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, 2022 (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 ("AirWisconsin "), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1)Lotus Aviation Leasing, LLC ("Lotus"), which leases flight equipment toAir Wisconsin , (2)Air Wisconsin Funding LLC ("AWF"), which provides flight equipment financing toAir Wisconsin , and (3)Harbor Therapeutics, Inc. ("Therapeutics"), which is a non-operating entity with no material assets. Because Harbor consolidatesAir Wisconsin for financial statement purposes, for purposes of this Annual Report on Form 10-K for the year endedDecember 31, 2022 (this "Annual Report"), 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." During the year endedDecember 31, 2022 ,Air Wisconsin had a fleet of 63 CRJ-200 regional jets covered under a capacity purchase agreement (the "United capacity purchase agreement") with its sole major airline partner,United Airlines, Inc. ("United"). Pursuant to the United capacity purchase agreement, United agreed to purchase the capacity ofAir Wisconsin's regional jets covered by the agreement, whichAir Wisconsin operated as United Express, with a presence at both Chicago O'Hare andWashington -Dulles international airports, two of United's key domestic hubs. 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. More than 99.9% of our operating revenues for the years endedDecember 31, 2022 andDecember 31, 2021 was derived from operations associated with the United capacity purchase agreement. Subject to certain limited exceptions,Air Wisconsin is entitled to receive, under the United capacity purchase agreement, 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. In addition,Air Wisconsin is eligible to receive incentive payments, or may be required to pay penalties, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion, on-time performance, and customer satisfaction ratings. The United capacity purchase agreement protectsAir 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. 27 -------------------------------------------------------------------------------- InOctober 2020 ,Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, modified certain scheduling requirements and settled certain disputes that had existed between United andAir Wisconsin over amounts owed toAir Wisconsin under the agreement. InApril 2021 ,Air Wisconsin and United entered into a second amendment to the United capacity purchase agreement, which addressed the scheduling of block hours after a certain date. InOctober 2022 , United delivered a wind-down schedule that provided for the withdrawal of aircraft from coverage under the United capacity purchase agreement beginning inMarch 2023 and continuing throughNovember 2023 . A dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed toAir Wisconsin by United. InOctober 2022 , United initiated arbitration under the United capacity purchase agreement and requested a declaration that it does not owe any of the amounts claimed byAir Wisconsin .Air Wisconsin expects that, unless the parties reach a settlement before then, the arbitration hearing will occur inJuly 2023 and that the arbitrators will make their award inAugust 2023 . InDecember 2022 andFebruary 2023 ,Air Wisconsin sent United notices of termination of the agreement. In the arbitration, United has contestedAir Wisconsin's right to terminate the agreement. In accordance with the termination provisions of the agreement, and in response toAir Wisconsin's first termination notice, United delivered a revised wind-down schedule inJanuary 2023 . Following the delivery of that revised schedule, inFebruary 2023 , the parties agreed, in a sixth amendment to the United capacity purchase agreement, to a wind-down schedule that provides for the withdrawal of aircraft from the agreement beginning inJanuary 2023 and continuing untilJune 2023 , at which time all ofAir Wisconsin's remaining aircraft would be withdrawn from the agreement, andAir Wisconsin would cease flying for United. As ofDecember 31, 2022 , the aggregate amount in dispute was approximately$47.9 million . AsAir Wisconsin and United are in the early stages of arbitration,Air Wisconsin cannot, with any degree of certainty, estimate the likely outcome of the arbitration including any potential award of the disputed amounts.Air Wisconsin , however, maintains that it has a strong position and is entitled to the disputed amounts under the terms of the United capacity purchase agreement. As a result, the Company has recognized all disputed amounts throughDecember 31, 2022 . InAugust 2022 ,Air Wisconsin entered into a new five-year capacity purchase agreement (the "American capacity purchase agreement") withAmerican Airlines, Inc. ("American"), which was subsequently amended inFebruary 2023 andMarch 2023 , pursuant to whichAir Wisconsin agreed to provide up to 60 CRJ-200 regional jet aircraft for regional airline services for American.Air Wisconsin commenced flying operations for American inMarch 2023 . American will becomeAir Wisconsin's sole airline partner once all aircraft are removed from United's flying operations, which is scheduled to occur by earlyJune 2023 . For additional information regarding the risks associated with the dispute with United and the transition from the United capacity purchase agreement to the American capacity purchase agreement, refer to the section entitled "Risk Factors" within this Annual Report.
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 has increased, labor shortages within the airline industry have become acute, particularly for regional airlines such asAir Wisconsin . The shortage is particularly critical at the captain level, since it can take as long as two years to replace a captain, taking into account training time and experience required at the first officer level before a pilot can be elevated to the rank of captain. Pilot shortages within the airline industry are the result of a number of factors, including personnel seeking opportunities with larger airlines where compensation may be substantially higher, the number of pilots at major airlines reaching retirement age, upward pressure on wages and bonuses at other regional carriers and within other industries, and the proliferation of cargo and low-cost carriers that have increased demand for pilots. In the past several months, these and other factors have caused our pilot attrition rates to be higher than our ability to hire and retain replacement pilots, resulting in our inability to consistently achieve block hours in line with pre-pandemic levels. To address the diminished supply of qualified pilot candidates, regional airlines, includingAir Wisconsin , have implemented significant pilot wage and bonus increases, which has substantially increased our labor costs and may continue to negatively impact our results of operations and financial condition. If we are unable to maintain a sufficient number of qualified pilots to operate our scheduled flights, it could lead to reduced flight schedules, which would further impact our financial condition. In addition to pilots,Air Wisconsin's operations rely on the availability of other qualified personnel, including maintenance technicians. As a result of global supply chain constraints and inflationary pressures, as well as increased flying levels,Air Wisconsin has experienced increased costs of certain maintenance activities and delays in obtaining third-party maintenance services, which has been compounded by difficulty recruiting and retaining qualified mechanics. Mechanic shortages within the industry have resulted from several factors, including larger airlines offering higher salaries and more extensive benefit programs, greater demand for mechanics across the airline industry, and upward pressure on wages in other industries. We anticipate these drivers will continue to place upward pressure on our operating costs. 28
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Impact of 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 or were 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.
Paycheck Protection Program
InApril 2020 ,Air Wisconsin received a$10.0 million loan (the "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 entire$10.1 million principal amount and accrued interest was forgiven inAugust 2021 , which was recorded as a gain on extinguishment of debt in the consolidated statement of operations for the year endedDecember 31, 2021 .
Payroll Support Program
InApril 2020 ,Air Wisconsin entered into a Payroll Support Program Agreement (the "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 whichAir Wisconsin received approximately$42.2 million . InDecember 2020 , the federal Consolidated Appropriations Act of 2021 ("PSP Extension Law") was adopted, which provided 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"), pursuant to whichAir Wisconsin received approximately$33.0 million .
In
The PSP Agreements contain various covenants, some of which have expired. The surviving covenants require that (i) the payroll support proceeds must have been used exclusively for the payment of wages, salaries and benefits, and (ii)Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps. IfAir Wisconsin failed to comply with any of its expired obligations or failed or fails to comply with any of its continuing obligations under these agreements, it may be required to repay some or all of the funds provided to it under the PSP Agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business.The Treasury's Office of the Inspector General ("OIG") 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. No such audits have been initiated by theTreasury under the PSP-2 Agreement or PSP-3 Agreement as of the date of this filing.
Employee Retention Credit
Air Wisconsin recorded an employee retention credit in 2021 in the aggregate amount of approximately$1.1 million pursuant to the CARES Act for payroll expenses incurred during the second, third, and fourth quarters of 2020. A credit of$0.2 million for one of the three eligible quarters was received in 2022 and the remaining credits were received inJanuary 2023 .
2022 Financial Highlights
For the year endedDecember 31, 2022 , we had total operating revenues of$280.9 million , a 13.4% increase, compared to$247.6 million for the year endedDecember 31, 2021 . Net income for the year endedDecember 31, 2022 was$39.1 million , or net income of$0.83 per basic share and$0.61 per diluted share, compared to net income of$92.6 million , or net income of$1.69 per basic share and$1.29 per diluted share, for the year endedDecember 31, 2021 . For additional information, refer to Note 12, Earnings per Share and Equity, and Note 13, Stock Option, 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. Primarily as a result of the pilot shortage, block hours decreased from 116,081 during the year endedDecember 31, 2021 to 107,666 during the year endedDecember 31, 2022 , or by 7.2%, and departures decreased from 80,927 in 2021 to 70,280 in 2022, or by 13.2%. 29 -------------------------------------------------------------------------------- Although our block hours and departures decreased during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , leading to a decrease in variable revenue of$7.1 million for 2022 when compared to 2021, overall revenues from the United capacity purchase agreement increased by 13.4% to$280.7 million primarily due to recognition of previously deferred revenues.Air Wisconsin deferred 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 revenues, and it anticipates continuing to do so through the wind-down period under the United capacity purchase agreement (wind-down period). Accordingly, during the year endedDecember 31, 2022 ,Air Wisconsin recognized$35.1 million of revenues that were previously deferred, compared to recognizing$3.3 million for the year endedDecember 31, 2021 , or an increase of$31.8 million .Air Wisconsin also recognized$6.4 million in incentive revenue for the year endedDecember 31, 2022 , compared to$3.0 million for the year endedDecember 31, 2021 , or an increase of$3.4 million . As a result of the stand ready performance obligation, which was a part of theOctober 2020 amendment to the United capacity purchase agreement, we recognized$18.0 million of revenue during the year endedDecember 31, 2022 , compared to$15.1 million of revenue during the year endedDecember 31, 2021 , or an increase of$2.9 million , resulting from the payment or accrual by United toAir Wisconsin based on certain scheduling benchmarks. Further, as a result of an increase to the fixed revenue rate inJanuary 2022 , fixed revenues increased approximately$2.6 million . Increases in variable revenue rates inJanuary 2022 for departures and block hours were offset by the decrease in block hours and departures as noted above. 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.
For additional information, also refer to the section entitled "Critical Accounting Policies - Revenue Recognition."
Operating Expenses
Our total operating expenses increased$82.6 million , or 58.0%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . We did not record any amount in payroll support grants received from theTreasury as an offset to our operating expenses during the year endedDecember 31, 2022 compared to$66.3 million for the year endedDecember 31, 2021 . Increasing costs for aircraft maintenance and personnel shortages resulted in an$11.0 million increase in aircraft maintenance and repair costs. We also did not record an employee retention credit to offset our operating expenses for the year endedDecember 31, 2022 , compared to$1.1 million recorded for the year endedDecember 31, 2021 . When combined with an increase of approximately$1.9 million in employee benefits and other payroll costs, payroll and related expense increased$3.0 million , or 2.8%. The additional increase of$2.4 million for the year endedDecember 31, 2022 compared toDecember 31, 2021 is primarily due to an increase of$1.1 million , or 21.2%, in rental costs, mostly simulator rent, and an increase in cost for purchased services and other of$1.5 million , or 10.8%. 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 8,096,562 shares of its common stock pursuant to the stock repurchase program during the year endedDecember 31, 2022 .
Economic Conditions, Challenges and Risks Impacting Financial Results
Although the United capacity purchase agreement has reduced, and the American capacity purchase agreement will reduce,Air 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. Transition from the United Capacity Purchase Agreement to the American Capacity Purchase Agreement.Air Wisconsin commenced flying for American under the American capacity purchase agreement in March of 2023, and it will continue flying for United under the United capacity purchase agreement until earlyJune 2023 . Certain inefficiencies are inevitable in the process of winding down flying for United and ramping up flying for American. Aircraft that are withdrawn from the United capacity purchase agreement cannot be immediately inducted into service for American, andAir Wisconsin will receive no revenue for any aircraft during the period after it has been withdrawn from the United capacity purchase agreement until it has been inducted into service under the American capacity purchase agreement. 30 -------------------------------------------------------------------------------- Pilot Shortage. An industry wide pilot shortage has existed for many years.Air Wisconsin , like most of its peers, has not been able to hire and retain a sufficient number of pilots to crew all of its aircraft. This has limited the number of flights it could fly under the United capacity purchase agreement. Under the American capacity purchase agreement,Air Wisconsin will not be able to induct an aircraft into service for American unless it has sufficient crew to satisfy certain block hour requirements, which will have an adverse effect on our revenues. Arbitration. Currently, a dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed toAir Wisconsin by United. As ofDecember 31, 2022 , the aggregate amount in dispute was approximately$47.9 million . InOctober 2022 , United initiated arbitration under the agreement and requested a declaration that it does not owe any of the disputed amounts as claimed byAir Wisconsin . The arbitration could result in substantial costs and a diversion of management's attention and resources, and there is always a chance of an unfavorable determination by the arbitrators, which could harm our business, financial condition and results of operations. 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 American capacity purchase agreement has several provisions that provide for early termination. If the agreement is terminated early,Air Wisconsin's ability to enter into 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. 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, 2022 , the average age ofAir Wisconsin's CRJ-200 regional jets was approximately 20.3 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 years ended
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, 2022 ,Air Wisconsin had 1,044 full-time employees and 41 part-time employees, for a total of 1,085 employees, of which 813 were represented by unions.Air Wisconsin's collective bargaining agreement with its pilots, represented by theAirline Pilots Association , became amendable inNovember 2022 , its collective bargaining agreement with its flight attendants, represented by theAssociation of Flight Attendants-CWA , became amendable inOctober 2022 , and its collective bargaining agreement with its clerical, office fleet and passenger service employees, represented by theInternational Association of Machinists andAerospace Workers AFL-CIO , became amendable inSeptember 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. 31 -------------------------------------------------------------------------------- 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, includingAir Wisconsin , 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.
For additional information, 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 and American capacity purchase agreements mitigate 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.
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 2022 and 2021 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 same amendment provides that these accruals are to be evidenced by notes receivable from United toAir Wisconsin , although such notes for the fourth quarter of 2021, the first through fourth quarters of 2022, and a portion of first quarter 2023 are subject to the dispute between United andAir 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 non-operational aircraft
leased for the purpose of adding an aircraft type rating to
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Other Rents. Other rents include expenses related to leased engines, costs
related to leased flight simulators used to train
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.
Payroll Support Program. The payroll support program ended in 2021, and thus there are no amounts recorded for the year endedDecember 31, 2022 . For the year endedDecember 31, 2021 , the proceeds of the Treasury Payroll Support received pursuant to the PSP Agreements were recorded in cash and cash equivalents when received and were recognized as a reduction in expense over the periods that the funds were intended to offset payroll expenses. For the year endedDecember 31, 2021 ,Air Wisconsin received and recognized approximately$66.3 million under the Payroll Support Program. Purchased Services and Other. Purchased services and other expense primarily includes 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.
Other (Expense) Income, Net
Interest Income. Interest income includes interest income earned on our cash and cash equivalents balance, notes receivable due from United, and investment income on our marketable securities.
Interest Expense. Interest expense in 2022 was immaterial. Interest expense in 2021 was interest primarily relating toAir Wisconsin's debt under the Aircraft Credit Agreements and certain other credit agreements, which were paid in full during 2021. Loss onMarketable Securities . Loss on marketable securities was$8.8 million and$1.2 million for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. The loss reflects the change in the market value of our marketable securities for the years endedDecember 31, 2022 andDecember 31, 2021 , and the sales of securities for the year endedDecember 31, 2021 . Gain on Extinguishment of Debt. Gain on extinguishment of debt was$0.1 million and$10.4 million for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. A gain of$0.1 million resulted from the prepayment of debt for the year endedDecember 31, 2022 , and a gain of$10.1 million resulted from the forgiveness of the SBA Loan with the remainder attributable to the prepayment of debt for the year endedDecember 31, 2021 . For additional information refer to Note 6, Debt, in our audited consolidated financial statements included in this Annual Report.
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
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The following table sets forth our major operational statistics and the associated percentage changes for the periods presented:
Year Ended
December 31,
2022 2021 Change
Operating Data:
Available Seat Miles ("ASMs") (in
thousands) 1,253,896 1,310,157 (56,261 ) (4.3% )
Actual Block Hours 107,666 116,081 (8,415 ) (7.2% )
Actual Departures 70,280 80,927 (10,647 ) (13.2% )
Revenue Passenger Miles ("RPMs") (in
thousands) 1,053,754 1,041,763 11,991 1.2%
Average Stage Length (in miles) 365 327 38 11.6%
Contract Revenue Per Available Seat Mile
(in cents) 22.39 ¢ 18.89 ¢ 3.50 ¢ 18.5%
Passengers 2,859,047 3,082,394 (223,347 ) (7.2% )
The decrease in ASMs, block hours, departures, and passengers during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was primarily due to the industry-wide pilot shortage which resulted in a significantly lower number of flights. The increase in contract revenue per available seat mile during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was primarily due to an increase in deferred revenue recognized in 2022.
Operating Revenues
The following table sets forth our operating revenues and the associated dollar and percentage changes for the periods presented:
Year Ended
December 31,
2022 2021 Change
Operating Revenues ($ in thousands): Contract Revenues$ 280,737 $ 247,519 $ 33,218 13.4% Contract Services and Other 126 60 66 110.0% Total Operating Revenues$ 280,863 $ 247,579 $ 33,284 13.4% Total operating revenues increased$33.3 million , or 13.4%, during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , primarily due to an increase in the recognition of previously deferred revenues in the amount of$31.8 million , an increase of$3.4 million for performance incentives, and an increase of$2.9 million for the stand ready performance obligation. As a result of an increase to the fixed revenue rate inJanuary 2022 , fixed revenues increased approximately$2.6 million . Increases in variable revenue rates inJanuary 2022 for departures and block hours were offset by the reduced flight activity due to the industry-wide pilot shortage, as illustrated in the table above for operating data, causing variable revenue to decrease$7.1 million overall. Refer to Note 1, Summary of Significant Accounting Policies for additional information regarding the stand ready performance obligation.
Operating Expenses
The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented:
Year Ended
December 31,
2022 2021 Change
Operating Expenses ($ in thousands): Payroll and Related Costs$ 109,831 $ 106,881 $ 2,950 2.8% Aircraft Fuel and Oil 169 171 (2 ) (1.2% ) Aircraft Maintenance, Materials and Repairs 67,096 56,145 10,951 19.5% Aircraft Rent - 67 (67 ) (100.0% ) Other Rents 6,582 5,375 1,207 22.5% Depreciation, Amortization and Obsolescence 26,327 26,552 (225 ) (0.8% ) Purchased Services and Other 14,992 13,535 1,457 10.8% Payroll Support Program - (66,316 ) 66,316 100.0% Total Operating Expenses$ 224,997 $ 142,410 $ 82,587 58.0% 34
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Our consolidated operating expenses consist of the following items:
Payroll and Related Costs. Payroll and related costs increased$3.0 million , or 2.8%, to$109.8 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase was primarily driven by increases in pilot bonuses of$1.9 million , an increase in employee benefits of$1.3 million , an increase in payroll taxes of$1.1 million due to employee retention credits recorded in 2021,$0.5 million in personnel expenses and$0.3 million for general management wages. This was offset by an over-all decrease in wages of$1.6 million for pilots and flight attendants in operations, training, and per diem, and$0.5 million decrease in maintenance employee wages. 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 endedDecember 31, 2022 andDecember 31, 2021 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. These expenses were immaterial for the years endedDecember 31, 2022 andDecember 31, 2021 . Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs costs increased$11.0 million , or 19.5%, to$67.1 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , primarily as a result of an increase in airframe repairs and materials purchases of$5.9 million and$4.1 million , respectively, an increase in engine overhaul amortization of$0.8 million , and increases in freight and scrap expenses of$0.7 million , offset by a decrease in engine repairs and contract rebates of$0.6 million . The increases were largely driven by higher maintenance rates and a greater reliance on third-party maintenance providers due to the ongoing labor shortage. For additional information, refer to Note 1, Summary of Significant Accounting Policies - Reclassification. Other Rents. Other rents expense increased$1.2 million , or 22.5%, to$6.6 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , primarily as a result of an increase in flight simulator rent of$1.0 million and an increase in facilities rent of$0.2 million .
Depreciation, Amortization and Obsolescence. Depreciation, amortization and
obsolescence expense was relatively unchanged for the year ended
Payroll Support Program. The contra-expense for the Payroll Support Program decreased$66.3 million , or 100%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , due to the cessation of the Payroll Support Program in 2021. Purchased Services and Other. Purchased services and other expense increased$1.5 million , or 10.8%, to$15.0 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase was primarily due to increases in professional and technical fees of$0.9 million , technology fees and maintenance of$0.4 million , and legal fees of$0.3 million . For additional information, refer to Note 1, Summary of Significant Accounting Policies - Reclassification.
Other (Expense) Income
Interest Income. Interest income increased$2.5 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase was primarily due to an increase in interest earned on marketable securities of$2.2 million and an increase in interest earned on the notes receivable due from United of$0.3 million .
Interest Expense. Interest expense decreased
Loss on
Gain on Extinguishment of Debt. Gain on extinguishment of debt decreased$10.3 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease is primarily due to the forgiveness of the SBA Loan inAugust 2021 of$10.1 million . 35
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Other, Net. Other income and expense was immaterial and relatively unchanged for
the year ended
Net Income
Net income for the year endedDecember 31, 2022 was$39.1 million , or$0.83 per basic share and$0.61 per diluted share, compared to net income of$92.6 million , or$1.69 per basic share and$1.29 per diluted share, for the year endedDecember 31, 2021 . For additional information, refer to Note 10, Earnings Per Share and Equity, in our consolidated financial statements included in this Annual Report. The decrease in net income for the year endedDecember 31, 2022 , when compared to the year endedDecember 31, 2021 , primarily resulted from an increase in overall operating expenses consisting primarily of maintenance expenses and no contra-expense related to the Payroll Support Program, under which we ceased receiving support in 2021. The decrease in net income is also attributable to a decrease in gain on extinguishment of debt and increased losses on investments in marketable securities. Income Taxes In the year endedDecember 31, 2022 , our effective tax rate was 27.7%, compared to 21.5% in the year endedDecember 31, 2021 . 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, 2022 resulted in an effective tax rate of 27.7%, 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 valuation allowances recorded against deferred tax assets. 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, 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.
As of
For additional information, refer to Note 5, Income Taxes, in our consolidated financial statements included in this Annual Report.
Liquidity and Capital Resources
Air Wisconsin's departures and block hours in 2022 were below pre-COVID-19 levels, generally due to the industry-wide pilot shortage. 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, andAir Wisconsin's cash flows from operations. As ofDecember 31, 2022 , our cash and cash equivalents balance was$33.3 million and we held$153.8 million of marketable securities. For the year endedDecember 31, 2022 , cash provided by operations was$45.0 million . OnNovember 4, 2022 , United prepaid toAir Wisconsin $50.1 million to satisfy all of the outstanding, undisputed notes receivable, including all accrued interest, issued pursuant to the first amendment to the United capacity purchase agreement. In the near term, we expect to fund our liquidity requirements through cash generated from operations and existing cash, cash equivalents, and marketable securities balances. For additional information, refer to Note 1, Contract Revenue.Air Wisconsin requires cash to fund its operating expenses and working capital requirements, which include outlays for capital expenditures, labor, and maintenance costs, and payment of debt service obligations, including principal and interest payments. Our 36
-------------------------------------------------------------------------------- cash needs vary from period to period primarily based on the timing and costs of significant maintenance events and increased labor costs due to shortages of qualified pilots and mechanics. 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, 2022 , we had$5.5 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, in part, 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, 2022 ,Air Wisconsin had$9.2 million of short-term debt, and$52.1 million of long-term debt, all of which is secured indebtedness incurred in connection with the Aircraft Notes. For additional information, refer to " - Debt and Credit Facilities" within 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. 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, 2022 , in addition to cash and cash equivalents of$33.3 million , the Company had$0.8 million in restricted cash, which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker's compensation insurance program, landing fees at certain airports and facility leases, as well as cash held for the repurchase of shares under Harbor's stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secures the credit facility.
Cash Flows
The following table presents information regarding our cash flows for each of the periods presented ($ in thousands):
Year Ended
December 31,
2022 2021 Change
Net cash provided by operating activities
$ (49,179 ) (52.2% ) Net cash used in investing activities (29,732 ) (143,135 ) 113,403 79.2% Net cash used in financing activities (19,739 ) (43,652 )
23,913 54.8%
Cash Flows Provided by Operating Activities
During the year endedDecember 31, 2022 , our cash flows provided by operating activities were$45.0 million . We had net income of$39.1 million . Net cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of$24.7 million , notes receivable of$28.1 million , loss on marketable securities of$8.8 million , deferred income taxes payable of$8.0 million , and prepaid and other expenses of$3.4 million , offset by decreases in cash primarily related to deferred revenues of$28.3 million , accounts receivable of$32.9 million , contract liabilities of$3.1 million , and accrued payroll and employee benefits of$1.9 million . 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 lower overall expenses. Net cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of$24.9 million , accounts payable of$8.3 million , and deferred revenues of$12.8 million , partially offset by decreases in cash primarily related to the gain on extinguishment of debt of$10.4 million , contract liabilities of$11.9 million , notes receivable of$15.1 million , and deferred income taxes of$6.0 million . 37
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Cash Flows Used in Investing Activities
During the year ended
During the year ended
Cash Flows Used in Financing Activities
During the year endedDecember 31, 2022 , our cash flows used in financing activities were$19.7 million , reflecting$6.3 million in repayments of long-term debt,$0.8 million of dividends paid on preferred stock,$1.0 million for the cancellation of a stock option, and$11.7 million to repurchase shares of our common stock.
During the year ended
Commitments and Contractual Obligations
InSeptember 2022 ,Air Wisconsin prepaid approximately$0.4 million of debt outstanding under the Aircraft Notes dueDecember 31, 2025 . The prepayment under the Aircraft Notes resulted in a$0.1 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. As ofDecember 31, 2022 ,Air Wisconsin had$73.8 million of long-term debt (including principal and projected interest obligations) and operating lease obligations (including current maturities). This amount consisted of$55.6 million in long-term notes payable related to owned aircraft used in continuing operations. As ofDecember 31, 2022 ,Air Wisconsin also had$12.6 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$5.6 million in projected interest costs through 2027 and thereafter. The following table sets forth our cash obligations for the periods presented ($ in thousands): Payment Due for Year Ended December 31, (in thousands) Total 2023 2024 2025 2026 2027 Thereafter Aircraft Notes Principal$ 55,600 $ 7,000 $ 7,000 $ 41,600 $ - $ - $ - Aircraft Notes Interest$ 5,622 $ 2,154 $ 1,874 $ 1,594 $ - $ - $ - Operating Lease Obligations$ 11,892 $ 5,580 $ 3,222 $ 2,487 $ 171 $ 75 $ 357 Total$ 73,114 $ 14,734 $ 12,096 $ 45,681 $ 171 $ 75 $ 357 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 ofDecember 31, 2022 , all ofAir 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, 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. 38 -------------------------------------------------------------------------------- The Series C Preferred accrues cumulative quarterly dividends at the rate per share of 6.0% of the Series C Issue Price per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the board of directors (the "Preferential Dividends"). From and afterDecember 31, 2023 , upon the election of holders of a majority of the outstanding Series C Preferred, the rate of the Preferential Dividends shall be increased by an additional 1.0% per annum per share for each and every six-month period following such election (the "Dividend Ratchet"). At the option of the board of directors, in lieu of paying the Preferential Dividends and the Conversion Cap Excess Dividends (as defined below) in cash, all or some of such dividends may be paid in additional shares of Series C Preferred (the "PIK Dividends"). Each share of Series C Preferred was initially convertible at the election of the holders, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (as defined below) by$0.80 , subject to certain adjustments set forth in the Certificate of Designations (the "Conversion Price"). The Conversion Price as of the date of this filing is$0.15091 . The Conversion Price may be subject to further adjustment as described in the Certificate of Designations. 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 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 17, 2023 , 754,550 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock (representing 26.9% 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. Harbor may redeem all, but not less than all, of the Conversion Cap Excess Shares at any time upon notice to the holders for a cash payment in an amount equal to the Series C Liquidation Amount per share. In the event of any liquidation, dissolution or winding up of Harbor or a sale of Harbor, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of Harbor to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (the "Series C Liquidation Amount"). OnMarch 30, 2022 ,June 30, 2022 ,September 30, 2022 , andDecember 30, 2022 , the board of directors declared a Preferential Dividend of$198 on the Series C Preferred, which was paid onMarch 31, 2022 ,June 30, 2022 ,September 30, 2022 andDecember 30, 2022 , respectively. 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 in our audited consolidated financial statements included in this Annual Report.
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, 2022 ,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. 39
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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 , which was recorded as gain on extinguishment of debt in the consolidated statements of operations.
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 year endedDecember 31, 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, some of which have expired. The surviving covenants require that (i) the payroll support proceeds must have been used exclusively for the payment of wages, salaries and benefits, and (ii)Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps. IfAir Wisconsin failed to comply with any of its expired obligations or failed or fails to comply with any of its continuing obligations under these agreements, it may be required to repay some or all of the funds provided to it under the PSP Agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on the Company's business. TheTreasury commenced a routine audit ofAir Wisconsin's compliance with the terms of the PSP-1 Agreement. No such audits have been initiated by theTreasury under the PSP-2 Agreement or PSP-3 Agreement as of the date of this filing. 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, one had an initial term that has been extended throughSeptember 2026 , and the other has an initial term throughMay 2024 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 term. 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.
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 or are reasonably likely to have a material current or future effect on our 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
40
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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, revenues 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. Our
critical accounting policies relate to revenue recognition, long-lived assets,
and income tax. The application of these accounting policies involves the
exercise of judgment and the use of assumptions as to the future uncertainties
and, as a result, actual results will likely differ, and may differ materially,
from such estimates.
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 is being 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 throughJune 1, 2023 , the end of the contract period. Accordingly, during the year endedDecember 31, 2022 ,Air Wisconsin recognized$28.3 million of fixed revenues that were previously deferred, compared to a deferral of$1.6 million of fixed revenues in 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, 2022 andDecember 31, 2021 ,Air Wisconsin recorded$18.0 million and$15.1 million in revenue, respectively. 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 underFinancial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 606, Revenue from Contracts with Customers (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.
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Long-Lived Assets
As ofDecember 31, 2022 , we had approximately$102.3 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, 2022 , 63 ofAir Wisconsin's aircraft were subject to 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. 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 2019. With a few exceptions, the Company is no longer subject to state, and local income tax examinations for the years prior to 2018. As ofDecember 31, 2022 , the Company had no outstanding tax examinations.
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