flows from operating activities in the Company's Consolidated Statement of Cash Flows, and the corresponding liability for this transaction is included as a component of Current liabilities and Other noncurrent liabilities in the Company's Consolidated Balance Sheet. A rollforward of the Company's B717 lease/sublease liability for 2014 and 2013 is shown below:



(in millions)	B717 lease/sublease liability
Balance at December 31, 2012	$	128
Lease/sublease accretion	6
Lease/sublease payments, net (a)	(12		)
Balance at December 31, 2013	$	122
Lease/sublease accretion	5
Lease/sublease expense adjustment	22
Lease/sublease payments, net (a)	(86		)
Balance at December 31, 2014	$	63

(a) Includes lease conversion cost payments

The Company halted service of its B717 fleet as of December 28, 2014, and as a result recorded an additional $9 million charge associated with the extension of the time between when the Company removed the aircraft from revenue service and when they enter the conversion process.