HARBOR DIVERSIFIED, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements, accompanying notes, and other financial information included within this Annual Report on Form 10-K for the year endedDecember 31, 2021 (this "Annual Report"). The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere within this Annual Report, particularly in the sections entitled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors."
Overview
Harbor Diversified, Inc. ("Harbor") is a non-operating holding company that is the parent of a consolidated group of subsidiaries, includingAWAC Aviation, Inc. ("AWAC"), which is the sole member ofAir Wisconsin Airlines LLC ("Air Wisconsin"), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1)Lotus Aviation Leasing, LLC , which leases flight equipment toAir Wisconsin , (2)Air Wisconsin Funding LLC , which provides flight equipment financing toAir Wisconsin , and (3)Harbor Therapeutics, Inc. , which is a non-operating entity with no material assets. Because Harbor consolidatesAir Wisconsin for financial statement purposes, disclosures relating to activities ofAir Wisconsin also apply to Harbor, unless otherwise noted. When appropriate,Air Wisconsin is named specifically for its individual contractual obligations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as the "Company," "we," "us," or "our." Where reference is intended to refer only toHarbor Diversified, Inc. , it is referred to as "Harbor." For the year endedDecember 31, 2021 ,Air Wisconsin operated a fleet of 64 CRJ-200 regional jets under a capacity purchase agreement (the "United capacity purchase agreement") with its sole major airline partner,United Airlines, Inc. ("United"), with a presence at both Chicago O'Hare and Washington-Dulles, two of United's key domestic hubs. All ofAir Wisconsin's flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. More than 99% of our operating revenues for the years endedDecember 31, 2021 andDecember 31, 2020 was derived from operations associated with the United capacity purchase agreement. Subject to certain limited exceptions, the United capacity purchase agreement providesAir Wisconsin fixed daily revenue for each aircraft covered under the agreement, a fixed payment for each departure and block hour flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying service for United. The agreement also provides for the payment or accrual of certain amounts by United toAir Wisconsin based on certain scheduling benchmarks. The United capacity purchase agreement has the effect of protectingAir Wisconsin , to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers. In providing regional flying under the United capacity purchase agreement,Air Wisconsin uses United's logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United providesAir Wisconsin with ground support services and gate access. InOctober 2020 ,Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, provided relief on certain scheduling requirements and settled certain disputes that had existed between United andAir Wisconsin over amounts owed toAir Wisconsin under the United capacity purchase agreement. InApril 2021 ,Air Wisconsin entered into a second amendment to the United capacity purchase agreement which addressed the scheduling of block hours after a certain date. Currently, a dispute exists under the United capacity purchase agreement with respect to certain amounts owed toAir Wisconsin by United. We cannot predict the outcome of this dispute on the negotiation of an extension to the United capacity purchase agreement, the execution of a new agreement with United, or our relationship with United generally. 32
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Impact of the COVID-19 Pandemic on Our Business and Industry As of the date of this filing, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in whichAir Wisconsin operates. The extent to which the COVID-19 pandemic will impact our industry, business, financial condition, and results of operations in the future is highly uncertain and will be affected by a number of factors. These include the duration and extent of the COVID-19 pandemic, the development of new variants of the COVID-19 virus that may be more contagious or virulent than prior versions, the scope and effect of vaccine mandates and of other mandated or recommended containment and mitigation measures, the effect of government stabilization and recovery efforts, and the success of vaccine distribution programs.
Focus on Safety for Employees and Passengers
The safety and well-being of our employees and passengers are our priority. Throughout the COVID-19 pandemic,Air Wisconsin has taken numerous steps to provide its employees and passengers with the ability to take appropriate safety measures in accordance with guidelines provided by theCenters for Disease Control and Prevention , including working with United to:
• enhance
• provide gloves, masks, and other personal protective equipment for crew
members;
• provide options to Air Wisconsin's employees who are diagnosed with
COVID-19,
including pay protection and extended leave options;
• provide financial incentive to employees to encourage vaccination and
booster shots;
• implement workforce social distancing, mask requirements and other
protection measures, and enhanced cleaning of our facilities; and
• provide regular, ongoing communication regarding impacts of the
COVID-19
pandemic, including health and safety protocols and procedures.
Reduction in Demand for Air Travel
Public concerns about the COVID-19 virus, as well as the various governmental guidelines and restrictions adopted to limit the spread of the virus, have had a material adverse impact on passenger demand for air travel since the beginning of the pandemic. While passenger demand for air travel has generally increased in recent months as a result of the easing of certain of these guidelines and restrictions, as well as expanded availability and adoption of vaccines, United has stated that it expects demand will remain below pre-pandemic levels throughout 2022. Notwithstanding the significant negative impact to our business and the airline industry,Air Wisconsin's receipt of governmental assistance under the SBA Loan and the Payroll Support Program (each as described below), has mitigated to some extent the adverse impacts of the COVID-19 pandemic. Labor Shortages Historically, the airline industry has experienced periodic shortages of qualified personnel, particularly pilots and mechanics. As a result of the reduced flying caused by the COVID-19 pandemic, the shortage was temporarily abated. However, as flight demand increased, the shortage has become acute, particularly for regional airlines such asAir Wisconsin due to a number of factors, including retirements and employees seeking opportunities at mainline carriers and in other industries.Air Wisconsin's monthly departures and scheduled block hours generally increased fromJune 2020 untilOctober 2021 . However, departures and scheduled block hours rarely reached pre-pandemic levels and have declined slightly sinceOctober 2021 , mostly as a result of pilot shortages.
Impact on Competitive Environment
Several regional and larger carriers have ceased operations as a direct or indirect result of the COVID-19 pandemic. As of the date of this filing,ExpressJet Airlines, Inc. ,Miami Air International ,Trans States Airlines , andCompass Airlines , each of which are domestic, regional, or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy, or ceased or severely limited operations. The impact of these and other changes to the competitive environment on our business and industry is highly uncertain. 33
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Operational Challenges
During the early stages of the COVID-19 pandemic,Air Wisconsin's scheduled departures and block hours were significantly reduced. As flight demand increased,Air Wisconsin's scheduled departures and block hours increased significantly throughOctober 2021 . However, the effects of the COVID-19 pandemic, the industry wide pilot and mechanic shortages, and the significant increase in scheduled departures and block hours increasedAir Wisconsin's costs and negatively affected its operations in the second half of 2021 in several respects:
•
is consistent with trends experienced across the airline industry;
• the cost of certain maintenance activities increased as a result of
supply chain issues;
•
party maintenance services;
• aircraft maintenance and repair costs, as well as payroll costs,
increased as a result of increased flying levels across our industry;
• one of Air Wisconsin's maintenance bases was closed for six days as aresult of an outbreak of
COVID-19,
which required moving aircraft to different maintenance bases and the use
of third-party maintenance providers;
• certain changes in the flight schedules that United assigned to Air
maintenance bases, which led to increases in
and
• these operational and performance issues negatively impacted the
incentive payments
purchase agreement and in some cases required the payment of penalties.
Paycheck Protection Program InApril 2020 ,Air Wisconsin received a$10.0 million loan ("SBA Loan") under the small business Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and administered by theSmall Business Administration ("SBA"). The loan was forgivable subject to certain limitations, including that the loan proceeds be used to retain workers and for payroll, mortgage payments, lease payments, and utility payments. The entire principal amount and accrued interest were forgiven inAugust 2021 in the amount of$10.1 million , which was recorded as gain on extinguishment of debt in the consolidated statements of operations.
Payroll Support Program
InApril 2020 ,Air Wisconsin entered into a Payroll Support Program Agreement ("PSP-1 Agreement") with respect to payroll support ("Treasury Payroll Support") from theU.S. Department of the Treasury ("Treasury") under a program ("Payroll Support Program") provided by the CARES Act. Pursuant to the Payroll Support Program,Air Wisconsin received approximately$42.2 million , all of which was received in the year endedDecember 31, 2020 . TheTreasury commenced a routine audit ofAir Wisconsin's compliance with the terms of the PSP-1 Agreement. As of the date of this filing,Air Wisconsin has not received written confirmation from the OIG regarding the status or results of the audit. InDecember 2020 , the federal Consolidated Appropriations Act of 2021 ("PSP Extension Law") was adopted, which provided for additional payroll support to eligible air carriers. InMarch 2021 , pursuant to the PSP Extension Law,Air Wisconsin entered into a Payroll Support Program Extension Agreement with theTreasury (the "PSP-2 Agreement"), which is substantially similar to the PSP-1 Agreement.Air Wisconsin received approximately$33.0 million pursuant to the PSP-2 Agreement, all of which was received in the six months endedJune 30, 2021 . InMarch 2021 , the federal American Rescue Plan Act of 2021 ("American Rescue Plan") was adopted, which provided further payroll support to eligible air carriers. InJune 2021 , pursuant to the American Rescue Plan, theTreasury entered into a Payroll Support Program 3 Agreement withAir Wisconsin (the "PSP-3 Agreement" and, together with the PSP-1 Agreement and the PSP-2 Agreement, the "PSP Agreements"), which is substantially similar to the PSP-1 Agreement and the PSP-2 Agreement.Air Wisconsin received approximately$33.3 million pursuant to the PSP-3 Agreement, all of which was received in the six months endedSeptember 30, 2021 . 34
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The PSP Agreements contain various covenants, including that (i) the payroll support proceeds must be used exclusively for the payment of wages, salaries, and benefits, (ii)Air Wisconsin cannot involuntarily terminate or furlough any employee or reduce any employee's pay rates or benefits without that employee's consent, in any case prior to certain dates, (iii)Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps, (iv)Air Wisconsin cannot pay dividends or make other capital distributions prior to certain dates, and (v) neitherAir Wisconsin nor any of its affiliates can purchase an equity security ofAir Wisconsin , or any direct or indirect parent company ofAir Wisconsin , that is listed on a national securities exchange prior to certain dates. IfAir Wisconsin fails to comply with its obligations under these agreements, it may be required to repay some or all of the funds provided to it under these agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. For additional information, refer to Note 8, Commitments and Contingencies, in our audited consolidated financial statements within this Annual Report.
Employee Retention Credit
2021 Financial Highlights For the year endedDecember 31, 2021 , we had total operating revenues of$247.6 million , a 33.1% increase, compared to$185.9 million for the year endedDecember 31, 2020 . Net income for the year endedDecember 31, 2021 was$92.6 million , or net income of$1.69 per basic share and$1.29 per diluted share, compared to net income of$39.8 million , or$0.71 per basic share and$0.56 per diluted share, for the year endedDecember 31, 2020 . For additional information, refer to Note 12, Earnings per Share and Equity , and Note 13, Stock Options , in our audited consolidated financial statements included in this Annual Report.
Revenue
The number of aircraft we have in scheduled service and the block hours and departures we generate from our flights are primary drivers of our revenues under the United capacity purchase agreement. As a result of greater passenger demand since the beginning stages of the COVID-19 pandemic, block hours increased from 74,438 during the year endedDecember 31, 2020 to 116,081 during the year endedDecember 31, 2021 , or by 55.9%, and our number of departures increased from 52,405 in 2020 to 80,927 in 2021, or by 54.4%. Primarily as a result of the increased flight schedules during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , revenues from the United capacity purchase agreement increased by 33.2% to$247.5 million . Furthermore, we deferred recognizing revenue of$1.6 million related to fixed payments received under the United capacity purchase agreement during the year endedDecember 31, 2021 , compared to$43.2 million during the year endedDecember 31, 2020 , consistent with recognizing this revenue based on current and estimated future departures. For additional information, refer to the section entitled "Critical Accounting Policies - Revenue Recognition ." However, as a result of theOctober 2020 amendment to the United capacity purchase agreement, we recognized$17.1 million of revenue during the year endedDecember 31, 2021 as compared to$28.7 million of revenue during the year endedDecember 31, 2020 , resulting from the payment or accrual by United toAir Wisconsin based on certain scheduling benchmarks and the settlement of certain other outstanding items. For additional information, refer to Note 1, Summary of Significant Accounting Policies - Contract Revenues , in our audited consolidated financial statements included in this Annual Report. 35
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Operating Expenses
Our total operating expenses decreased$0.2 million , or 0.1%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Although our year over year operating expenses were relatively unchanged, the increased number of flights we operated as a result of the increase in passenger demand since the beginning stages of the COVID-19 pandemic resulted in a$16.4 million increase in aircraft maintenance and repair costs and a$7.8 million increase in payroll expense, partially offset by a$6.6 million decrease in aircraft rent due to the acquisition of formerly leased aircraft in 2020. Furthermore, we recorded an additional$24.1 million in payroll support grants received from theTreasury as an offset to our operating expenses during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . For additional information, refer to the section entitled "- Results of Operations-Operating Expenses ."
Stock Repurchase Program
Harbor's board of directors has adopted a stock repurchase program pursuant to which Harbor could initially repurchase up to$1.0 million of shares of its common stock during the first calendar month of the program, subject to an automatic increase of$1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, depend on a number of factors, including the trading price of the common stock, the Company's financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. Harbor may, but is not required to, effect repurchases under a trading plan adopted pursuant to Rule 10b5-1 under the Exchange Act, or subject to Rule 10b-18 under the Exchange Act. Harbor is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time. Harbor acquired 1,547,006 shares of its common stock pursuant to the stock repurchase program during the year endedDecember 31, 2021 .
Economic Conditions, Challenges and Risks Impacting Financial Results
Although the United capacity purchase agreement reducesAir Wisconsin's exposure to certain risks, its operating and business performance is driven by various factors that typically affect regional airlines and their markets, including factors that affect the broader airline and travel industries. The following key factors, in addition to the impact of the COVID-19 pandemic, may materially affect our future performance. Extension of United Capacity Purchase Agreement . The United capacity purchase agreement expires inFebruary 2023 .Air Wisconsin and United are in active negotiations regarding the extension of the agreement or the execution of a new agreement, although we can provide no assurance that any agreement will be reached. Accordingly,Air Wisconsin is exploring a commercial agreement with another major airline partner, as well as other business strategies to take advantage of anticipated demand for regional air services. Contract Dispute . More than 99% of our operating revenues for the year endedDecember 31, 2021 were derived from operations associated with the United capacity purchase agreement. Agreements such as the United capacity purchase agreement are subject to interpretation, and disputes may arise if the parties apply different interpretations to the agreements. Currently, a dispute exists under the United capacity purchase agreement with respect to certain amounts owed toAir Wisconsin by United. We cannot predict the outcome of this dispute. Industry Volatility . The airline industry is volatile and affected by numerous factors, such as tourist activity, consumer confidence, discretionary spending, fare initiatives, fuel prices, labor actions, global pandemics, outbreak of war or hostilities, changes in governmental regulations, government sanctions, changes in taxes and fees, and weather. These factors have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional airlines. Historically, capacity purchase agreements shelter regional airlines from some of these factors.
Competition
. The airline industry is highly competitive.Air Wisconsin competes principally with other regional airlines. We believe that major airlines typically award capacity purchase agreements to regional airlines based on the following criteria: aircraft fleet type; ability to fly proposed schedules; availability of labor resources, including pilots; proposed economic terms; aircraft and engine resources; financial resources; operational reliability; reputation; customer service levels; and other factors. The extension of the United capacity purchase agreement, the execution of a new agreement with United, or the pursuit of a commercial agreement with another major airline partner will depend, in significant part, onAir Wisconsin's ability to maintain a cost structure competitive with other regional air carriers, attract and retain qualified pilots, and maintain operational reliability. However, we continue to believe there will be strong demand from major airlines for regional air services, and we seek to continue to positionAir Wisconsin to take advantage of this anticipated demand. 36
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Maintenance Contracts, Costs and Timing .Air Wisconsin's employees perform routine airframe and engine maintenance along with periodic inspections of equipment at its maintenance facilities. It also uses third-party vendors for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services forAir Wisconsin's aircraft. As ofDecember 31, 2021 , the average age ofAir Wisconsin's CRJ-200 regional jets was approximately 19.3 years. We expect that maintenance costs will increase as its fleet continues to age. We use the direct expense method of accounting forAir Wisconsin's maintenance of airframes, rotable parts, and normal recurring maintenance and for Lotus' maintenance of engines, pursuant to which we recognize the expense when the maintenance work is completed. We use the deferral method of accounting forAir Wisconsin's planned major maintenance activities for engines pursuant to which the capitalized engine overhaul costs are amortized over the estimated useful life measured in engine cycles remaining until the next scheduled shop visit. WhileAir Wisconsin keeps a record of expected maintenance events, the actual timing and costs of maintenance expense are subject to variables, such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs. Aircraft Leases . During the year endedDecember 31, 2020 , in three different transactions,Air Wisconsin acquired all thirteen of the remaining operational aircraft that were under various lease agreements.
Labor
. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements. As ofDecember 31, 2021 ,Air Wisconsin had 1,212 full-time employees and 36 part-time employees, for a total of 1,248 employees, of which 995 were represented by unions.Air Wisconsin's collective bargaining agreement with its pilots, represented by theAirline Pilots Association , is amendable inNovember 2022 and its collective bargaining agreement with its flight attendants, represented by theAssociation of Flight Attendants-CWA , is amendable inOctober 2022 .Air Wisconsin's collective bargaining agreement with its dispatchers represented by theTransport Workers Union of America , is amendable and is in mediated negotiations. Conflicts between airlines and their unions can lead to work slowdowns or stoppages. A strike or other significant labor dispute withAir Wisconsin's unionized employees may adversely affectAir Wisconsin's ability to conduct business. Availability and Training of Qualified Pilots . OnJuly 8, 2013 , as directed by theU.S. Congress , theFAA issued more stringent pilot qualification and crew member flight training standards, which, among other things, increased the required training time for new airline pilots from 250 hours to 1,500 hours of flight time. These changes dramatically reduced the supply of qualified pilot candidates eligible for hiring by the airline industry and, in response, regional airlines implemented significant pilot wage and bonus increases. In recent years,Air Wisconsin experienced a significant increase in pilot attrition, and our results of operations may be negatively impacted ifAir Wisconsin is unable to hire and train pilots in a timely manner. Refer to the section entitled " Risk Factors " within this Annual Report for a discussion of the general and specific factors and trends affecting our business and results of operations.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year because the airline industry is subject to seasonal fluctuations and general economic conditions. WhileAir Wisconsin's operations can be negatively impacted by factors outside of its control, including inclement weather, the United capacity purchase agreement mitigates some of the risks associated with seasonal fluctuations.
Components of Our Results of Operations
The following discussion summarizes the key components of our consolidated statements of operations.
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Operating Revenues
Our consolidated operating revenues consist primarily of contract revenues from flight services.
Contract Revenues . Contract revenues consist of the fixed monthly amounts per aircraft received pursuant to the United capacity purchase agreement, along with the additional amounts received based on the number of departures and block hours flown. The United capacity purchase agreement includes provisional cash payments four times per month based on a projected level of flying each month.Air Wisconsin and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis. In addition, contract revenues in 2021 and 2020 include the impact of the amendment to the United capacity purchase agreement thatAir Wisconsin entered into inOctober 2020 which, among other things, provides for the payment or accrual of certain amounts by United toAir Wisconsin based on certain scheduling benchmarks. The accruals are evidenced by notes receivable from United toAir Wisconsin . Contract Services and Other . Contract services and other revenue are not material and primarily consist of the sale of parts. Operating Expenses
Our consolidated operating expenses consist of the following items:
Payroll and Related Costs . Payroll and related costs primarily relate to wages, benefits and payroll taxes for allAir Wisconsin's employees, as well as costs related to lodging of our flight crews and crew training expenses. Aircraft Fuel and Oil . Substantially all aircraft fuel and related fueling costs for flying under the United capacity purchase agreement are directly paid and supplied by United; we do not record any revenue or expense for such fuel. We include the cost of aircraft oil, which we are responsible for under the United capacity purchase agreement, although that expense is not material. Aircraft Maintenance, Materials and Repairs . Aircraft maintenance, materials and repairs include costs related to airframe and rotable overhauls, normal recurring maintenance and the cost of aircraft materials and parts related toAir Wisconsin's CRJ-200 regional jets and the cost of engine maintenance by Lotus. With the exception of engine overhauls byAir Wisconsin , we record these costs using the direct expense method of accounting, pursuant to which the expense is recognized when the maintenance work is completed. As a result of using the direct expense method, the timing of maintenance expense reflected in the financial statements may vary from period to period. We capitalizeAir Wisconsin's engine overhaul costs, and the amortization expense is included in aircraft maintenance, materials and repairs using the deferral method of accounting;Air Wisconsin's engine overhaul costs are amortized over the estimated useful life of the overhaul measured in engine cycles remaining until the next scheduled shop visit. Aircraft Rent . Aircraft rent includes costs related to leased aircraft, including any lease termination expenses related to aircraft acquired prior to the end of their lease term. Other Rents . Other rents include expenses related to leased engines, costs related to leased flight simulators used to trainAir Wisconsin's pilots, and building rents such as crew and maintenance bases and corporate office space. Depreciation, Amortization and Obsolescence . Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine and rotable parts depreciation. Obsolescence expense is a periodic non-cash charge primarily related to the provision for obsolescence on our expendable aircraft parts. Purchased Services and Other . Purchased services and other expense primarily includes third-party aircraft line maintenance support inChicago (O'Hare) andWashington (Dulles) , information technology systems, legal fees, professional and technical fees, insurance and property taxes and other administrative expenses. The majority of insurance and property taxes are pass-through costs to United. 38
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Table of Contents Other (Expense) Income, Net Interest Expense . Interest expense is interest primarily relating toAir Wisconsin's debt under the Aircraft Credit Agreements and certain other credit agreements. Interest Income . Interest income includes interest income earned on our cash and cash equivalent balance and notes receivable due from United.
Other
.
Other income (expense) includes income (expense) derived from activities not classified in any other area of the consolidated statements of operations.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of Accounting Standards Codification (ASC) 280, " Segment Reporting, " we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flight services in accordance with the United capacity purchase agreement. Additionally, our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis upon which the results and performance of the Company are communicated to the board of directors. The chief operating decision maker bases all significant decisions regarding the allocation of our resources on a consolidated basis. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operate as one operating and reportable segment.
Results of Operations
Comparison of the Years Ended
We had operating income of$105.2 million in the year endedDecember 31, 2021 , compared to$43.4 million in the year endedDecember 31, 2020 . In the year endedDecember 31, 2021 , we had net income of$92.6 million compared to$39.8 million in the year endedDecember 31, 2020 . Operating Revenues Year Ended December 31, 2021 2020 Change Operating Revenues ($ in thousands): Contract Revenues$ 247,519 $ 185,866 $ 61,653 33.2% Contract Services and Other 60 83 (23 ) (27.7)% Total Operating Revenues$ 247,579 $ 185,949 $ 61,630 33.1% Operating Data: Available Seat Miles (ASMs) (in thousands) 1,310,157 864,494 445,663 51.6% Actual Block Hours 116,081 74,438 41,643 55.9% Actual Departures 80,927 52,405 28,522 54.4% Revenue Passenger Miles (RPMs) (in thousands) 1,041,763 501,636 540,127 107.7% Average Stage Length (in miles) 327 335
(8 ) (2.4)%
)
Contract Revenue Per Available Seat ¢
Mile (CRASM) (in cents) 18.89 ¢ 21.50 ¢ (2.61 (12.1)%
Passengers 3,082,394 1,444,274 1,638,120 113.4%
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The increase in departures and RPMs during the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , was primarily due to an increase in flying under the United capacity purchase agreement. As a result of the increased demand for air travel since the beginning stages of the COVID-19 pandemic, total operating revenues increased by$61.6 million , or 33.1%, during the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 .Air Wisconsin's block hours flown during the year endedDecember 31, 2021 increased 55.9%, compared to the year endedDecember 31, 2020 .
Operating Expenses
The following table sets forth our operating expenses and associated dollar and percentage changes for the periods presented:
Year Ended
December 31,
2021 2020 Change
Operating Expenses ($ in thousands):
Payroll and Related Costs $ 106,881 $ 99,100 $ 7,781 7.9%
Aircraft Fuel and Oil 171 55 116 210.9%
Aircraft Maintenance, Materials and Repairs 43,742 27,350 16,392 59.9%
Aircraft Rent 67 6,713 (6,646 ) (99.0)%
Other Rents 5,375 4,580 795 17.4%
Depreciation, Amortization and Obsolescence 26,552 27,222 (670 ) (2.5)%
Payroll Support Program (66,316 ) (42,185 ) (24,131 ) 57.2%
Purchased Services and Other 25,938 19,764 6,174 31.2%
Total Operating Expenses $ 142,410 $ 142,599 $ (189 ) (0.1)%
Payroll and Related Costs
. Payroll and related costs increased $7.8 million , or 7.9%, to $106.9 million
for the year ended December 31, 2021 , compared to the year ended December 31,
2020 . The increase was primarily driven by an increase in crew wages, bonuses
and training expenses of $8.8 million and personnel expenses of $3.0 million .
These increases were offset by other wages, taxes and benefits which decreased
by $2.6 million , inclusive of a refund claim for the employee retention credit
in the amount of $1.1 million , and a decrease in management wages of
$1.1 million .
Aircraft Fuel and Oil
. Substantially all of the fuel costs incurred as a result of flying pursuant to
the United capacity purchase agreement during the years ended December 31, 2021
and 2020 were directly paid to suppliers by United. Aircraft fuel and oil
expense primarily reflects the costs associated with aircraft oil purchases.
This increase was primarily due to an increase in the number of flights we
operated.
Aircraft Maintenance, Materials and Repairs
. Aircraft maintenance, materials and repairs costs increased $16.4 million , or
59.9%, to $43.7 million for the year ended December 31, 2021 , compared to the
year ended December 31, 2020 . This increase was primarily driven by an increase
in required maintenance and repair activities due to an increase in flying
attributable to increased passenger demand for air transportation.
Aircraft Rent
. Aircraft rent expense decreased $6.6 million , or 99.0%, to $0.07 million for
the year ended December 31, 2021 , compared to the year ended December 31, 2020 .
The decrease was due to Air Wisconsin's acquisition of its remaining operating
leased aircraft during 2020. Air Wisconsin incurred $0.07 million in aircraft
rent expense in 2021 for a
CRJ-700
that was leased for the purpose of adding that aircraft type to its FAA
Operations Specifications. For additional information, refer to Note 4,
Property and Equipment
, in our audited consolidated financial statements included in this Annual
Report.
Other Rents
. Other rents expense increased $0.8 million , or 17.4%, to $5.4 million for the
year ended December 31, 2021 , compared to the year ended December 31, 2020 . The
increase was primarily due to an increase of $0.8 million in flight training
simulator rental expense.
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Depreciation, Amortization and Obsolescence . Depreciation, amortization and obsolescence expense decreased$0.7 million , or 2.5%, to$26.6 million for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The decrease was primarily due to the retirement of leasehold improvements in 2020 on formerly leased aircraft and the retirement of a spare engine. For additional information, refer to Note 4, Property and Equipment , in our audited consolidated financial statements included in this Annual Report. Payroll Support Program . The proceeds of the Treasury Payroll Support received pursuant to the PSP Agreements are recorded in cash and cash equivalents when received and were recognized as a reduction in expense over the periods that the funds are intended to offset payroll expenses. For the years endedDecember 31, 2021 , andDecember 31, 2020 ,Air Wisconsin received and recognized approximately$66.3 million and$42.2 million , respectively, under the Payroll Support Program. Purchased Services and Other . Purchased services and other expense increased$6.2 million , or 31.2%, to$25.9 million for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . This increase was primarily due to an increase in outside services, consisting primarily of aircraft line and on call maintenance, of$6.0 million , an increase in insurance expense of$1.1 million , an increase in supplies of$0.5 million , and an increase of$0.4 million of other credits, partially offset by a decrease in legal expense of$0.5 million , a decrease in professional and technical fees, consisting primarily of consulting and auditing services of$0.3 million , and a decrease in property tax expense of$0.3 million . The year endedDecember 31, 2021 included a net gain on disposal of assets of$0.3 million compared to a net loss of$0.4 million on disposal of assets in the year endedDecember 31, 2020 .
Other Income (Expense)
Interest Income . Interest income increased$1.4 million for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The increase was primarily due to an increase in interest earned on the long-term notes receivable due from United. Interest Expense . Interest expense decreased by$0.9 million for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , primarily due to the significant prepayment of debt in 2021. For additional information, refer to the section entitled " - Debt and Credit Facilities " and Note 6, Debt , in our audited consolidated financial statements included in this Annual Report. Loss onMarketable Securities . Loss on marketable securities was$1.2 million for the year endedDecember 31, 2021 . The loss reflects the change in market value and sales of securities for the year endedDecember 31, 2021 . There were no marketable securities held during the year endedDecember 31, 2020 . Gain on Extinguishment of Debt. Gain on extinguishment of debt was$10.4 million for the year endedDecember 31, 2021 . A gain of$10.1 million resulted from the forgiveness of the SBA Loan with the remainder attributable to the prepayment of debt. For additional information refer to Note 6, Debt , in our audited consolidated financial statements included in this Annual Report. Other, Net . Other income increased by$2.5 million for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . This increase primarily consists of dividend income of$2.5 million from investments in marketable securities.
Net Income
Net income for the year endedDecember 31, 2021 was$92.6 million , or$1.69 per basic share and$1.29 per diluted share, compared to net income of$39.8 million , or$0.71 per basic share and$0.56 per diluted share for the year endedDecember 31, 2020 . For additional information, refer to Note 12, Earnings per Share and Equity , in our consolidated financial statements included in this Annual Report. The increase in net income for the year endedDecember 31, 2021 primarily resulted from increased revenues as a result of increased demand for air travel and slightly overall lower operating expenses, as a result of the increase in the contra-expense related to funds received under the Payroll Support Program, and the gain resulting from the forgiveness of the SBA Loan. Although overall operating expenses were slightly lower in the year endedDecember 31, 2021 when compared to the year endedDecember 31, 2020 , there were significant increases in aircraft maintenance and repair costs as well as payroll and related costs resulting from the increased flying levels. 41
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Income Taxes
In the year endedDecember 31, 2021 , our effective tax rate was 21.5%, compared to 5.8% in the year endedDecember 31, 2020 . Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our deferred tax assets.
We recorded an income tax provision of
The income tax provision for the year endedDecember 31, 2021 resulted in an effective tax rate of 21.5%, which differed from theU.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and taxable income. In addition to the state effective tax rate impact, other state impacts include changes in state apportionment and statutory rates. The income tax provision for the year endedDecember 31, 2020 resulted in an effective tax rate of 5.8%, which differed from theU.S. federal statutory rate of 21% primarily due to the impact of state taxes, permanent differences between financial statement and taxable income and changes in federal and state valuation allowances against deferred tax assets. In addition to the state effective tax rate impact, other state impacts include changes in state apportionment and statutory rates.
As of
For additional information, refer to Note 5, Income Taxes , in our audited consolidated financial statements included in this Annual Report.
Liquidity and Capital Resources
AlthoughAir Wisconsin's departures and block hours generally increased through the year endedDecember 31, 2021 and the date of this filing, the COVID-19 pandemic continues to evolve. As such, the ongoing impact that the pandemic will have on our financial condition, results of operations, and liquidity remains highly uncertain. Management is actively monitoring the impact on our operations, airline partner, suppliers, industry, and workforce. We are taking actions based on currently available information to address the changing business environment; however, we cannot predict what changes in circumstances and future developments may occur or what effect those changes or developments may have on our business. Sources and Uses of Cash Our principal sources of liquidity are our cash and cash equivalents balance, our marketable securities,Air Wisconsin's cash flows from operations, and its receipt of governmental assistance under the SBA Loan and the Payroll Support Program. As ofDecember 31, 2021 , our cash and cash equivalents balance was$37.2 million and we held$138.4 million of marketable securities. For the year endedDecember 31, 2021 , we generated cash flows from operations of$94.2 million , which included$66.3 million received pursuant to the Payroll Support Program. In the near term,Air Wisconsin expects to fund its liquidity requirements through cash generated from operations and existing cash, cash equivalents, and marketable securities balances.Air Wisconsin requires cash to fund its operating expenses and working capital requirements, which include outlays for capital expenditures, labor, maintenance, and payment of debt service obligations, including principal and interest payments. Our cash needs vary from period to period, based in part on the timing and costs of significant maintenance events and increased labor costs due to shortages of qualified pilots and mechanics. 42
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During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect current market conditions and our projected demand. Our capital expenditures are typically used to acquire or maintain aircraft and flight equipment forAir Wisconsin . During the year endedDecember 31, 2021 , we paid$3.6 million in capital expenditures primarily related to purchases of rotable parts and capitalized engine overhauls. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.Air Wisconsin's ability to service its long-term debt obligations and business development efforts depends on its ability to generate cash from operating activities, which is subject to, among other things, its future operating performance, as well as other factors, some of which may be beyond our control. IfAir Wisconsin fails to generate sufficient cash from operations, it may need to obtain additional debt financing, or restructure its current debt financing, to achieve its longer-term objectives. As ofDecember 31, 2021 , Harbor had no indebtedness, andAir Wisconsin had$67.6 million in secured indebtedness, including$5.9 million of short-term indebtedness and$61.7 million of long-term indebtedness, all of which is secured indebtedness incurred in connection with the Aircraft Notes. For additional information, refer to the section entitled " - Debt and Credit Facilities " and Note 6, Debt , in our audited consolidated financial statements included in this Annual Report. The United capacity purchase agreement andAir Wisconsin's credit agreements with its lender contain restrictions that limitAir Wisconsin's ability to pay, or prohibit it from paying, dividends or distributions to Harbor. In addition, the PSP Agreements preventAir Wisconsin from paying dividends prior to certain dates. We believe our available working capital and anticipated cash flows from operations will be sufficient to meet our liquidity requirements for at least the next 12 months from the date of this filing. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted. Restricted Cash As ofDecember 31, 2021 , in addition to cash and cash equivalents of$37.2 million , the Company had$1.4 million in restricted cash which primarily relates to a credit facility used for the issuance of cash collateralized letters of credit supportingAir Wisconsin's performance of its obligations under certain lease agreements, airport agreements and insurance policies, as well as cash held for the repurchase of shares under Harbor's stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secure the credit facility.
Cash Flows
The following table presents information regarding our cash flows for each of
the years ended
Year Ended
December 31, Year Ended
December 31,
2021 2020 Change
Net Cash Flow Provided by Operating
Activities $ 94,213 $ 73,178 $ 21,035 28.7%
Net Cash Flow Used in Investing
Activities (143,135 ) (8,654 ) (134,481 ) 1,554.0%
Net Cash Flow Used in Financing
Activities (43,652 ) (3,604 ) (40,048 ) 1,111.2%
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash (92,574 ) 60,920 (153,494 ) (252.0)% Cash, Cash Equivalents and Restricted Cash at Beginning of Year 131,193 70,273 60,920 86.7% Cash, Cash Equivalents and Restricted Cash at End of Year$ 38,619 $ 131,193 $ (92,574 ) (70.6)% 43
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Net Cash Flows Provided by Operating Activities
During the year endedDecember 31, 2021 , our net cash flows provided by operating activities were$94.2 million . We had net income of$92.6 million , which was primarily due to increased revenues as a result of the increase in demand for air travel, and slightly lower overall expenses when compared to the year endedDecember 31, 2020 , which was due in part to payroll support received under the Payroll Support Program. Net cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of$24.9 million , contract liabilities of$22.6 million , and accounts payable of$8.3 million , partially offset by decreases in cash primarily related to the gain on extinguishment of debt of$10.4 million , long-term deferred revenues of$21.7 million , notes receivable of$15.1 million , and$6.0 million of deferred income taxes. During the year endedDecember 31, 2020 , our net cash flows provided by operating activities was$73.2 million . We had net income of$39.8 million , which was primarily due to lower expenses as a result of payroll support received under the PSP Agreements, and lower expenses related to reduced flying activity, further adjusted for increases in cash primarily related to long-term deferred revenue of$30.7 million under the United capacity purchase agreement, depreciation and engine overhaul amortization of$28.5 million ,$2.5 million related to operating lease right-of-use assets, contract liabilities of$12.3 million and deferred income taxes of$3.6 million , partially offset by decreases in cash primarily related to notes receivable of$32.4 million , accounts payable of$7.8 million , amortization of contract costs of$2.5 million , prepaid expenses of$1.9 million and accounts receivable of$2.4 million .
Net Cash Flows Used in Investing Activities
During the year ended
During the year endedDecember 31, 2020 , our net cash flow used in investing activities was$8.7 million resulting primarily from the purchase of aircraft and an investment in rotable parts and engine overhauls to supportAir Wisconsin's fleet under the United capacity purchase agreement.
Net Cash Flows Used in Financing Activities
During the year ended
During the year ended
Commitments and Contractual Obligations
InJune 2021 ,Air Wisconsin prepaid approximately$11.2 million of debt outstanding under the Aircraft Notes dueDecember 31, 2025 , and approximately$17.0 million of the principal amount outstanding under a credit agreement due 2022 along with all interest due as ofJune 30, 2021 . The prepayment under the Aircraft Notes resulted in a$0.2 million gain on extinguishment of debt due to the decrease in previously expected future undiscounted cash flows used in determining the carrying value of the debt.
In
In
As ofDecember 31, 2021 ,Air Wisconsin had$86.1 million of long-term debt (including principal and projected interest obligations) and operating lease obligations (including current maturities). This amount consisted of$59.5 million in long-term notes payable related to owned aircraft used in continuing operations. As ofDecember 31, 2021 ,Air Wisconsin also had$18.6 million of operating lease obligations primarily related to certain training simulators and facilities.Air Wisconsin's debt obligations set forth below include an aggregate of$8.1 million in projected interest costs through 2026 and thereafter. 44
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The following table sets forth the Company's cash obligations for the periods
indicated:
Payment Due for
Year Ended
December 31,
(in thousands)
Total 2022 2023 2024 2025 2026 Thereafter
Aircraft Notes Principal $ 59,500 $ 3,500 $ 7,000 $ 7,000 $ 42,000 $ - $ -
Aircraft Notes Interest $ 8,050 $ 2,380 $ 2,170 $ 1,890 $ 1,610 $ - $ -
Operating Lease Obligations $ 18,586 $ 6,095 $ 5,832 $ 3,356 $ 2,645 $ 147 $ 511
Total $ 86,136 $ 11,975 $ 15,002 $ 12,246 $ 46,255 $ 147 $ 511
The principal amount of the Aircraft Notes is payable in semi-annual
installments of $3.5 million and certain additional amounts may be due based on
excess cash flow. The amounts set forth in the table do not reflect any such
additional excess cash flow payments. As a result of certain prepayments made
under the Aircraft Notes in June 2021 , no semi-annual installments are due prior
to December 31, 2022 . As of December 31, 2021 , all of Air Wisconsin's long-term
debt was subject to fixed interest rates. For additional information regarding
the Aircraft Notes and Other Loans, refer to Note 6,
Debt
, included in our audited consolidated financial statements included in this
Annual Report.
Series C Convertible Redeemable Preferred Stock
InJanuary 2020 , Harbor completed an acquisition fromSouthshore Aircraft Holdings, LLC and its affiliated entities ("Southshore") of three CRJ-200 regional jets, each having two General Electric ("GE") engines, plus five additionalGE engines, in exchange for the issuance of 4,000,000 shares of Harbor's Series C Convertible Redeemable Preferred Stock (the "Series C Preferred") with an aggregate value of$13.2 million , or$3.30 per share (the "Series C Issue Price").Air Wisconsin had leased each of these CRJ-200 regional jets andGE engines from Southshore. InJanuary 2020 , Harbor filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock ("Certificate of Designations") with the Secretary of State of theState of Delaware , which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred. Each share of Series C Preferred was initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by$0.80 , subject to certain adjustments set forth in the Certificate of Designations (the "Conversion Price"). The adjusted Conversion Price as of the date of this filing is$0.15091 . The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500,000, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii)$0.80 , (the "Conversion Cap") plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii)$0.80 . Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (the "Conversion Cap Excess Shares"), from and afterDecember 31, 2022 , in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends equal to an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter afterDecember 31, 2022 , and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (the "Conversion Cap Excess Dividends"). As ofMarch 18, 2022 , 754,550 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock (representing 25.9% of the fully diluted shares of capital stock of Harbor), and the remaining 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares. For additional information related to the Series C Preferred, refer to the Annual Report on Form 10-K of the Company for the year endedDecember 31, 2020 . OnMarch 30, 2021 ,June 30, 2021 ,September 28, 2021 , andDecember 31, 2021 , the board of directors declared a dividend of$198 on the Series C Preferred, which was paid onMarch 31, 2021 ,June 30, 2021 ,September 30, 2021 andDecember 30, 2021 , respectively. 45
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Based on the applicable accounting guidance, Harbor is required to apply the "if-converted" method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.
Harbor accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480,
Distinguishing Liabilities from Equity . Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or "mezzanine" equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders' equity section of the consolidated balance sheets.
Aircraft Operating Leases
As of
Debt and Credit Facilities Aircraft Credit Agreements In seven separate transactions occurring in 2003 and 2004,Air Wisconsin financed the acquisition of 35 CRJ-200 regional jets through the issuance of senior aircraft notes to a loan trustee on behalf of a senior lender (the "Lender") and subordinated aircraft notes to the loan trustee on behalf of a subordinated lender. The senior aircraft notes and the subordinated aircraft notes were governed by seven credit agreements. Prior toDecember 2018 , the Lender acquired all of the subordinated aircraft notes from the subordinated lender. InDecember 2018 ,Air Wisconsin entered into a debt restructuring arrangement with the Lender, as holder of all of the senior aircraft notes and subordinated aircraft notes, and a loan trustee for the Lender (the "Loan Trustee"). The seven original credit agreements were amended and restated as part of that restructuring, and those seven amended and restated credit agreements (the "Aircraft Credit Agreements") remain in effect. Prior to the restructuring, the aggregate outstanding principal amount of the senior aircraft notes and the subordinated aircraft notes was approximately$246.8 million . Pursuant to the restructuring, the outstanding principal and accrued interest on the subordinated aircraft notes were forgiven and deemed paid in full, and the senior aircraft notes outstanding under the original credit agreements were cancelled and exchanged for notes in an outstanding principal amount of$70.0 million . All principal on the senior aircraft notes in excess of$70.0 million and all interest accrued on the senior aircraft notes prior toDecember 24, 2018 were forgiven and deemed paid in full. The notes issued under the Aircraft Credit Agreements (the "Aircraft Notes") bear interest at the rate of 4% per annum and mature onDecember 31, 2025 . Interest on the Aircraft Notes is paid quarterly. The principal amount of the Aircraft Notes is payable in semi-annual installments of$3.5 million with certain additional amounts payable based on excess cash flow. Each Aircraft Note issued pursuant to an Aircraft Credit Agreement is secured by each aircraft acquired with the proceeds of any of the original seven credit agreements and by certain spare aircraft, spare engines and spare parts. The Aircraft Credit Agreements contain covenants that, subject to exceptions described in the Aircraft Credit Agreements, (i) requireAir Wisconsin to provide certain financial and other information, (ii) provide certain inspection rights to the Loan Trustee, (iii) restrictAir Wisconsin's ability to consolidate with or merge into any other person or sell, convey, lease or otherwise transfer all or substantially all of its assets to any other person, (iv) restrictAir Wisconsin's ability to make payments to its affiliates, and (v) grant to the Loan Trustee security interests in certain after-acquired aircraft, spare engines and spare parts. The Aircraft Credit Agreements also contain customary events of default, including, without limitation: (a) payment defaults, (b) breach of covenants, (c) breach of representations and warranties, (d) cross-defaults, (e) certain bankruptcy-related defaults, (f) the occurrence of certain judgments, and (g) loss of first priority security interest in certain collateral. As ofDecember 31, 2021 ,Air Wisconsin was in compliance with the covenants under the Aircraft Credit Agreements, and no event of default existed under the Aircraft Credit Agreements. Neither Harbor nor any of its other subsidiaries has guaranteed or provided any other credit support with respect to the Aircraft Notes or other obligations ofAir Wisconsin under the Aircraft Credit Agreements. 46
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Other Credit Agreements
Air Wisconsin entered into a credit agreement with the Lender inJune 2017 in the amount of approximately$14.4 million . This loan bore interest at a rate of 5% per annum, was secured by certain aircraft, spare engines and spare parts and was paid in full inDecember 2020 . InJanuary 2018 ,Air Wisconsin entered into a second credit agreement with the Lender to borrow approximately$15.2 million in the year endedDecember 31, 2018 . That agreement was amended several times to increase the amount of the loans outstanding to$27.0 million and to extend the maturity date. The loans under the 2018 credit agreement bore interest at a rate of 5% per annum, were secured by certain aircraft, spare engines and spare parts and was paid in full in the third quarter of 2021. Paycheck Protection Program InApril 2020 ,Air Wisconsin received the$10.0 million SBA Loan under the PPP established under the CARES Act and administered by the SBA. The loan was forgivable subject to certain limitations, including that the loan proceeds be used to retain workers and for payroll, mortgage payments, lease payments, and utility payments. The entire principal amount and accrued interest were forgiven inAugust 2021 , in the amount of$10.1 million , which was recorded as gain on extinguishment of debt in the consolidated statements of operations included within this Annual Report. Payroll Support Program InApril 2020 ,Air Wisconsin entered into the PSP-1 Agreement with theTreasury for payroll support under the CARES Act and received approximately$42.2 million , all of which was received in the year endedDecember 31, 2020 . InMarch 2021 ,Air Wisconsin entered into the PSP-2 Agreement with theTreasury for payroll support under the PSP Extension Law and received approximately$33.0 million , all of which was received in the six months endedJune 30, 2021 . InJune 2021 theTreasury entered into the PSP-3 Agreement withAir Wisconsin for payroll support under the American Rescue Plan, andAir Wisconsin received approximately$33.3 million , all of which was received in the year endedDecember 31, 2021 . The PSP Agreements contain various covenants, including that (i) the payroll support proceeds must be used exclusively for the payment of wages, salaries and benefits, (ii)Air Wisconsin cannot involuntarily terminate or furlough any employee or reduce any employee's pay rates or benefits without that employee's consent, in any case prior to certain dates, (iii)Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps, (iv)Air Wisconsin cannot pay dividends or make other capital distributions prior to certain dates, and (v) neitherAir Wisconsin nor any of its affiliates can purchase an equity security ofAir Wisconsin or any direct or indirect parent company ofAir Wisconsin that is listed on a national securities exchange prior to certain dates. IfAir Wisconsin fails to comply with its obligations under the PSP Agreements, it may be required to repay some or all of the funds provided to it under those agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. For additional information, refer to Note 8, Commitments and Contingencies , in our consolidated financial statements included in this Annual Report.
Maintenance Commitments
Air Wisconsin has entered into two non-exclusive heavy maintenance services agreements for certain maintenance, repair and modification services with respect to airframes owned or operated byAir Wisconsin , and one exclusive engine maintenance agreement to perform certain maintenance, repair, restoration, overhaul, modification and other services on aircraft engines owned or operated byAir Wisconsin . Two of the non-exclusive heavy maintenance services agreements are subject to certain escalation of labor rates and have an initial term throughSeptember 2022 andMay 2024 , respectively, butAir Wisconsin has the right to extend the term for up to two renewal terms of one year each, on the same terms and conditions as during the initial terms. The exclusive engine maintenance agreement is subject to an annual escalation and had an initial term throughMay 2021 .Air Wisconsin exercised its right to extend the term throughMay 2023 . No additional renewal options are available under the current agreement. 47
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Table of Contents Off-Balance Sheet Arrangements An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us. We have no off-balance sheet arrangements that would have a material current or future effect on the Company's financial condition, results of operations or liquidity. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with generally accepted accounting principles. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management's subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies, which we discuss below. We have identified the accounting policies discussed below as critical to us. The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 1, Summary of Significant Accounting Policies , in our audited consolidated financial statements included in this Annual Report.
Revenue Recognition
Because our flights are distinct services that have the same pattern of transfer to the customer, satisfied over time with the measure of progress for each flight deemed to be substantially the same, the flight services promised in the United capacity purchase agreement represent a series of services that are accounted for as a single performance obligation. Therefore, our contract revenues are recognized when service is provided and our performance obligation is determined on a per completed flight basis. The performance obligation of each completed flight is measured using departures. In addition, as a result of an amendment to the United capacity purchase agreement inOctober 2020 (the CPA Amendment), management determined that, from an accounting perspective, a new performance obligation was created by United, requiringAir Wisconsin to stand ready to deliver flight services.Air Wisconsin determined, using the expected cost plus a margin method, that the United "stand ready" rate represents the relative stand-alone selling price of the performance obligation. The stand ready performance obligation will be recognized over time on a straight-line basis based on the number of unscheduled block hours below a minimum threshold at the stand ready rate as determined in a manner consistent with the CPA Amendment. As discussed above, under the United capacity purchase agreement,Air Wisconsin is paid a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement.Air Wisconsin deferred fixed revenues betweenApril 2020 andJune 2021 due to the significant decrease in its completed flights as a result of the COVID-19 pandemic. Beginning inJuly 2021 , due to an increase in completed flights and based on projected future completed flight activity,Air Wisconsin began reversing this deferral of fixed revenues, and it anticipates continuing to do so throughFebruary 2023 , the end of the contract period. Accordingly, during the first six months of 2021,Air Wisconsin deferred$15.4 million of fixed revenues, and in the last six months of 2021Air Wisconsin recognized$13.4 million of fixed revenues that were previously deferred, compared to a deferral of$43.2 million of fixed revenues in the year endedDecember 31, 2020 . In addition,Air Wisconsin's fixed revenue rate was adjusted in the fourth quarter of 2021 to account for the opening of a crew base. This resulted inAir Wisconsin recognizing$0.5 million as a cumulative catchup adjustment based on prior and future expected departures and total revenues of$0.5 million , with a net adjustment to deferred revenues of($0.4) million for the year endedDecember 31, 2021 .Air Wisconsin's deferred revenues related to the fixed portion of revenue under the United capacity purchase agreement will adjust over the remaining contract term based on the number of flights completed in each reporting period relative to the number of flights anticipated to be completed over the remaining contract term. With respect to the stand ready performance obligation, for the years endedDecember 31, 2021 andDecember 31, 2020 ,Air Wisconsin recorded$15.1 million and$21.4 million in revenue, respectively. 48
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Our revenues could be impacted by a number of factors, such as our flight schedules, terminations, labor shortages, weather, our estimates used to determine the amount of revenue we defer under the United capacity purchase agreement, and any incentive payments or performance penalties under the United capacity purchase agreement. Under that agreement,Air Wisconsin is eligible to receive incentive compensation or pay performance penalties upon the achievement of, or failure to achieve, certain performance criteria. The incentives and penalties are defined in the agreement and are measured and determined on a monthly basis. At the end of each month,Air Wisconsin calculates the incentives achieved, net of any penalties, during that period and recognizes revenue attributable to the agreement accordingly, subject to the variable constraint guidance under Topic 606. The United capacity purchase agreement includes weekly provisional cash payments based on a projected level of flying each month.Air Wisconsin and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis.
Other revenue is immaterial and primarily consist of the sales of parts to other airlines. The transaction price for the sale of these parts occurs at fair market value.
Long-Lived Assets
As ofDecember 31, 2021 , we had approximately$124.7 million of property and equipment and related assets net of accumulated depreciation. In accounting for these long-lived assets, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow losses associated with the use of the long-lived assets. When considering whether or not impairment of long-lived assets exists, we group similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Factors that may impact our estimates used for depreciation include anticipated useful lives and estimated residual values. Estimates may be impacted by future economic uncertainties. AtDecember 31, 2021 , we had 64 aircraft in service under the United capacity purchase agreement.
Income Taxes
The Company utilizes the asset and liability method for accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are determined based upon the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities, as
measured by the current applicable tax rates. Deferred tax expense represents
the result of changes in deferred tax assets and liabilities.
As required by the uncertain tax position guidance, the Company recognizes the
financial statement benefit of a tax position only after determining that the
relevant tax authority would
more-likely-than-not
sustain the position following an audit. For tax positions meeting the
more-likely-than-not
threshold, the amount recognized in the financial statements is the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement with the relevant tax authority. The Company has applied the
uncertain tax position guidance to all tax positions for which the statute of
limitations remains open.
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The Company is subject to federal, state and local income taxes inthe United States and various states. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject toU.S. federal income tax examinations for the years prior to 2018. With a few exceptions, the Company is no longer subject to state, and local income tax examinations for the years prior to 2017. As ofDecember 31, 2021 , the Company had no outstanding tax examinations.
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