LEASES

9 Months Ended

Sep. 30, 2019

The Company enters into leases for aircraft, property, and other types of equipment in the normal course of business. The accounting for these leases follows the requirements of the New Lease Standard, which the Company adopted as of January 1, 2019. See Note 2. For leases with terms greater than 12 months, an asset and lease liability are initially recorded at an amount equal to the present value of the unpaid lease payments. The Company's lease term includes any option to extend the lease when it is reasonably certain that it will exercise that option. The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments, since the Company does not know the actual implicit rates in its leases. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate. The Company does not separate lease and nonlease components within any of its agreements.

As of September 30, 2019, the Company held aircraft leases with remaining terms ranging from one month to 12 years. 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. Residual value guarantees included in the Company's lease agreements are not material. On July 9, 2012, the Company signed an agreement with Delta Air Lines, Inc. and Boeing Capital Corp. to lease or sublease 88 AirTran Airways, Inc. Boeing 717-200 aircraft ("B717s") to Delta at agreed-upon lease rates. Excluding aircraft for which the leases had expired as of September 30, 2019, the following remained: 68 on operating leases, ten owned, and two on finance leases. The sublease terms for the 68 B717s on operating lease and the two B717s on finance lease coincide with the Company's remaining lease terms for these aircraft from the original lessor, which have remaining lease terms ranging from approximately one month to five years. The Company's future sublease income associated with the 68 B717s on operating lease as of September 30, 2019 was as follows: $23 million remaining in 2019, $78 million in 2020, $41 million in 2021, $17 million in 2022, $7 million in 2023, and $1 million in 2024. The leasing of the ten B717s that are owned by the Company is subject to certain conditions, and the remaining lease terms are up to four years, after which Delta will have the option to purchase the aircraft at the then-prevailing fair market value. The ten owned B717s are accounted for as sales type leases, the two B717s classified by the Company as finance leases are accounted

for as direct financing leases, and the remaining 68 subleases are accounted for as operating leases. There are no contingent payments and no significant residual value conditions associated with the transaction.

At each airport where the Company conducts flight operations, the Company has lease agreements, generally with a governmental unit or authority, for the use of airport terminals, airfields, office space, cargo warehouses, and/or maintenance facilities. These leases are classified as operating lease agreements and have lease terms remaining ranging from one month to 27 years. The majority of the airport terminal leases contain certain provisions for periodic adjustments to rates that depend upon airport operating costs or use of the facilities, and are reset at least annually. Due to the nature and variability of the rates, the majority of these leases are not recorded on the unaudited Condensed Consolidated Balance Sheet.

The Company also leases certain technology assets, fuel storage tanks, and various other equipment that qualify as leases under the New Lease Standard. The remaining lease terms range from three months to eight years. Certain leases can be renewed from one to five years.

Lease-related assets and liabilities recorded on the unaudited Condensed Consolidated Balance Sheet were as follows:




(in millions)	Balance Sheet location	September 30, 2019
Assets
Operating	Operating lease right-of-use assets (net)	$	1,352
Finance	Property and equipment (net of allowance for depreciation and amortization of $430)	835
Total lease assets		$	2,187

Liabilities
Current
Operating	Current operating lease liabilities	$	332
Finance	Current maturities of long-term debt	86
Noncurrent
Operating	Noncurrent operating lease liabilities	1,014
Finance	Long-term debt less current maturities	586
Total lease liabilities		$	2,018

The components of lease costs, included in the unaudited Condensed Consolidated Statement of Comprehensive Income, were as follows:



(in millions)	Statement of Comprehensive Income location	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease cost - aircraft (a)	Other operating expenses	$	44	$	132
Operating lease cost - other	Landing fees and airport rentals, and Other operating expenses	22		66
Short-term lease cost	Other operating expenses	1		3
Variable lease cost	Landing fees and airport rentals, and Other operating expenses	337		1,016
Finance lease cost:
Amortization of lease liabilities	Depreciation and amortization	29		87
Interest on lease liabilities	Interest expense	6		20
Total net lease cost		$	439	$	1,324

(a) Net of sublease income of $25 million and $75 million for the three and nine months ended September 30, 2019, respectively.

Supplemental cash flow information related to leases, included in the unaudited Condensed Consolidated Statement of Cash Flows, was as follows:



(in millions)	Three months ended September 30, 2019		Nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	95	$	298
Operating cash flows for finance leases	6		20
Financing cash flows for finance leases	21		64
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	6		130
Finance leases	—		1

As of September 30, 2019, maturities of lease liabilities were as follows:



(in millions)	Operating leases			Finance leases
Remainder of 2019	$	115		$	28
2020	347			109
2021	213			104
2022	141			101
2023	111			97
Thereafter	753			338
Total lease payments	$	1,680		$	777
Less imputed interest	(334		)	(105		)
Total lease obligations	1,346			672
Less current obligations	(332		)	(86		)
Long-term lease obligations	$	1,014		$	586

The table below presents additional information related to the Company's leases as of September 30, 2019:



Weighted average remaining lease term
Operating leases	9 years
Finance leases	8 years

Weighted average discount rate
Operating leases (a)	3.8	%
Finance leases	3.8	%

(a) Upon adoption of the New Lease Standard, the incremental borrowing rate used for existing leases was established as of January 1, 2019.

As of September 30, 2019, the Company had additional operating lease commitments that had not yet commenced of approximately $533 million for 16 Boeing 737 MAX 8 aircraft expected to be delivered in 2019 and 2020, each with lease terms that range from eight to nine years.

Disclosures related to periods prior to the adoption of the New Lease Standard

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, 2018, were as follows:



(in millions)	Capital leases		Operating leases		Subleases			Operating leases, net
2019	$	111	$	348	$	(92	)	$	256
2020	109		357		(78		)	279
2021	105		244		(41		)	203
2022	100		172		(17		)	155
2023	97		146		(7		)	139
Thereafter	335		474		(1		)	473
Total minimum lease payments	$	857	$	1,741	$	(236	)	$	1,505
Less amount representing interest	126
Present value of minimum lease payments (a)	731
Less current portion	85
Long-term portion	$	646

(a) Excludes lease incentive obligation of $114 million.