15. Leases

Arrangements with Commercial Airlines—Pursuant to connectivity agreements with our airline partners, we place our equipment on commercial aircraft operated by the airlines for the purpose of delivering the Gogo^® service to passengers on the aircraft. Depending on the agreement, we may be responsible for the costs of installing and deinstalling the equipment. Under one type of connectivity agreement we maintain legal title to our equipment; however, under the second, more prevalent type of connectivity agreement our airline partners make an upfront payment and take legal title to such equipment. The majority of the equipment transactions where legal title transfers are not deemed to be sales transactions for accounting purposes because the risks and rewards of ownership are not fully transferred due to our continuing involvement with the equipment, the length of the term of our agreements with the airlines and restrictions in the agreements regarding the airlines’ use of the equipment. We account for these equipment transactions as operating leases of space for our equipment on the aircraft. The assets are recorded as airborne equipment on our consolidated balance sheets, as noted in Note 6, “Composition of Certain Balance Sheet Accounts.” Any upfront equipment payments are accounted for as a lease incentive and recorded as deferred airborne lease incentives on our consolidated balance sheets and are recognized as a reduction of the cost of service revenue on a straight-line basis over the term of the agreement with the airline. We recognized $8.1 million, $3.7 million and $1.5 million for the years ended December 31, 2013, 2012, and 2011, respectively, as a reduction to our cost of service revenue in our consolidated statements of operations. As of December 31, 2013, deferred airborne lease incentives of $9.0 million and $53.0 million are included in current and non-current liabilities, respectively, in our consolidated balance sheet. As of December 31, 2012, deferred airborne lease incentives of $5.9 million and $40.0 million are included in current and non-current liabilities, respectively, in our consolidated balance sheet.

The revenue share paid to the airlines represents an operating lease payment and is deemed to be contingent rental payments, as the payments due to each airline are based on a percentage of our CA-NA service revenue generated from that airline’s passengers, which is unknown until realized. As such, we cannot estimate the lease payments due to an airline at the commencement of our contract with such airline. Rental expense related to the arrangements with commercial airlines included in cost of service revenue is primarily comprised of these revenue share payments offset by the amortization of the deferred airborne lease incentives discussed above. Such rental expenses totaled a net charge of $33.3 million, $21.1 million and $8.5 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Leases and Cell Site Contracts—We have lease agreements relating to certain facilities and equipment, which are considered operating leases. Rent expense for such operating leases was $5.7 million, $5.0 million, and $4.3 million for the years ended December 31, 2013, 2012, and 2011, respectively. Additionally, we have operating leases with wireless service providers for tower space and base station capacity on a volume usage basis (“cell site leases”), some of which provide for minimum annual payments. Our cell site leases generally provide for an initial noncancelable term of up to five years with up to four five-year renewal options. Total cell site rental expense was $7.6 million, $6.2 million, and $5.5 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Annual future minimum obligations for operating leases for each of the next five years and thereafter, other than the arrangements we have with our commercial airline partners, as of December 31 2013, are as follows (in thousands):


Years ending December 31,	Operating Leases
2014	$	12,647
2015	$	16,906
2016	$	18,175
2017	$	16,325
2018	$	13,356
Thereafter	$	103,509

Equipment Leases—We lease certain computer and network equipment under capital leases, for which interest has been imputed with an annual interest rate of 10.0%. As of December 31, 2013 the computer equipment leases were classified as part of office equipment, furniture, and fixtures in our consolidated balance sheet at a gross cost of $1.2 million. As of December 31, 2013 the network equipment leases were classified as part of network equipment in our consolidated balance sheet at a gross cost of $3.6 million. Annual future minimum obligations under capital leases for each of the next five years and thereafter, as of December 31, 2013, are as follows (in thousands):


Years ending December 31,	Amortization Expense
2014	$	1,598
2015		1,427
2016		1,195
2017		729
2018		123
Thereafter		—

Total minimum lease payments		5,072
Less: Amount representing interest		(878	)

Present value of net minimum lease payments	$	4,194

The $4.2 million present value of net minimum lease payments as of December 31, 2013 has a current portion of $1.2 million included in current portion of long-term debt and capital leases and a non-current portion of $3.0 million included in other non-current liabilities.