Frontier Group Holdings, Inc. (ULCC) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Our discussion and analysis of fiscal year 2021 compared to fiscal year 2020 is included herein. Unless expressly stated otherwise, for discussion and analysis of fiscal year 2019 items and year-to-year comparisons between 2020 and 2019, please refer to in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus filed with the SEC April 2, 2021.

Overview

Frontier Airlines is an ultra low-cost carrier whose business strategy is focused on Low Fares Done Right. We are headquartered in Denver, Colorado and offer flights throughout the United States and to select near international destinations in the Americas. Our unique strategy is underpinned by our low-cost structure and superior low-fare brand.

We are managed as a single business unit that primarily provides air transportation for passengers. Management has concluded there is only one reportable segment.

Impact of the COVID-19 Pandemic

Beginning in March 2020, the rapid spread of coronavirus (“COVID-19”), along with government-mandated restrictions on travel, required stay-in-place orders, and other social distancing measures, resulted in a drastic decline in near-term air travel demand in the United States, and caused reductions in revenues and income levels as compared to corresponding pre-pandemic periods. The decline in demand for air travel has had a material adverse effect on our business and results of operations for the years ended December 31, 2021 and 2020. Although we have seen significant recovery of demand through the year ended December 31, 2021 as compared to the corresponding prior year period, we are unable to predict the future spread and impact of COVID-19, including future variants of the virus such as the recent Delta and Omicron variants, nor the efficacy and adherence rates of vaccines and other therapeutics and the resulting measures that may be introduced by governments or other parties and what impact those measures may have on the demand for air travel.

Beginning in December 2020, the U.S. Food and Drug Administration issued emergency use authorizations for various vaccines for COVID-19. Widespread distribution of the vaccines led to increased confidence in travel, particularly in the domestic leisure market on which our business is focused. While we have experienced a meaningful increase in passenger volumes as well as bookings since the vaccines became widely available, demand recovery slowed during the second half of the third quarter and into the fourth quarter of 2021 due to the rise in cases from the Delta and Omicron variants. We continue to closely monitor the COVID-19 pandemic and the need to adjust capacity and deploy other operational and cost-control measures as necessary to preserve short-term liquidity needs and ensure long-term viability of our business and our strategies. Any anticipated adjustments to capacity and other cost-savings initiatives implemented by us may vary from actual demand and capacity needs. We continue to focus on positioning the airline to be an industry leader in the recovery from the COVID-19 pandemic, and as of December 31, 2021 we have returned all of our aircraft and employees into service across all of our stations.

COVID-19 Relief Funding

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law on March 27, 2020 and includes various provisions to protect the U.S. airline industry, its employees, and many other stakeholders. The CARES Act is a relief package intended to assist many aspects of the American economy, including providing the

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airline industry with up to $25 billion for a Payroll Support Program (“PSP”) to be used for employee wages, salaries, and benefits and up to $25 billion in loans. On April 30, 2020, we reached an agreement with the U.S. Department of the Treasury (the “Treasury”) under which we received $211 million of installment funding comprised of a $178 million grant (the “PSP Grant”) for payroll support for the period from April 2020 through September 2020, and a $33 million unsecured 10-year, low-interest loan (the “PSP Promissory Note”), all of which was received as of December 31, 2020. In conjunction with the PSP Promissory Note, we issued to the Treasury warrants to purchase up to 522,576 shares of our common stock at an exercise price of $6.36 per share.

On January 15, 2021, as a result of the Consolidated Appropriations Act, 2021 (the “PSP Extension Law”), which extended the PSP provisions of the CARES Act, we entered into an agreement with the Treasury for installment funding under a second Payroll Support Program (“PSP2”), under which we received $161 million, comprised of a $143 million grant (the “PSP2 Grant”) for the continuation of payroll support through March 31, 2021, and an $18 million unsecured 10-year, low-interest loan (the “PSP2 Promissory Note”), all of which has been received as of December 31, 2021. In conjunction with the PSP2 Promissory Note, we issued to the Treasury warrants to purchase up to 157,313 shares of our common stock at an exercise price of $11.65 per share.

The American Rescue Plan Act (“ARP”), enacted on March 11, 2021, provided for additional assistance to passenger air carriers that received financial relief under PSP2. On April 29, 2021, we entered into an agreement with the Treasury for installment funding under a third Payroll Support Program (“PSP3”), under which we received $150 million, comprised of a $135 million grant (the “PSP3 Grant”) for the continuation of payroll support through September 30, 2021, and a $15 million unsecured 10-year, low-interest loan (the “PSP3 Promissory Note” and, together with the PSP Promissory Note and the PSP2 Promissory Note, the “PSP Promissory Notes”), all of which has been received as of December 31, 2021. In conjunction with the PSP3 Promissory Note, we issued to the Treasury warrants to purchase up to 79,961 shares of our common stock at an exercise price of $18.85 per share.

On September 28, 2020, we entered into a loan agreement with the Treasury for a term loan facility of up to $574 million pursuant to the secured loan program established under the CARES Act (the “Treasury Loan”). In conjunction with the Treasury Loan, we issued to the Treasury warrants to purchase up to 2,358,090 shares of our common stock at an exercise price of $6.36 per share. As of December 31, 2021 and December 31, 2020, we had borrowed $150 million under the Treasury Loan for which the right to draw any further funds lapsed in May 2021.

On February 2, 2022, we repaid the Treasury Loan which included the $150 million principal balance along with accrued interest of $1 million. The repayment terminated the loan agreement with the Treasury and unencumbered our co-branded credit card program and related brand assets that secured the loan. Certain limitations, including restrictions on stock repurchases and the payment of dividends, will continue to apply for one year after repayment, as described below.

In connection with our participation in the PSP, PSP2, PSP3 and the Treasury Loan, we have been and will continue to be subject to certain restrictions and limitations, including, but not limited to:

•restrictions on repurchases of equity securities listed on a national securities exchange or payment of dividends until February 2, 2023;

•requirements to maintain certain levels of scheduled services through March 31, 2022 (including to destinations where there may currently be significantly reduced or no demand);

•a prohibition on involuntary terminations or furloughs of employees (except for health, disability, cause, or certain disciplinary reasons) through September 30, 2021;

•a prohibition on reducing the salary, wages or benefits of our employees (other than our executive officers or independent contractors, or as otherwise permitted under the terms of the PSP, PSP2 and PSP3) through September 30, 2021;

•limits on certain executive compensation, including limiting pay increases and severance pay or other benefits upon terminations, until April 1, 2023;

•limitations on the use of the grant funds exclusively for the continuation of payment of employee wages, salaries and benefits; and

•additional reporting and recordkeeping requirements.

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The CARES Act also provided for an employee retention credit (“CARES Employee Retention Credit”), which is a refundable tax credit against certain employment taxes that we qualified for beginning on April 1, 2020. In December 2020, the CARES Employee Retention Credit program was extended and enhanced through June 30, 2021. Further, in March 2021, the ARP further extended the availability of the CARES Employee Retention Credit through December 31, 2021. The ARP increased the credit from 50% to 70% of qualified wages, increased the maximum wages per employee from $10,000 for the entire period to $10,000 per quarter, and expanded the gross receipts test for eligible employers from a 50% to an 80% decline in gross receipts as compared to the same calendar quarter in 2019. If the gross receipts test is met in any quarter, wages earned in the following quarter automatically qualify for the credit and as a result of the increase in revenues after the first quarter of 2021, we did not qualify for any additional CARES Employee Retention Credits. During the year ended December 31, 2021 and 2020, we recognized $17 million and $16 million, respectively, related to the CARES Employee Retention Credit within CARES Act credits in our consolidated statements of operations and other current assets on our consolidated balance sheets.

Initial Public Offering

On March 31, 2021, our registration statement on Form S-1 relating to our initial public offering (“IPO”) was declared effective by the SEC, and our common stock began trading on the NASDAQ Global Select Market on April 1, 2021 under the symbol “ULCC”. We completed our IPO on April 6, 2021 at an offering price of $19.00 per share. We issued and sold 15 million shares of common stock and our selling stockholders sold 15 million shares of common stock in the IPO. The underwriters were granted an over-allotment option to purchase up to 4.5 million additional shares of common stock from the selling shareholders, at the IPO price of $19.00 per share, less the underwriting discount, for 30 days from the date of the prospectus, which was exercised in full in April 2021. We did not receive any of the proceeds from the sale of shares by our selling stockholders. In April 2021, we received net proceeds of $266 million after deducting underwriting discounts and commissions of $14 million and offering costs of $5 million, which consisted of direct incremental legal, accounting, consulting and other fees relating to the IPO, and exclusive of any income tax benefits from the transaction.

Trends and Uncertainties Affecting Our Business

We believe our operating and business performance is driven by various factors that typically affect airlines and their markets, including trends which affect the broader travel industry, as well as trends which affect the specific markets and customer base that we target. The following key factors may affect our future performance:

Competition. The airline industry is highly competitive. The principal competitive factors in the airline industry are the fare and total price, flight schedules, number of routes served from a city, frequent flyer programs, product and passenger amenities, customer service, fleet type and reputation. The airline industry is particularly susceptible to price discounting as once a flight is scheduled airlines incur only nominal incremental costs to provide service to passengers occupying otherwise unsold seats. Price competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, target promotions and frequent flyer initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to maximize RASM. The prevalence of discount fares can be particularly acute when a competitor has excess capacity that it is under financial pressure to sell. A key element of our competitive strategy is to maintain very low unit costs in order to permit us to compete successfully in price-sensitive markets. In addition, some of the legacy network carriers match low-cost carrier and ultra low-cost carrier pricing on portions of their network. We believe that fare discounts have and will continue to stimulate demand for Frontier due to our Low Fares Done Right strategy.

Our Low Fares Done Right strategy is underpinned by our low-cost structure, and has significantly reduced our cost base by increasing aircraft utilization (prior to the COVID-19 pandemic), transitioning to larger and more fuel-efficient aircraft, maximizing seat density, renegotiating the majority of our distribution agreements, realigning our network, replacing our call center, enhancing our website and mobile app, boosting employee productivity and contracting with leading specialists to provide us with select operating and other services.

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Our cost structure has generally allowed us to achieve strong results from operations relative to the rest of the industry during periods of competitive pricing and price discounts and has helped our ability to manage through the COVID-19 pandemic. While we have already completed the substantial majority of strategic initiatives to reduce our unit operating costs, we believe that we are well positioned to maintain our low unit operating costs relative to our competitors through on-going strategic initiatives, including continuing our cost optimization efforts and further realizing economies of scale. To the extent that we are unable to maintain our low-cost structure, our ability to compete effectively may be impaired, even if demand does return to pre-pandemic levels. In addition, if our competitors engage in fare wars or similar behavior, our financial performance could be adversely impacted.

We continue to monitor the impact of the pandemic on our operations and financial condition, and to implement and adapt mitigation strategies while working to preserve our cash and protect our long-term sustainability. For more detailed information on the impact of COVID-19, please refer to "Notes to Consolidated Financial Statements—2. Impact of COVID-19."

Aircraft Fuel. Fuel expense represents one of the single largest operating expense for most airlines, including ours. Aircraft fuel prices and availability are subject to market fluctuations, refining capacity, periods of market surplus and shortage and demand for heating oil, gasoline and other petroleum products, as well as meteorological, economic and political factors and events occurring throughout the world, which we can neither control nor accurately predict. The future cost and availability of aircraft fuel cannot be predicted with any degree of certainty.

We have historically hedged our exposure to aircraft fuel prices using call options and collar structures, although we have in the past and may in the future utilize other instruments such as swaps on aircraft fuel or highly correlated commodities and fixed forward price instruments, which allow us to lock in the price of aircraft fuel for specific quantities and at specified locations in future periods.

Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than call options in that we could end up in a liability position when the collar structure or swap agreement settles. Our fuel hedging policy considers many factors, including our assessment of market conditions for fuel, competitor hedging activity, our access to the capital necessary to purchase coverage and support margin requirements, the pricing of hedges and other derivative products in the market and applicable regulatory policies. As of December 31, 2021, we had no fuel cash flow hedges for future fuel consumption.

Volatility. The air transportation business is volatile and highly affected by economic cycles and trends. Global pandemics and related health scares, consumer confidence and discretionary spending, fear of terrorism or war, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, changes in governmental regulations on taxes and fees, weather and other factors have resulted in significant fluctuations in revenue and results of operations in the past.

Seasonality. Our results of operations for any interim period are not necessarily indicative of those for the entire year because the air transportation business and our route network are subject to seasonal fluctuations. We generally expect demand to be greater in the second and third quarters compared to the rest of the year. While we have, over recent years, reduced our concentration in Denver to decrease the impact of seasonality in our business, 29% of our flights during the year ended December 31, 2021 had Denver International Airport as either their origin or destination.

Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements (“CBAs”). Relations between air carriers and labor unions in the United States are governed by the United States Railway Labor Act (“RLA”). Under the RLA, CBAs generally contain “amendable dates” rather than expiration dates and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“NMB”). This process continues until either the parties have reached agreement on a new CBA or the parties have been released to “self-help” by the NMB. In most circumstances, the RLA prohibits strikes. However, after release by the NMB, carriers and unions are free to engage in self-help measures such as lockouts and strikes.

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We have seven union-represented employee groups comprising approximately 88% of our employees as of December 31, 2021. Our pilots are represented by the Air Line Pilots Association (“ALPA”); our flight attendants are represented by the Association of Flight Attendants (“AFA-CWA”); our aircraft technicians, aircraft appearance agents, material specialists and maintenance control employees are all represented by the International Brotherhood of Teamsters (“IBT”); and our dispatchers are represented by the Transport Workers Union, (“TWU”).

During September 2020, and in anticipation of the lapse of the provisions set forth in the PSP under the CARES Act as described below, we reached agreement with the labor unions for our pilots and flight attendants to provide for voluntary paid leave of absence programs. Under the arrangements, the pilots and flight attendants were granted paid leave of absence periods of either one, three or six-month time frames. In exchange for accepting a voluntary leave of absence, the pilots and flight attendants received minimum monthly pay and continued to accrue certain benefits with no requirement to work. As employees covered under such paid voluntary programs were still considered active employees, the costs of such programs were recognized as period expenses.

Maintenance Materials and Repairs and Maintenance Reserve Obligations. The amount of total maintenance costs and related depreciation of heavy maintenance expense is subject to variables such as estimated usage, government regulations, the size, age and makeup of the fleet in future periods, and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify future maintenance-related expenses for any significant period of time.

As of December 31, 2021, the average age of our aircraft was approximately four years and all of the aircraft in our fleet are financed with operating leases, the last of which is scheduled to expire by the end of 2033. As of December 31, 2021, we had a firm obligation to purchase 234 aircraft by the end of 2029. We expect that these new aircraft will require less maintenance when they are first placed in service (sometimes called a “maintenance holiday”) because the aircraft will benefit from manufacturer warranties and also will be able to operate for a significant period of time, generally measured in years, before the most expensive scheduled maintenance obligations, known as heavy maintenance, are required. Once these maintenance holidays expire, these aircraft will require more maintenance as they age and our maintenance and repair expenses for each of our aircraft will be incurred at approximately the same intervals. When these more significant maintenance activities occur, this will result in out-of-service periods during which our aircraft are dedicated to maintenance activities and unavailable to generate revenue.

We account for heavy maintenance events under the deferral method. Accordingly, heavy maintenance is depreciated over the shorter of either the remaining lease term or the period until the next estimated heavy maintenance event. As a result, maintenance events occurring closer to the end of the lease term will generally have shorter depreciation periods than those occurring earlier in the lease term. This will create higher depreciation expense specific to any aircraft related to heavy maintenance during the final years of the lease as compared to earlier periods.

The terms of certain of our aircraft lease agreements require us to post deposits for future maintenance, also known as maintenance reserves, to the lessor in advance of and as collateral for the performance of heavy maintenance events, resulting in us recording significant prepaid deposits on our consolidated balance sheet. As a result, for leases requiring maintenance reserves, the cash costs of scheduled heavy maintenance events are paid in advance of the recognition of the maintenance event in our results of operations. Please see “—Critical Accounting Policies and Estimates—Aircraft maintenance including maintenance reserves and leased aircraft return costs.”

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Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). In doing so, we 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 estimates, which we discuss below. For a detailed discussion of our significant accounting policies, please refer to “Notes to Consolidated Financial Statements — 1. Summary of Significant Accounting Policies.”

Frequent Flyer Program

Our Frontier Miles frequent flyer program provides frequent flyer travel awards to program members based on accumulated mileage credits. Mileage credits are accumulated as a result of travel, purchases using the co-branded credit card and purchases from other participating partners. As of December 31, 2021 and 2020, our total frequent flyer liability was $54 million and $63 million, respectively.

The contract to sell mileage credits under the co-branded credit card partnership has multiple performance obligations. The agreement provides for joint marketing, and we account for this agreement consistently with the accounting method that allocates the consideration received to the individual products and services delivered based on relative stand-alone selling prices. We determined the best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) equivalent ticket value (“ETV”) for the award travel obligation, (3) licensing of brand and access to member lists and (4) advertising and marketing efforts. Any changes in the assumptions outlined above related to our co-branded credit card partnership at agreement inception would impact the allocation of consideration received and the resulting timing of when revenues from the each of the specific performance obligation would be recognized.

We estimate breakage (mileage credits that are expected to expire unutilized) based on statistical models derived from historical redemption patterns. Breakage assumptions, including the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits, the impact of the COVID-19 pandemic, or the estimated fair value of mileage credits expected to be redeemed, could have an impact on revenues in the year in which the change occurs and in future years. Additionally, we estimate ETV, which is used to determine the value per mileage credit, based on the historical prices of the flights redeemed using mileage credits and changes to these assumptions could impact the initial allocation of consideration in our co-branded credit card partnership or the amount of revenue recognized or deferred for miles accumulated as a result of travel.

For the year ended December 31, 2021, holding other factors constant, a 10% change in our estimated frequent flyer breakage rate would have resulted in a change to passenger revenues of approximately $3 million, or less than 1%.

Revenues from Customer’s Rights to Book Future Travel

As of December 31, 2021, our current air traffic liability was $273 million, of which $59 million was related to customer rights to book future travel, which generally expire 12 months after issuance if not redeemed by the passenger. The amounts not expected to be redeemed are recognized as revenue over the historical pattern of rights exercised by customers. During the years ended December 31, 2021, 2020 and 2019, we recognized $58 million, $126 million and $26 million, respectively, in passenger revenue within the consolidated statements of operations, related to expected and actual expiration of customer rights to book future travel.

We estimate amounts not expected to be redeemed (breakage) based on historical redemption patterns of such customer rights, which also considers any historical redemption activity that may not be indicative of future trends

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such as COVID-19 or program modifications that may impact future expectations of breakage. Changes in breakage rate assumptions as a result of actual results differing from historical patterns or other factors, including the period over which these rights are expected to be redeemed, could have a material impact on revenues recognized in the year in which the change occurs and in future years.

For the year ended December 31, 2021, holding other factors constant, a 10% change in our estimated breakage related to customer’s rights to book future travel, which assumes no change in historical pattern of usage of such rights, would have resulted in a change to passenger revenues of approximately $9 million, or less than 1%.

Aircraft Leases - Maintenance Reserves and Aircraft Return Costs

Under our aircraft operating lease agreements and United States Federal Aviation Administration (“FAA”) regulations, we are obligated to perform all required maintenance activities on our fleet, including component repairs, scheduled air frame checks and major engine restoration events. Certain of our aircraft lease agreements provide that we pay maintenance reserves to aircraft lessors to be held as collateral in advance of our required performance of heavy maintenance events. Recoverable maintenance reserve payments are reflected as aircraft maintenance deposits on the accompanying consolidated balance sheets.

Additionally, our aircraft lease agreements generally require us to return aircraft airframes and engines to the lessor in a certain condition or pay an amount to the lessor based on the airframe and engine’s actual return condition. These return provisions are evaluated at inception of the lease and throughout the lease terms and are accounted for as either fixed or variable lease payments (depending on the nature of the lease return condition). When such costs become both probable and estimable, they are accrued as a component of supplemental rent through the remaining lease term. Changes to the assumptions utilized in the estimation of these lease return costs are accounted for on a cumulative catch-up basis.

In assessing the future potential lease return costs and the recoverability of our maintenance reserves we consider the future anticipated costs and scope of maintenance events (driven by projected number of flight hours and cycles estimated to be utilized on the aircraft prior to its return), estimated timing of such events including the timing since the last expected major maintenance event, the date the aircraft is due to be returned to the lessor, contractual terms of the lease agreements, current condition of each aircraft, age of the aircraft at lease expiration, projected number of hours and cycles run on the engines at the time of return, and the number of projected cycles run on the airframe at the time of return, among other estimates.

If actual estimates vary materially from those utilized in the assessment of the recoverability of maintenance deposits we may determine that some or all of the maintenance deposit is not recoverable and, therefore, could incur incremental supplemental rent. Conversely, a maintenance deposit previously expensed could be considered reimbursable. If actual estimates vary materially from those utilized in the estimation of lease return costs we could incur more or less supplemental rent expense depending on the direction of the adjustments necessary. There can be no assurance that the projections utilized won’t materially change in the future given the inherent difficulty in forecasting future utilization of aircraft over their lease terms, especially in light of the impact COVID-19 has had on forecast compared to actual utilization, however, the estimates utilized are the best available at the time the financial statements were issued.

Income Tax Valuation Allowance

As of December 31, 2021, our total net deferred tax assets were $646 million, which includes an $8 million valuation allowance, as well as $47 million of gross net operating loss carry forwards. These net operating loss carryforwards are comprised of $30 million of federal net operating losses, $10 million of state net operating losses and $7 million of foreign net operating losses. We assess whether it is more likely than not that sufficient taxable income will be generated to realize deferred tax assets, and a valuation allowance is established if it is not likely that deferred income tax assets will be realized. We consider sources of taxable income from prior period carryback

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periods, future reversals of existing taxable temporary differences, tax planning strategies and future taxable income when assessing the future utilization of deferred tax assets.

As part of our assessment of whether a valuation allowance is warranted, we consider all available positive and negative evidence in conjunction with evaluating the source and availability of taxable income to utilize such deferred tax assets. We updated this assessment as of December 31, 2021, noting that in part as a result of the significant impacts caused by the COVID-19 pandemic particularly prior to the wide availability of vaccines, we were in a cumulative three-year loss position. Conversely, prior to the pandemic, we had a consistent history of generating significant earnings and resulting taxable income and had typically utilized significant deferred tax assets such as net operating losses prior to expiration. The main sources of taxable income that supported realization of our deferred tax assets were from the projected reversal of existing temporary differences and our projected future taxable income. There are significant estimates inherent in the reversal of taxable temporary differences such as projecting the timing of such reversals as well as nature and character of the taxable income created as to whether it can be appropriately utilized for the deferred tax assets subject to evaluation. Most of our operations are domestic and the majority of taxable income created from reversal of temporary differences was appropriate to utilize against our federal net operating losses. A significant portion of taxable income used to support the realization of our remaining deferred tax assets was based on projections of our future taxable income. Our projections of future taxable income considered the general business environment, our recent history of profitability outside of the impact of the COVID-19 pandemic, the extended tenure of the COVID-19 recovery which has been longer than originally anticipated, industry wide consensus on air travel outlook and post-December 31, 2021 booking trends. These factors were considered in conjunction with other evidence such as our cumulative three-year loss position. Given the significant impact that the COVID-19 pandemic had on our results for which we continue to recover from post vaccine availability, we don’t believe the factors that caused our cumulative three-year loss to be indicative of future performance. Based on the factors outlined above, we concluded that as a result of taxable income generated from reversal of taxable temporary differences and projected future income that the majority of our deferred tax assets were likely to be realized.

Additionally, under current tax law, our federal net operating losses do not expire and most state net operating losses have a carry forward period of ten years or greater. As a result of our assessment, we recorded a valuation allowance on certain state deferred tax assets of $1 million and a valuation allowance on our foreign deferred tax assets of $7 million as we concluded this $8 million of net operating losses will more likely than not be realized primarily due to short expiry periods combined with significant income required to utilize these deferred tax assets. The $7 million valuation allowance recorded on our foreign net operating losses was fully offset by a corresponding reversal of a U.S. federal deferred tax liability.

If we are unable to achieve our projected operating income targets or actual results are not in line with those utilized in the judgments listed above an adjustment to our conclusion on the recoverability of our future deferred tax assets may occur and, therefore, may result in either the creation of a valuation allowance being recorded against some or all of our net deferred tax assets in future periods or the reversal of the recorded valuation allowance. An increase in our valuation allowance would result in additional income tax expense and a subsequent release of a valuation allowance in future periods, if those deferred tax assets become realizable, would reduce our income tax expense. There can be no assurance that an additional valuation allowance on our net deferred tax assets will not be required and such valuation allowance could be material.

Results of Operations

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Total operating revenues for the year ended December 31, 2021 totaled $2,060 million, an increase of 65% compared to the year ended December 31, 2020, as the demand for leisure travel continues to recover from the COVID-19 pandemic. We had 31% more average aircraft in service during the year ended December 31, 2021 as

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compared to the year ended December 31, 2020, with a 23% increase in average daily aircraft utilization, which resulted in an increase to capacity of 58% compared to the year ended December 31, 2020.

Total operating expenses during the year ended December 31, 2021 totaled $2,177 million, including $295 million of CARES Act credits and $11 million of early lease termination costs. Fuel expense was 70% higher during the year ended December 31, 2021, as compared to the year ended December 31, 2020, with the $237 million increase in fuel expense driven by the 64% increase in fuel consumption associated with the 58% increase in our capacity and the 4% increase in fuel rates. The increase in fuel rates was partially offset by the $82 million in losses associated with fuel hedges during the year ended December 31, 2020. We had no fuel hedges (and no fuel hedge gains or losses) in the year ended December 31, 2021. Our non-fuel expenses increased by 25%, driven primarily by higher capacity and the resulting increase in operations during the year ended December 31, 2021, as compared to the year ended December 31, 2020. Aircraft rent during the year ended December 31, 2021 was also unfavorably impacted by the payback of vendor deferrals granted in 2020, the impact of a larger fleet, increased lease return costs and costs related to early termination of the leases related to our remaining A319 aircraft. These increases in non-fuel expenses were partly offset by a $102 million increase in benefits from CARES Act credits. CASM (excluding fuel) decreased by 21%, from 7.53¢ for the year ended December 31, 2020 to 5.96¢ for the year ended December 31, 2021, driven largely by the significant growth in capacity coupled with the fixed nature of certain operating costs such as aircraft rent as well as salaries, wages and benefits in part due to the CARES Act restrictions. Adjusted CASM (excluding fuel), which excludes the impact of the CARES Act credits, early lease termination costs for the remaining A319 aircraft and the one-time write-off of deferred registration statement costs due to the uncertainty in the capital markets caused by the COVID-19 pandemic, decreased from 8.63¢ for the year ended December 31, 2020 to 7.02¢ for the year ended December 31, 2021. See the reconciliation to corresponding GAAP measures provided below.

We generated a net loss of $102 million during the year ended December 31, 2021 and a net loss of $225 million during the year ended December 31, 2020, as a result of the significant reduction in demand beginning in March 2020 caused by the COVID-19 pandemic. Our results for the year ended December 31, 2021 include CARES Act credits and other charges that reduced our operating expenses by $284 million, including $295 million related to funding recognized from the PSP2 and PSP3 Grants and the recognition of CARES Employee Retention Credits offset by $11 million in costs incurred with the early termination of our A319 leased aircraft. The results for the year ended December 31, 2021 also include $22 million in other non-operating expenses related to mark to market adjustments associated with the warrants issued as part of the Treasury Loan and PSP Promissory Notes. As a result of our IPO and the resulting reclassification of warrants from liability based awards to equity based awards, as of April 6, 2021, we no longer mark to market the warrants. Our results for the year ended December 31, 2020 include certain items that reduced our operating expenses by $134 million and include $193 million related to funding recognized from the PSP Grant and the recognition of CARES Employee Retention Credits partly offset by $52 million in expenses resulting from the de-designation of certain derivative contracts as a result of the estimated future fuel consumption for gallons subjected to fuel hedges no longer deemed probable due to the decline in demand from the impact of the COVID-19 pandemic and the subsequent mark to market adjustments and $7 million relating to a one-time write-off of deferred registration statement costs due to the uncertainty in the capital markets caused by the COVID-19 pandemic. The results for the year ended December 31, 2020 also include $9 million in other non-operating expenses related to mark to market adjustments associated with the warrants issued as part of the Treasury Loan and PSP Promissory Note. Excluding these credits and charges and the related tax benefit of $65 million and $49 million for the years ended December 31, 2021 and 2020, respectively, our adjusted net loss was $299 million for the year ended December 31, 2021, as compared to an adjusted net loss of $301 million for the year ended December 31, 2020.

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As comparisons of our 2021 results to 2020 may reflect disproportionate changes due to the impact of the COVID-19 pandemic, we have also provided analysis of certain revenue and expense line items to 2019 results where helpful to understand trends in our performance.

Operating Revenues

Total operating revenue increased $810 million, or 65%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020, as we experienced increased demand for leisure travel as COVID-19 vaccines were available and widely utilized as compared to the year ended December 31, 2020. Revenue was favorably impacted by the 58% capacity growth, as measured by ASMs, as well as the increase in our load factor from 67.5% during year ended December 31, 2020 to 75.9% for the year ended December 31, 2021. Additionally, our total revenue per passenger was lower during the year ended December 31, 2021 due primarily to the decrease in expected and actual expiration of customer rights to book future travel recognized in 2021 as compared to the corresponding prior year period.

Total operating revenue decreased $448 million, or 18%, during the year ended December 31, 2021, as compared to year ended December 31, 2019, primarily due to a lower revenue per passenger as well as the decrease in our load factor from 86.1% during the year ended December 31, 2019 to 75.9% for the year ended December 31, 2021, which resulted in RASM decreasing 14%. In addition, revenue was unfavorably impacted by the 4% capacity decline, as measured by ASMs caused by lower utilization per aircraft offset by a 20% increase of aircraft in service.

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Operating Expenses

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(a)Cost per ASM figures may not recalculate due to rounding.

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Reconciliation of CASM to Adjusted CASM (excluding fuel) and Adjusted CASM including net interest

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(a)Figures may not recalculate due to rounding.

(b)As a result of an early termination and buyout agreement executed in May 2021 with one of our lessors, we were able to accelerate the removal of the remaining four A319 aircraft from our fleet. These aircraft were originally scheduled to return in December 2021 and were instead returned during the second and third quarters of 2021. During the year ended December 31, 2021, we incurred $10 million in aircraft rent costs and $1 million in depreciation relating to the acceleration and resulting changes to our lease return obligations.

(c)Represents (i) the recognition of $278 million of the grant funding received from the Treasury for payroll support during the year ended December 31, 2021 as part of the PSP2 and PSP3 Agreements under the CARES Act along with $17 million of CARES Employee Retention Credits and (ii) the recognition of $177 million of net grant funding received from the Treasury for payroll support during the year ended December 31, 2020 as part of the PSP Agreement under the CARES Act, along with $16 million of CARES Employee Retention Credits.

(d)Represents the write-off of our deferred IPO preparation costs during the first quarter of 2020 due to the impact of the COVID-19 pandemic and the resulting uncertainty on our ability to access the capital markets.

(e)Represents the impact of the change in value and vesting of phantom equity units pursuant to the Pilot Phantom Equity Plan. In accordance with the amended and restated phantom equity agreement, the remaining phantom equity obligation became fixed as of December 31, 2019 and is no longer subject to valuation adjustments.

(f)Represents $15 million of costs related to a one-time contract ratification incentive, plus $3 million in payroll-related taxes and certain other compensation and benefits-related accruals earned through March 31, 2019 and committed to by us as part of a tentative agreement with the union representing our flight attendants that was reached in March 2019 for a contract that was ratified and became effective in May 2019, in addition to $4 million in pilot vacation accrual adjustments as a result of the ratified agreement with the union representing our pilots specifically tied to the implementation of a preferred bidding system.

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(g)Represents expenses associated with an early out program agreed to in 2019 with our flight attendants, payable throughout 2019, 2020 and 2021.

(h)Due to the significant reduction in demand resulting from the COVID-19 pandemic, our future anticipated consumption of fuel dropped significantly and we therefore de-designated hedge accounting in March 2020 on the derivative positions where the future consumption was not deemed probable, which primarily related to our written put options on our costless collars. The $52 million charge is the result of the de-designation and the resulting mark to market impact on the quantities where consumption was not deemed probable.

(i)Represents the mark to market adjustment to the value of the warrants issued as part of the funding provided under the CARES Act. This amount is a component of interest expense. As a result of our IPO and the resulting reclassification of warrants from liability based awards to equity based awards, as of April 6, 2021, we no longer mark to market the warrants.

Aircraft Fuel. Aircraft fuel expense increased by $237 million, or 70%, during the year ended December 31, 2021, as compared to the corresponding prior year period. The increase was primarily due to the 64% increase in fuel gallons consumed due to the higher capacity and a 4% increase in fuel rates. The increase in fuel rates was partially offset by the $82 million in losses associated with fuel hedges during the year ended December 31, 2020. We had no fuel hedges (and no fuel hedge gains or losses) in the year ended December 31, 2021.

Aircraft fuel expense decreased by $65 million, or 10%, during the year ended December 31, 2021, as compared to the year ended December 31, 2019. The decrease was due to a 8% decrease in fuel gallons consumed due to lower load factor and capacity, a 2% decrease in fuel rates and $17 million in losses associated with fuel hedges during the year ended December 31, 2019. We had no fuel hedges in the year ended December 31, 2021.

Salaries, Wages and Benefits. Salaries, wages and benefits expense increased by $83 million, or 16%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020. We did not reduce headcount during either period and have operated in accordance with the provisions of the CARES Act, which began in March 2020 and ended in September 2021. The increase was primarily due to increased crew expenses caused by higher credit hours and rates as a result of increased capacity, as well as higher employee benefit costs for the year ended December 31, 2021, as compared to the year ended December 31, 2020.

Salaries, wages and benefits expense increased by $87 million, or 16%, during the year ended December 31, 2021, as compared to the year ended December 31, 2019. The increase was primarily due to increased crew expenses caused by higher rates, higher employee benefit costs, stock based compensation and an 11% increase in FTEs for the year ended December 31, 2021, as compared to the year ended December 31, 2019.

Aircraft Rent. Aircraft rent expense increased by $134 million, or 34%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to a $62 million net unfavorable impact from the $31 million in vendor deferrals granted in 2020 that were paid and expensed during the year ended December 31, 2021. Further increases were due to the impact of a larger fleet, higher costs associated with anticipated lease returns and the early termination costs of the leases related to our remaining A319 aircraft.

Aircraft rent expense increased by $162 million, or 44%, during the year ended December 31, 2021, as compared to the year ended December 31, 2019, primarily due to the impact of a larger fleet. In addition, further increases were due to $31 million in vendor deferrals expensed during 2021 related to 2020 and higher costs associated with anticipated lease returns for tails in 2021 as compared to 2019.

Station Operations. Station operations expense increased by $127 million, or 49%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020, due to a 62% increase in departures and an 84% increase in passengers as demand continues to recover from the COVID-19 pandemic. These increases were partially offset by the fixed nature of certain charges as well as a $7 million net favorable impact of additional deferral agreements in 2021 related to certain leases with our airport facilities that were negotiated to manage liquidity during recovery of the COVID-19 pandemic.

Station operations expense increased by $48 million, or 14%, during the year ended December 31, 2021, as compared to the year ended December 31, 2019, due to rate increases and a 4% increase in departures. These increases were partially offset by a $9 million net favorable impact of payment deferral agreements related to certain

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leases with our airport facilities based on negotiations with our vendors to manage liquidity as the effects of the COVID-19 pandemic persisted.

Sales and Marketing. Sales and marketing expense increased by $31 million, or 40%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to higher credit card fees resulting from the 65% increase in revenue and an increase in booking fees due to greater volume as demand continues to recover from the impacts of the COVID-19 pandemic.

Sales and marketing expense decreased by $21 million, or 16%, during the year ended December 31, 2021, as compared to the year ended December 31, 2019, primarily due to lower credit card fees resulting from the 18% decrease in revenue, reduced sales support and paid media advertising.

The following table presents our distribution channel mix:

Maintenance Materials and Repairs. Maintenance materials and repair expense increased by $36 million, or 43%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020, due to higher flight hours due to the 31% increase in aircraft in service as compared to the highly constrained capacity during the year ended December 31, 2020, an increase in maintenance checks performed during 2021 and the impact of inflationary pressures.

Maintenance materials and repair expense increased by $33 million, or 38%, during the year ended December 31, 2021, as compared to the year ended December 31, 2019, due to increased costs in maintaining a larger fleet mainly caused by a 20% increase in average aircraft in service during the year ended December 31, 2021, increases relating to the timing and mix of maintenance events and the impact of inflationary pressures.

Depreciation and Amortization. Depreciation and amortization expense increased by $5 million, or 15%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020, due to losses on asset disposal and an increase in capitalized maintenance.

Depreciation and amortization expense decreased by $8 million, or 17%, during the year ended December 31, 2021, as compared to the year ended December 31, 2019, primarily due to a decrease in capitalized maintenance due to return of leased aircraft.

CARES Act Credits. CARES Act credits increased by $102 million, or 53%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020. During the year ended December 31, 2021, we recognized $278 million in net grant funding received from the Treasury under the PSP2 and PSP3 Agreements and $17 million in CARES Employee Retention Credits, as compared to $177 million in net PSP grant funding and $16 million in CARES Employee Retention Credits recognized during year ended December 31, 2020.

Other Operating Expenses. Other operating expenses increased by $11 million, or 12%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase was driven primarily by increases in travel expenses relating to crew accommodations as well as higher other general and administrative costs due to increased capacity as demand continues to recover from the COVID-19 pandemic. These increases were partially offset by increased sale-leaseback gains of $60 million due to higher aircraft deliveries during the year ended December 31, 2021, as compared to $48 million during the year ended December 31, 2020, as well as the $7 million write off of our deferred registration costs in 2020.

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Other operating expenses increased by $37 million, or 58%, during the year ended December 31, 2021, as compared to the year ended December 31, 2019. The increase was driven primarily by decreased sale-leaseback gains, as well as higher other general administrative costs. These increases were partially offset by decrease in travel expenses relating to crew accommodations.

Other Income (Expense). Other expenses increased by $20 million, or 286%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase was primarily due to $22 million in interest expense related to the mark to market adjustments of warrants issued in conjunction with the PSP Promissory Notes and the Treasury Loan, as compared to $9 million in the corresponding prior year, in addition to decreases in interest income resulting from lower interest rates. Further increases in interest expense relate to increased principal balances from CARES Act funding outstanding during the year ended December 31, 2021.

We incurred $27 million in other expenses during the year ended December 31, 2021, as compared to $16 million in other income for the year ended December 31, 2019. The change was primarily due to $22 million in interest expense related to the mark to market adjustments of warrants issued in conjunction with the PSP Promissory Notes and the Treasury Loan, in addition to decreases in interest income resulting from lower principal balances and interest rates as well as a reduction in capitalized interest as compared to the year ended December 31, 2019.

Income Taxes. Our effective tax rate for the year ended December 31, 2021 was a benefit of 29.2%, compared to a benefit of 39.5% for the year ended December 31, 2020. The effective tax rate for the year ended December 31, 2021 is higher than the statutory rate primarily due to the release of the reserves related to uncertain tax positions for which the statute of limitations has expired and excess tax benefits associated with our stock-based compensation arrangements which was partially offset by non-deductible interest from the mark to market adjustments from the warrants issued to the Treasury as part of our participation in the PSP, PSP2, PSP3, and the Treasury Loan. The effective tax rate for the year ended December 31, 2020 was favorably impacted by the CARES Act benefit which allowed the 2020 net operating loss to be carried back to tax years in which a federal 35% tax rate applied, resulting in a 14% permanent rate benefit. In addition, the prior year rate was also favorably impacted by the inclusion of the tax deduction for the payments made to FAPAInvest, LLC, as described further in Note 11, in the notes to our consolidated financial statements.

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Reconciliation of Net income (loss) to Adjusted net income, EBITDA, Adjusted EBITDA, EBITDAR and Adjusted EBITDAR

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(a)Adjusted net income, EBITDA and Adjusted EBITDA are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of net income and EBITDA are well-recognized performance measurements in the airline industry that are frequently used by our management, as well as by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry.

Adjusted net income, EBITDA and Adjusted EBITDA have limitations as analytical tools. Some of the limitations applicable to these measures include: Adjusted net income, EBITDA and Adjusted EBITDA do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; Adjusted net income, EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; EBITDA, and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness or possible cash requirements related to our warrants; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and other companies in our industry may calculate Adjusted net income, EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted net income, EBITDA and Adjusted EBITDA should not be considered in isolation from or as a substitute for performance measures calculated in accordance with GAAP. In addition, because derivations of Adjusted net income, EBITDA and Adjusted EBITDA are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, derivations of Net income and EBITDA, including Adjusted net income and Adjusted EBITDA, as presented may not be directly comparable to similarly titled measures presented by other companies.

For the foregoing reasons, each of Adjusted net income, EBITDA and Adjusted EBITDA has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

(b)EBITDAR and Adjusted EBITDAR are included as a supplemental disclosure because we believe them to be useful solely as valuation metrics for airlines as their calculations isolate the effects of financing in general, the accounting effects of capital spending and acquisitions (primarily aircraft, which may be acquired directly, directly subject to acquisition debt, by capital lease or by operating lease, each of which is presented differently for accounting purposes), and income taxes, which may vary significantly between periods and for different airlines for reasons unrelated to the underlying value of a particular airline. However, EBITDAR and Adjusted EBITDAR are not determined in accordance with GAAP, are susceptible to varying calculations and not all companies calculate the measure in the same manner. As a result, EBITDAR and Adjusted EBITDAR, as presented, may not be directly comparable to similarly titled measures presented by other companies. In addition, EBITDAR and Adjusted EBITDAR should not be viewed as a measure of overall performance since they exclude aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. Accordingly, you are cautioned not to place undue reliance on this information.

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(a)See “Reconciliation of CASM to Adjusted CASM (excluding fuel) and Adjusted CASM including net interest” above for discussion on adjusting items.

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(b)Represents aircraft rent expense included in Adjusted EBITDA. Excludes aircraft rent expense of $10 million for the year ended December 31, 2021 for costs incurred due to the early termination of our A319 leased aircraft. See footnote (b) under the caption “Reconciliation of CASM to Adjusted CASM (excluding fuel) and Adjusted CASM including net interest”.

Comparative Operating Statistics

The following table sets forth our operating statistics for the years ended December 31, 2021, 2020 and 2019. These operating statistics are provided because they are commonly used in the airline industry and, as such, allow readers to compare our performance against our results for the prior year periods, as well as against the performance of our peers.

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(a)See “Glossary of Airline Terms” for definitions of terms used in this table.

(b)For a reconciliation of CASM to Adjusted CASM (excluding fuel) and Adjusted CASM including net interest, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

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Liquidity, Capital Resources and Financial Position

As of December 31, 2021, we had $918 million of total available liquidity made up of cash and cash equivalents, $127 million of net short-term debt and $287 million of net long-term debt. The $414 million of total net debt is comprised of our $150 million Treasury Loan, $174 million pre-delivery payment facility (“PDP Financing Facility”), $66 million PSP Promissory Notes, $18 million in secured indebtedness for our headquarters building, and a $15 million pre-purchased miles facility with Barclays, partly offset by $9 million in deferred debt acquisition costs and other discounts.

We completed our IPO on April 6, 2021, at an offering price of $19.00 per share. We issued and sold 15 million shares of common stock and our selling stockholders sold 15 million shares of common stock in the IPO. We did not receive any of the proceeds from the sale of shares by our selling stockholders. In April 2021, we received net proceeds of $266 million after deducting underwriting discounts and commissions of $14 million and offering costs of $5 million, which consisted of direct incremental legal, accounting, consulting and other fees relating to the IPO exclusive of any income tax benefits from the transaction.

On December 3, 2013, to give effect to the reorganization of our corporate structure, an agreement was reached to amend and restate a phantom equity agreement with our pilots. Under the terms of this agreement, pilots received phantom equity units which became fully vested in 2016. Each unit constituted the right to receive the cash value of a share of our common stock or, in certain circumstances, a share of common stock in connection with certain events. As of December 31, 2019, the final associated liability agreed to by FAPAInvest, LLC became fixed and the associated liability was $137 million, of which $111 million was paid in March 2020 and the remaining $26 million is to be paid in March 2022 and, as such, is presented within other long-term liabilities and other current liabilities on our consolidated balance sheets as of December 31, 2020 and December 31, 2021, respectively.

On February 5, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Top Gun Acquisition Corp., a direct wholly owned subsidiary of ours (“Merger Sub”) and Spirit Airlines, Inc. (“Spirit”). The Merger Agreement provides that, among other things, the Merger Sub will be merged with and into Spirit (the “Merger”), with Spirit surviving the Merger and continuing as a wholly owned subsidiary of ours.

We continue to monitor our covenant compliance with various parties, including, but not limited to, our lenders and credit card processors. As of December 31, 2021, we are in compliance with all of our covenants, except we have obtained a waiver of relief for the covenant provisions through the second quarter of 2022 related to one of our credit card processors that represents less than 10% of total revenues, which may require future waivers or an amendment to existing covenants to reflect the downturn due to the COVID-19 pandemic.

The following table presents the major indicators of our financial condition and liquidity.

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Use of Cash

Our cash requirements, and ability to generate the cash flow, have been and continue to be, adversely impacted by the COVID-19 pandemic. However, we expect to meet our cash requirements for the next twelve months through use of our available cash and cash equivalents and cash flows from operating activities. We expect to meet our long-term cash requirements with cash flows from operating and financing activities, including, but not limited to, potential future borrowings on our credit facility and/or potential issuance of debt or equity. Our primary uses of cash are for working capital, aircraft pre-delivery payments, debt repayments, capital expenditures, and maintenance reserve deposits.

Our single largest capital commitment relates to the acquisition of aircraft. As of December 31, 2021, we operated all of our 110 aircraft under operating leases. Pre-delivery payments relating to future deliveries under our agreement with Airbus are required at various times prior to each aircraft’s delivery date. As of December 31, 2021, we had $260 million of pre-delivery payments held by Airbus which has been partially financed by our PDP Financing Facility. As of December 31, 2021 our PDP Financing Facility had $174 million outstanding which we have the ability to draw up to an aggregate of $200 million on. As of December 31, 2021, we had a firm obligation to purchase 234 A320neo family aircraft by 2029, none of which had a committed operating lease. We intend to evaluate financing options for the aircraft on order.

Additionally, we are required by some of our aircraft leases to pay maintenance reserves to our respective aircraft lessors in advance of our performance of major maintenance activities; these payments act as collateral for the lessors to ensure aircraft are returned in the agreed upon condition at the end of the lease period. Qualifying payments that are expected to be recovered from lessors are recorded as aircraft maintenance deposits on our consolidated balance sheets. A portion of our cash is, therefore, unavailable until after we have completed the scheduled maintenance in accordance with the terms of the operating leases. During the years ended December 31, 2021 and 2020, we made $20 million and $15 million, respectively, in maintenance deposit payments to our lessors. As of December 31, 2021, we had $108 million in recoverable aircraft maintenance deposits on our consolidated balance sheets, of which $10 million was included in accounts receivable because the eligible maintenance had been performed.

On February 2, 2022, we repaid the Treasury Loan which included the $150 million principal balance along with accrued interest of $1 million to settle the liability with the Treasury. By repaying the amounts outstanding under our Treasury Loan facility we consequently unencumbered our co-brand credit card program that collateralized the facility. We believe that our loyalty program, encompassing our co-brand credit card program and Discount Den subscription program, together with the Frontier brand could act as collateral for debt financing that could generate substantial liquidity should the need arise.

Additionally, upon completion of the Merger, we will have a cash requirement of $2.13 per each share of outstanding Spirit common stock. Based on the number of outstanding shares disclosed in Spirit’s Annual Report on Form 10-K as filed with the SEC on February 8, 2022, our cash requirement will be approximately $231 million in the aggregate, payable at the closing of the Merger.

The following table summarizes current and long-term material cash requirements as of December 31, 2021, which we expect to fund primarily with operating cash flows (in millions):

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(1)Includes principal only associated with our PDP Financing Facility due through 2024, our floating rate building note through 2023, the Treasury Loan through 2025, our affinity card unsecured debt due through 2029, and the PSP Promissory Notes through 2031. See Note 9, Debt, in the notes to our consolidated financial statements.

(2)Represents interest on long-term debt.

(3)Represents fixed maintenance reserve payments for aircraft including estimated amounts for contractual price escalations.

(4)Represents the Treasury Loan repaid on February 2, 2022.

Cash Flows

The following table presents information regarding our cash flows in the years ended December 31, 2021 and 2020:

Operating Activities

During the year ended December 31, 2021, net cash provided by operating activities totaled $216 million, which was primarily driven by $338 million inflows from changes in net operating assets and liabilities partly offset by $102 million net loss resulting from the significant impact the COVID-19 pandemic had on our operations.

The $338 million of inflows from other net operating assets and liabilities includes:

•$174 million cash inflow from supplies and other current assets due primarily to the decrease in other current assets, $158 million of which is related to the receipt of our 2020 federal income tax receivable;

•$138 million increase in our air traffic liability as a result of increased bookings;

•$13 million increase in accounts payable and $84 million increase in other liabilities as our operational related accruals increased during 2021 in line with demand, capacity and overall departure increases.

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These cash inflows due to changes in our operating assets and liabilities were partly offset by an increase to our other long-term assets as well as higher maintenance and credit card receivables and increases to our aircraft maintenance deposits.

Our net loss of $102 million includes the following significant items that were adjusted in arriving at cash provided by operating activities:

•$60 million of gains recognized on sale-leaseback transactions;

•$32 million deferred tax benefit partly offset by;

•$38 million depreciation and amortization;

•$22 million unrealized loss on the mark to market of our warrant liability with the Treasury;

•$11 million stock-based compensation expense; and

•$1 million amortization of swaption cash flow hedges, net of tax.

In response to the COVID-19 pandemic, we were granted rent payment deferrals totaling a net favorable impact of $31 million and $2 million which were not included within aircraft rent expense or station operations, respectively, within the consolidated statements of operations for the year ended December 31, 2020. The impact of the deferrals decreased operating cash flows and unfavorably impacted our results of operations by $22 million for the year ended December 31, 2021. The deferral impact included a $31 million unfavorable impact to aircraft rent for the year ended December 31, 2021 which was partially offset by additional station deferrals granted during the year ended December 31, 2021 which resulted in a $9 million favorable impact for the year ended December 31, 2021. As of December 31, 2021, we had paid back all of our aircraft rent deferrals, and had $11 million in station deferrals yet to be recognized. The remaining deferrals will be recognized throughout future years as such amounts are paid.

Investing Activities

During the year ended December 31, 2021, net cash used in investing activities totaled $67 million, driven by:

•$36 million net payments for pre-delivery deposit activity;

•$27 million cash outflows for capital expenditures; and

•$4 million cash outflows relating to other investing activity.

Financing Activities

During the year ended December 31, 2021, net cash provided by financing activities was $391 million, primarily driven by:

•$266 million aggregate net proceeds from our IPO;

•$66 million in proceeds from the issuance of long-term debt net of principal repayments due to $33 million of proceeds from the PSP2 and PSP3 Promissory Notes in addition to net borrowings under our PDP Financing Facility;

•$59 million in net proceeds received from sale-leaseback transactions; and

•$3 million in proceeds from the exercise of stock options; partially offset by

•$3 million of payments for tax withholdings related to vesting of share-based awards.

Commitments and Contractual Obligations

Our contractual purchase commitments as of December 31, 2021 include future aircraft and engine acquisitions. Except to the extent set forth in the applicable notes to our consolidated financial statements, the table below does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time. Due to uncertainty surrounding the timing of delivery of certain aircraft, the amounts in this table represent our

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current best estimate; however, the actual delivery schedule may differ from the table below.

During October 2019, we entered into an amendment with Airbus that allows us the option to convert 18 A320neo aircraft to A321XLR aircraft. This conversion right is available until December 31, 2022 and is not reflected in the table above as this option has not been exercised.

During July 2021, we signed a letter of intent with two of our leasing partners to add ten additional A321neo aircraft through direct leases, with deliveries beginning in the second half of 2022 and continuing into the first half of 2023. As of December 31, 2021, we entered into a signed direct lease agreement for seven of the additional aircraft, while the remaining three are covered under a non-binding letter of intent. None of these ten aircraft that will be acquired through direct leases are reflected in the table above given these are not committed purchase agreements.

In November 2021, we entered into an amendment with Airbus to add an additional 91 A321neo aircraft to the committed purchase agreement, which are expected to be delivered starting in 2023 and continuing through 2029, all of which are reflected in the table above.

As of December 31, 2021, all 110 aircraft in our fleet were subject to operating leases. These leases expire between 2022 and the end of 2033. Leases for eight of our aircraft could generally be renewed at rates based on fair market value at the end of a lease term for a four-year extension.

Separately, we have various leases with respect to real property as well as various agreements among airlines relating to fuel consortia or fuel farms at airports. Under some of these contracts, we are party to joint and several liability regarding damages. Under others, where we are a member of an LLC or other entity that contracts directly with the airport operator, liabilities are borne through the fuel consortia structure. Our aircraft, services, equipment lease and sale and financing agreements typically contain provisions requiring us, as the lessee, obligor or recipient of services, to indemnify the other parties to those agreements, including certain of those parties’ related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or such other equipment. We believe that our insurance would cover most of our exposure to liabilities and related indemnities associated with the commercial real estate leases and aircraft, services, equipment lease and sale and financing agreements described above.

Certain of our aircraft and other financing transactions include provisions that require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or regulations. In certain of these financing transactions and other agreements, we also bear the risk of certain changes in tax laws that would subject payments to non-U.S. entities to withholding taxes.

Certain of these indemnities survive the length of the related financing or lease. We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict when and under what circumstances these provisions may be triggered and the amount that would be payable

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if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time.

Recently Adopted Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.

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GLOSSARY OF AIRLINE TERMS

Set forth below is a glossary of industry terms:

“A320 family” means, collectively, the Airbus series of single-aisle aircraft, including the A319ceo, A320ceo, A320neo, A321ceo and A321neo aircraft.

“A320neo family” means, collectively, the Airbus series of single-aisle aircraft that feature the new engine option, including the A320neo and A321neo aircraft.

“Adjusted CASM” means operating expenses, excluding special items, divided by ASMs. For a discussion of such special items and a reconciliation of CASM to Adjusted CASM (excluding fuel) and Adjusted CASM including net interest, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Adjusted CASM including net interest” or “Adjusted CASM + net interest” means the sum of Adjusted CASM and Net interest expense (income) excluding special items divided by ASMs. For a discussion of such special items and a reconciliation of CASM to Adjusted CASM (excluding fuel) and Adjusted CASM including net interest, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Adjusted CASM (excluding fuel)” means operating expenses less aircraft fuel expense, excluding special items, divided by ASMs. For a discussion of such special items and a reconciliation of CASM to Adjusted CASM (excluding fuel) and Adjusted CASM including net interest, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Air traffic liability” or “ATL” means the value of tickets and other related fees sold in advance of travel.

“Ancillary revenue” means the sum of non-fare passenger revenue and other revenue.

“Available seat miles” or “ASMs” means the number of seats available for passengers multiplied by the number of miles the seats are flown.

“Average aircraft in service” means the average number of aircraft used in flight operations, as calculated on a daily basis.

“Average daily aircraft utilization” means block hours divided by number of days in the period divided by average aircraft.

“Average stage length” means the average number of statute miles flown per flight segment.

“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.

“CASM” or “unit costs” means operating expenses divided by ASMs.

“CBA” means a collective bargaining agreement.

“CASM including net interest” means the sum of CASM and Net interest expense (income) divided by ASMs.

“DOT” means the United States Department of Transportation.

“EPA” means the United States Environmental Protection Agency.

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“FAA” means the United States Federal Aviation Administration.

“Fare revenue” consists of base fares for air travel, including mileage credits redeemed under our frequent flyer program, unused and expired passenger credits, other redeemed or expired travel credits and revenue derived from charter flights.

“Fare revenue per passenger” means fare revenue divided by passengers.

“FTE” means full-time equivalent employee.

“GDS” means a Global Distribution System such as Amadeus, Sabre and Travelport, used by travel agencies and corporations to purchase tickets on participating airlines.

“LCC” means low-cost carrier.

“Load factor” means the percentage of aircraft seat miles actually occupied on a flight (RPMs divided by ASMs).

“Net interest expenses (income)” means interest expense, capitalized interest, interest income and other.

“NMB” means the National Mediation Board.

“Non-fare passenger revenue” consists of fees related to certain ancillary items such as baggage, service fees, seat selection, and other passenger-related revenue that is not included as part of base fares for travel.

“Non-fare passenger revenue per passenger” means non-fare passenger revenue divided by passengers.

“Other revenue” consists primarily of services not directly related to providing transportation, such as the advertising, marketing and brand elements of the Frontier Miles affinity credit card program and commissions revenue from the sale of items such as rental cars and hotels.

“Other revenue per passenger” means other revenue divided by passengers.

“Passengers” means the total number of passengers flown on all flight segments.

“Passenger revenue” consists of fare revenue and non-fare passenger revenue.

“PDP” means pre-delivery deposit payments, which are payments required by aircraft manufacturers in advance of delivery of the aircraft.

“RASM” or “unit revenue” means total revenue divided by ASMs.

“Revenue passenger miles” or “RPMs” means the number of miles flown by passengers.

“RLA” means the United States Railway Labor Act.

“Total Revenue per passenger” means the sum of fare revenue, non-fare passenger revenue, and other revenue (collectively, “Total Revenue”) divided by passengers.

“Treasury” means the United States Department of the Treasury

“TSA” means the United States Transportation Security Administration.

“ULCC” means ultra low-cost carrier.

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“VFR” means visiting friends and relatives.