Frontier Airlines Quarterly Report
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction of incorporated or organization) (I.R.S. Employer Identification No.)
7001 Tower Road, Denver, CO 80249
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (720) 374-4200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The number of shares of the Company's Common Stock outstanding as of February
10, 2002 was 29,223,580.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Information
Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Item 3: Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
PART I. FINANCIAL INFORMATION
December 31, March 31,
2001 2001
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 89,834,621 $109,251,426
Short-term investments 2,000,000 2,000,000
Restricted investments 11,674,000 9,100,000
Receivables, net of allowance for doubtful accounts of $148,000
and $368,000 at December 31 and March 31, 2001, respectively 22,285,354 32,380,943
Maintenance deposits 34,407,606 30,588,195
Prepaid expenses and other assets 9,226,184 10,849,080
Inventories 5,511,272 4,072,335
Deferred tax assets 1,571,458 1,506,218
Deferred lease and other expenses 74,953 45,621
--------------- ---------------
Total current assets 176,585,448 199,793,818
Security, maintenance and other deposits 49,749,457 45,680,373
Property and equipment, net 147,605,839 38,100,126
Deferred lease and other expenses 541,872 58,621
Restricted investments 13,044,812 11,683,660
--------------- ---------------
$387,527,428 $295,316,598
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 13,557,709 $ 21,623,067
Air traffic liability 47,915,266 62,663,237
Other accrued expenses 26,287,310 18,236,479
Deferred federal grant 4,970,429 -
Accrued maintenance expense 36,842,371 33,510,531
Current portion of long-term debt 3,169,914 -
Income taxes payable - -
Current portion of obligations under capital leases 151,937 125,552
--------------- ---------------
Total current liabilities 132,894,936 136,158,866
Long-term debt 67,666,796 -
Accrued maintenance expense 14,245,238 12,175,225
Deferred tax liability 5,467,631 1,999,553
Deferred rent 2,325,430 -
Obligations under capital leases, excluding current portion 101,313 203,863
--------------- ---------------
Total liabilities 222,701,344 150,537,507
--------------- ---------------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares;
none issued - -
Common stock, no par value, stated value of $.001 per share, authorized
100,000,000 and 40,000,000 shares at December 31 and
March 31, 2001, respectively; 29,039,590 and 28,194,602 issued and
outstanding at December 31, and March 31, 2001, respectively 29,040 28,195
Additional paid-in capital 81,339,176 77,606,918
Unearned ESOP shares (1,275,000) (1,662,087)
Retained earnings 84,732,868 68,806,065
--------------- ---------------
Total stockholders' equity 164,826,084 144,779,091
--------------- ---------------
$387,527,428 $295,316,598
=============== ===============
FRONTIER AIRLINES, INC.
Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
--------------- --------------- -------------- ---------------
Revenues:
Passenger $90,620,523 $111,318,875 $325,092,337 $350,690,244
Cargo 1,268,503 2,102,347 4,806,967 5,374,595
Other 667,830 790,814 1,980,120 2,038,819
--------------- --------------- -------------- ---------------
Total revenues 92,556,856 114,212,036 331,879,424 358,103,658
--------------- --------------- -------------- ---------------
Operating expenses:
Flight operations 41,000,078 48,003,293 141,695,871 132,090,129
Aircraft and traffic servicing 16,492,448 15,279,898 52,293,101 43,768,413
Maintenance 17,319,910 15,926,512 55,683,809 48,517,172
Promotion and sales 12,526,189 13,220,744 45,437,169 41,041,610
General and administrative 5,390,015 5,738,402 18,598,935 18,383,889
Depreciation and amortization 3,120,702 1,380,767 8,187,111 3,673,549
--------------- --------------- -------------- ---------------
Total operating expenses 95,849,342 99,549,616 321,895,996 287,474,762
--------------- --------------- -------------- ---------------
Operating (loss) income (3,292,486) 14,662,420 9,983,428 70,628,896
--------------- --------------- -------------- ---------------
Nonoperating income (expense):
Interest income 826,464 2,229,031 3,473,444 6,001,629
Interest expense (1,191,648) (20,856) (2,118,074) (55,806)
Federal grant 3,765,724 - 12,567,959 -
Other, net (71,028) (10,508) (267,836) (47,709)
--------------- --------------- -------------- ---------------
Total nonoperating income, net 3,329,512 2,197,667 13,655,493 5,898,114
--------------- --------------- -------------- ---------------
Income before income taxes 37,026 16,860,087 23,638,921 76,527,010
Income tax (benefit) expense (871,597) 6,575,434 7,712,118 29,600,539
--------------- --------------- -------------- ---------------
Net income $ 908,623 $ 10,284,653 $15,926,803 $ 46,926,471
=============== =============== ============== ===============
Earnings per share:
Basic $0.03 $0.38 $0.56 $1.74
=============== =============== ============== ===============
Diluted $0.03 $0.35 $0.54 $1.61
=============== =============== ============== ===============
Weighted average shares of
common stock outstanding
Basic 28,573,706 27,186,171 28,408,056 26,894,223
=============== =============== ============== ===============
Diluted 29,610,062 29,768,079 29,442,019 29,151,668
=============== =============== ============== ===============
FRONTIER AIRLINES, INC.
Statements of Cash Flows
For the Nine Months Ended December 31, 2001 and 2000
(Unaudited)
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net income $15,926,803 $46,926,471
Adjustments to reconcile net income to net cash
provided by operating activities:
Employee stock ownership plan compensation expense 1,662,087 857,713
Depreciation and amortization 8,252,487 3,796,195
Deferred tax (benefit) expense 3,402,838 (484,083)
Loss on disposal of equipment 1,765,746 -
Changes in operating assets and liabilities:
Restricted investments (4,866,952) (1,632,400)
Trade receivables 10,638,154 3,798,564
Security, maintenance and other deposits (4,893,409) (12,131,674)
Prepaid expenses and other assets 1,044,937 172,808
Inventories (1,438,937) (1,132,929)
Accounts payable (8,065,358) 3,972,582)
Air traffic liability (14,747,971) (4,802,797)
Other accrued expenses 8,050,831 3,756,720
Deferred federal grant 4,970,429 -
Income taxes payable - 4,877,382
Accrued maintenance expense 5,401,853 12,329,447
Deferred rent 2,325,430 -
---------------- ----------------
Net cash provided by operating activities 29,428,968 52,358,835
---------------- ----------------
Cash flows from investing activities:
Decrease in short-term investments - 13,760,000
Aircraft lease and purchase deposits, net (2,995,086) (16,431,652)
Decrease (increase) in restricted investments 931,800 (3,580,500)
Capital expenditures (119,458,570) (10,609,580)
---------------- ----------------
Net cash used by investing activities (121,521,856) (16,861,732)
---------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,915,538 1,010,364
Proceeds from long-term borrowings 72,000,000 -
Principal payments on long-term borrow (1,163,290) -
Principal payments on obligations under capital leases (76,165) (83,124)
---------------- ----------------
Net cash provided by financing activities 72,676,083 927,240
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (19,416,805) 36,424,343
Cash and cash equivalents, beginning of period 109,251,426 67,850,933
---------------- ----------------
Cash and cash equivalents, end of period $ 89,834,621 $104,275,276
================ ================
FRONTIER AIRLINES, INC.
Notes to Financial Statements
December 31, 2001
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended March 31, 2001.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation have
been included. The results of operations for the nine months ended
December 31, 2001 are not necessarily indicative of the results that will
be realized for the full year.
(2) Air Transportation Safety and Stabilization Act
As a result of the September 11, 2001 terrorist attacks on the United
States, on September 22, 2001 President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the "Act"). The Act
includes for all U.S. airlines and air cargo carriers the following key
provisions: (i) $5 billion in cash compensation, of which $4.5 billion
is available to commercial passenger airlines and is allocated based on
the lesser of each airline's share of available seat miles during August
2001 or the direct and incremental losses (including lost revenues)
incurred by the airline from September 11, 2001 through December 31,
2001; (ii) subject to certain conditions, the availability of up to $10
billion in federal government guarantees of certain loans made to air
carriers for which credit is not reasonably available as determined by a
newly established Air Transportation Stabilization Board; (iii) the
authority of the Secretary of Transportation to reimburse air carriers
(which authority expires 180 days after the enactment of the Act) for
increases in the cost of war risk insurance over the premium in effect
for the period September 4, 2001 to September 10, 2001; (iv) at the
discretion of the Secretary of Transportation, a $100 million limit on
the liability of any air carrier to third parties with respect to acts of
terrorism committed on or to such air carrier during the 180 day period
following enactment of the Act; and (v) the extension of the due date
for the payment by air carriers of certain payroll and excise taxes until
November 15, 2001 and January 15, 2002, respectively.
The Company was entitled to receive up to approximately $20,200,000 from
the $5 billion in authorized grants, of which $17,538,000 was received as
of December 2001. The Company recognized $3,766,000 and $12,568,000 of
the grant during the three and nine months ended December 31, 2001,
respectively, which is included in nonoperating income and expense. The
remaining $4,970,000 represents amounts received in excess of estimated
allowable direct and incremental losses incurred from September 11, 2001
to December 31, 2001 and is included as a liability on our balance sheet
as of December 31, 2001. As of December 31, 2001, the Company had
deferred the payment of $8,819,000 of excise taxes, as permitted by the
Act. These taxes were paid on January 15, 2002.
(3) Long-Term Debt
In May 2001, the Company entered into a credit agreement to borrow up to
$72,000,000 for the purchase of three Airbus aircraft with a maximum
borrowing of $24,000,000 per aircraft. Each aircraft loan has a term of
120 months and is payable in equal monthly installments, including
interest payable in arrears. The loans are secured by the aircraft. As
of December 31, 2001, the Company had borrowed $72,000,000 for the
purchase of these three aircraft. Each loan provides for monthly
principal and interest payments ranging from $205,579 to $218,109, bears
interest with rates ranging from 6.05% to 6.71%, averaging 6.43% for the
three aircraft loans, with maturities in May, August, and September 2011,
at which time balloon payments totaling $10,200,000 are due with respect
to each aircraft loan.
(4) Subsequent Event
As of February 14, 2002, we signed an amendment to two aircraft lease
agreeements whereby these two aircraft will be returned to their lessor
approximately 22 months sooner than their respective original lease
termination dates. We have paid the lessor approximately $3,700,000 and
have committed to pay at the early return date as much as an additional
$1,200,000 for the right to early return these two aircraft. We expect
to record in our fiscal fourth quarter ended March 31, 2002 an unusual
charge against earnings of approximately $3,100,000 net of taxes to reflect
this transaction.
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 that describe the business and
prospects of Frontier Airlines, Inc. ("Frontier" or the "Company") and the
expectations of our Company and management. All statements, other than
statements of historical facts, included in this report that address
activities, events or developments that we expect, believe, intend or
anticipate will or may occur in the future, are forward-looking statements.
When used in this document, the words "estimate," "anticipate," "project" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted with accuracy and some of which might not
even be anticipated. These risks and uncertainties include, but are not
limited to: the timing of, and expense associated with, expansion and
modification of our operations in accordance with our business strategy or in
response to competitive pressures or other factors; general economic factors
and behavior of the fare-paying public and its potential impact on our
liquidity; increased federal scrutiny of low-fare carriers generally that may
increase our operating costs or otherwise adversely affect us; actions of
competing airlines, such as increasing capacity and pricing actions of United
Airlines and other competitors; the availability of suitable aircraft, which
may inhibit our ability to achieve operating economies and implement our
business strategy; the unavailability of, or inability to secure upon
acceptable terms, financing necessary to purchase aircraft which we have
ordered; issues relating to our transition to an Airbus aircraft fleet;
uncertainties regarding aviation fuel price; uncertainties regarding future
terrorist attacks on the United States or military actions that may be taken;
and uncertainties as to when and how fully consumer confidence in the airline
industry will be restored, if ever. Because our business, like that of the
airline industry generally, is characterized by high fixed costs relative to
revenues, small fluctuations in our yield per RPM or expense per ASM can
significantly affect operating results. See "Risk Factors" in our Form 10-K
for the year ended March 31, 2001 as they may be modified by the disclosures
contained in this report. Additional information regarding these and other
factors may be contained in our Form 10-K for the fiscal year ended March 31,
2001; our Form 8-K filed May 7, 2001 and our Form 8-K filed Jan. 22, 2001, as
amended by our Form 8-K/A filed July 11, 2001, and our Form 10-Q for the
fiscal quarters ended June 30, 2001 and September 30, 2001.
Share, per share and common stock information contained in this report has
been retroactively adjusted or "restated" to reflect a 50% common stock
dividend to shareholders of record on February 19, 2001, which we paid on
March 5, 2001.
General
We are a scheduled airline based in Denver, Colorado. We were
organized in February 1994 and we began flight operations in July 1994 with
two leased Boeing 737-200 aircraft. We have since expanded our fleet to 26
leased aircraft and three purchased Airbus A319 aircraft, comprised of seven
Boeing 737-200s, 17 Boeing 737-300s, and five Airbus A319s. During the three
months ended March 31, 2002, we expect to add an additional leased Airbus A319
aircraft. Beginning in May 2001, we began a fleet replacement plan by which
we will replace our Boeing aircraft with new purchased and leased Airbus jet
aircraft, a transition we expect to complete by approximately the first
quarter of calendar year 2005, assuming early lease returns of five of our
Boeing aircraft. We advanced the return of one leased Boeing 737-300 aircraft
to its owner from April 2002 to September 2001.
As of February 10, 2002, we operate routes linking our Denver hub to 25
cities in 19 states spanning the nation from coast to coast. We added
Houston, Texas to our route system on May 16, 2001. We commenced service
between Denver, and each of Reno/Lake Tahoe, Nevada and Austin, Texas, on
October 1, 2001. Effective February 1, 2002, we began service between Denver
and New Orleans, Louisiana. We intend to begin service between Denver and
Fort Lauderdale, Florida and Sacramento, California effective February 26,
2002.
Effective July 9, 2001, we began a codeshare agreement with Great Lakes
Aviation, Ltd. ("Great Lakes") by which Great Lakes provides daily service to
seven regional markets from our Denver hub. The codeshare agreement initially
included Casper, Cody, Gillette, and Cheyenne, Wyoming; Amarillo, Texas; Santa
Fe New Mexico; and Hayden, Colorado. Effective November 15, 2001, we
expanded the codeshare agreement to include nine additional Great Lakes cities
including Laramie, Riverton, Rock Springs, and Worland, Wyoming; Cortez and
Telluride, Colorado; Scottsbluff, Nebraska; and Farmington, New Mexico and we
commenced a Great Lakes codeshare to Sheridan, Wyoming, on October 31, 2001.
Effective December 14, 2001, an additional 20 cities were added including Page
and Phoenix, Arizona; Alamosa and Pueblo, Colorado; Dodge City, Garden City,
Hays, and Liberal, Kansas; Dickinson and Williston, North Dakota; Alliance,
Chadron, Grand Island, Kearney, McCook, Norfolk, and North Platte, Nebraska;
Pierre, South Dakota; and Moab and Vernal, Utah. Service between Denver and
Hayden, Colorado was deleted from the codeshare agreement effective December
13, 2001.
In September 2001, we entered into a codeshare agreement with Mesa
Airlines, Inc. ("Mesa"). Under the terms of the agreement, we will market and
sell flights operated by Mesa as Frontier JetExpress. We expect this
codeshare to begin February 17, 2002 with service between Denver and San Jose,
California, and with supplemental flights to our current service between
Denver and Houston, Texas. Effective April 7, 2002, the codeshare will be
expanded to include service to St. Louis, Missouri., and Ontario, California.
This codeshare is expected to expand to include the operation by Mesa of at
least five 50-passenger Bombardier CRJ-200 regional jets, providing service to
new destinations as well as additional frequencies to our current route
system.
We currently use up to 11 gates at our hub, Denver International
Airport ("DIA"), where we operate approximately 132 daily system flight
departures and arrivals. Prior to the September 11, 2001 terrorist attacks,
we operated approximately 126 daily system flight departures and arrivals.
Following the terrorist attacks, we reduced our service to approximately 103
daily system flight departures and arrivals. On November 15, 2001, we added
an additional eight daily system flight departures and arrivals to our
schedule, and we reinstated service to Ronald Reagan Washington National
Airport on December 12, 2001 with one daily round-trip. As of March 5, 2002,
we expect to restore our service to our pre-September 11, 2001 levels. We
intend to continue to monitor passenger demand and other competitive factors
and adjust the number of flights we operate accordingly.
Small fluctuations in our yield per revenue passenger mile ("RPM") or
expense per available seat mile ("ASM") can significantly affect operating
results because we, like other airlines, have high fixed costs in relation to
revenues. Airline operations are highly sensitive to various factors,
including the actions of competing airlines and general economic factors,
which can adversely affect our liquidity, cash flows and results of operations.
As a result of the September 11 terrorist attacks, expansion of our
operations, and transition costs associated with our fleet replacement plan
during the nine months ended December 31, 2001, the slowing economy, and hail
storms that damaged five of our aircraft earlier in the year, we do not
believe our results of operations for the nine months ended December 31, 2001
are indicative of future operating results or comparable to the nine months
ended December 31, 2000.
Critical Accounting Policies
Because we accrue in advance for such events, our accounting policy for
maintenance expenses requires the use of estimates for the cost of future
major airframe maintenance checks, landing gear and engine overhauls. These
estimates and accruals are based on timing and the scope of event and
prevailing market conditions, all of which are subject to change, and may
impact future operating results when the events actually take place.
Results of Operations
We had net income of $15,927,000 or 54(cent)per diluted share for the nine
months ended December 31, 2001 as compared to net income of $46,926,000 or
$1.61 per diluted share for the nine months ended December 31, 2000. We had
net income of $909,000 or 3(cent)per diluted share for the three months ended
December 31, 2001 as compared to net income of $10,285,000 or 35(cent)per diluted
share for the three months ended December 31, 2000. On September 11, 2001,
the Federal Aviation Administration ("FAA") temporarily suspended all
commercial airline flights as a result of the terrorist attacks on the United
States. As a result of this suspension, we cancelled 407 scheduled flights
until we resumed operations on September 14, 2001. After we resumed
operations, we cancelled 303 additional scheduled flights through September
30, 2001 as a result of diminished consumer demand. During the three months
ended December 31, 2001, our daily average aircraft block hour utilization
decreased to 7.8 from 9.2 during the prior comparable period ended December
31, 2000, as we reduced approximately 20.1% of departures originally scheduled
during that period. Due to high fixed costs, we continued to incur a
significant portion of our normal operating expenses during the period from
September 11, 2001 through December 31, 2001 and incurred operating losses.
(For a discussion of steps we have taken to reduce our expenses as a result of
the September 11, 2001 terrorist attacks, see "Liquidity and Capital
Resources" below.)
As a result, we recognized $12,568,000 of the federal grant we received
under the Act, which compensates for direct and incremental losses incurred by
air carriers from September 11, 2001 through the end of calendar year 2001.
During the three months ended December 31, 2001, we wrote down the carrying
value of spare parts that support the Boeing 737-200 aircraft by $1,512,000 as
a result of diminished demand for that aircraft type. During the three months
ended December 31, 2001, we recorded a credit to income tax expense totaling
$886,000 as a result of accruing income taxes during the year ended March 31,
2001, at a rate that was greater than the actual effective tax rate as
determined upon the filing of the income tax returns in December 2001.
Excluding the amount of the grant we recognized, the write down on aircraft
parts, and credits recorded to income tax expense, our net loss for the three
months ended December 31, 2001 would have been $1,357,000 or 5(cent)per share and
net income for the nine months ended December 31, 2001 would have been
$7,701,000 or 26(cent)per diluted share.
Prior to the terrorist attacks on September 11, 2001, we were
experiencing the effects of a slowing economy, that had caused lower fares and
reduced business and leisure travel. During the nine months ended December
31, 2001, we cancelled approximately 830 flights as a result of the September
11, 2001 terrorist attacks, and weather conditions and weather related repairs
in the Denver area earlier in the year.
During the nine months ended December 31, 2001, we took delivery of our
first five Airbus aircraft. As this was a new aircraft type for us, we were
required by the FAA to demonstrate that our crews were proficient in flying
this type aircraft and that we were capable of properly maintaining the
aircraft and related maintenance records before we placed these aircraft in
scheduled passenger service. This process took longer than we originally had
anticipated and, as a result, we were required to cancel scheduled flights
that the first aircraft was scheduled to perform. We believe that this delay
in receiving necessary FAA approvals, adversely affected our passenger
revenues and our cost per ASM during the nine months ended December 31, 2001.
Our cost per ASM for the nine months ended December 31, 2001 and 2000
was 9.58(cent)and 9.09(cent), respectively, an increase of .49(cent)or 5.4%. Cost per ASM
excluding fuel for the nine months ended December 31, 2001 and 2000 was 8.18(cent)
and 7.40(cent), respectively, an increase of .78(cent)or 10.5%. Our cost per ASM for
the three months ended December 31, 2001 and 2000 was 9.49(cent)and 9.29(cent),
respectively, an increase of .20(cent)or 2.2%. Cost per ASM excluding fuel for
the three months ended December 31, 2001 and 2000 was 8.32(cent)and 7.37(cent),
respectively, an increase of .95(cent)or 12.9%. Our cost per ASM increased during
the nine months ended December 31, 2001 principally because of an increase in
aircraft and traffic servicing expenses of .18(cent), and an increase in
maintenance expenses of .13(cent)per ASM. Our cost per ASM increased during the
three months ended December 31, 2001 over the prior comparable period
principally because of the decreased aircraft utilization and shorter stage
lengths during that period. These expenses were impacted by the terrorist
attacks and the hail damage to five of our aircraft, or approximately 20% of
our fleet, during the nine months ended December 31, 2001. During the three
months ended December 31, 2001, we wrote down the carrying value of spare
parts that support the Boeing 737-200 aircraft by $1,512,000 as a result of
diminished demand for that aircraft type, resulting in an increase of .15(cent)per
ASM for the period. We incurred short-term lease expenses for substitute
aircraft to minimize the number of flight cancellations while the hail damage
to our aircraft was being repaired, additional maintenance expenses for the
repair of the hail damage, and interrupted trip expenses as a result of the
number of flight cancellations related to the aircraft out of service for
repair. During April 2001, the Denver area also experienced an unusual
blizzard, which caused flight cancellations as well as expenses associated
with deicing our aircraft. We estimate that the total adverse impact on our
cost per ASM associated with these unusual weather conditions was .06(cent), or
approximately $1,893,000 for the nine months ended December 31, 2001. During
the nine months ended December 31, 2001, we incurred approximately $3,940,000
in transition expenses associated with the induction of the Airbus aircraft,
which had an adverse effect on our CASM of approximately .12(cent)per ASM. These
include crew salaries; travel, training and induction team expenses; and
depreciation expense. We also experienced an increase in promotion and sales
expenses to stimulate traffic in a weak economy of .05(cent)per ASM. An increase
in pilots' salaries effective in May 2001 also contributed to the increase in
cost per ASM during the nine months ended December 31, 2001. Additionally,
due to the flight cancellations as a result of the September 11 terrorist
attacks and these weather conditions, our ASMs were less than we had planned,
which caused our fixed costs to be spread over fewer ASMs and, we believe,
distorted our cost per ASM for the period.
An airline's break-even load factor is the passenger load factor that
will result in operating revenues being equal to operating expenses, assuming
constant revenue per passenger mile and expenses. For the nine months ended
December 31, 2001 and 2000, our break-even load factors were 58.3% and 52.2%,
respectively, compared to our achieved passenger load factors of 60.7% and
66.8%. For the three months ended December 31, 2001 and 2000, our break-even
load factors were 53.7% and 54.3%, respectively, compared to our achieved
passenger load factors of 52.4% and 64%. Our break-even load factor increased
for the nine months ended December 31, 2001 from the prior comparable period
largely as a result of a decrease in our average fare to $133 during the nine
months ended December 31, 2001 from $146 during the nine months ended December
31, 2000, compounded by an increase in our expense per ASM to 9.58(cent)for the
nine months ended December 31, 2001 from 9.09(cent)for the nine months ended
December 31, 2000.
During the nine months ended December 31, 2001, our average daily block
hour utilization decreased to 9.0 from 9.3 for the nine months ended December
31, 2000. During the three months ended December 31, 2001 our average daily
block hour utilization decreased to 7.8 from 9.2 for the three months ended
December 31, 2000. The calculation of our block hour utilization includes all
aircraft that are on our operating certificate, which includes scheduled
aircraft as well as aircraft out of service for maintenance and operational
spare aircraft. In September 2001, we grounded several aircraft as a result
of the September 11, 2001 terrorist attacks, resulting in reduced aircraft
utilization.
The following table provides certain of our financial and operating
data for the three month and nine month periods ended December 31, 2001 and
2000. The write-down of the carrying values of the Boeing 737-200 aircraft
parts totaling $1,512,000 has been excluded from the calculation of the
break-even load factor, expense per ASM and expense per ASM excluding fuel.
Selected Financial and Operating Data
Three Months Ended December 31, Nine Months Ended December 31,
2001 2000 2001 2000
------------------------------------ ------------------------------------
Selected Operating Data:
Passenger revenue (000s) (1) $ 90,621 $ 111,319 $ 325,092 $ 350,690
Revenue passengers carried (000s) 623 750 2,271 2,289
Revenue passenger miles (RPMs) (000s) (2) 529,593 685,507 2,038,888 2,113,107
Available seat miles (ASMs) (000s) (3) 1,010,091 1,071,714 3,359,245 3,162,972
Passenger load factor (4) 52.4% 64.0% 60.7% 66.8%
Break-even load factor (5) 53.7% 54.3% 58.3% 52.2%
Block hours (6) 20,780 21,068 67,208 61,916
Departures 9,469 9,755 30,389 28,656
Average aircraft stage length 808 839 837 843
Average passenger length of haul 850 914 898 923
Average daily fleet block hour utilization (7) 7.8 9.2 9.0 9.3
Yield per RPM (cents) (8) 17.11 16.24 15.94 16.60
Total yield per RPM (cents) (9) 17.48 16.66 16.28 16.95
Yield per ASM (cents) (10) 8.97 10.39 9.68 11.09
Total yield per ASM (cents) (11) 9.16 10.66 9.88 11.32
Expense per ASM (cents) 9.34 9.29 9.54 9.09
Expense per ASM excluding fuel (cents) 8.17 7.37 8.14 7.40
Average fare (12) $ 134 $ 142 $ 133 $ 146
Average aircraft in fleet 29.0 25.0 27.2 24.3
Aircraft in fleet at end of period 29.0 25.0 29.0 25.0
Average age of aircraft at end of period 10.4 11.1 10.4 11.0
EBITDAR (000s) (13) 19,672 31,603 79,062 119,728
EBITDAR as a % of revenue 21.3% 27.7% 23.8% 33.4%
(1) "Passenger revenue" includes revenues for non-revenue passengers,
administrative fees, and revenue recognized for unused tickets that are
greater than one year from issuance date.
(2) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown.
(3) "Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(4) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(5) "Break-even load factor" is the passenger load factor that will result in
operating revenues being equal to operating expenses, assuming constant
revenue per passenger mile and expenses
(6) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(7) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(8) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(9) "Total Yield per RPM" is determined by dividing total revenues by
revenue passenger miles.
(10) "Yield per ASM" is determined by dividing passenger revenues by
revenue passenger miles.
(11) "Total Yield per ASM" is determined by dividing total revenues by
available seat miles.
(12) "Average fare" excludes revenue included in passenger revenue for
non-revenue passengers, administrative fees, and revenue recognized for
unused tickets that are greater than one year from issuance date.
(13) "EBITDAR", or "earnings before interest, income taxes, depreciation,
amortization and aircraft rentals," is a supplemental financial
measurement many airline industry analysts and we use in the evaluation
of our business. However, EBITDAR should only be read in conjunction
with all of our financial statements appearing elsewhere herein, and
should not be construed as an alternative either to operating income (as
determined in accordance with generally accepted accounting principles)
as an indicator of our operating performance or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) as a measure of liquidity.
The following table provides our operating revenues and expenses
expressed as cents per total ASMs and as a percentage of total operating
revenues, as rounded, for the three month and nine month periods ended
December 31, 2001 and 2000.
Three Months Ended December 31, Nine Months Ended December 31,
----------------------------------------- -----------------------------------------
2001 2000 2001 2000
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 8.97 97.9% 10.39 97.5% 9.68 98.0% 11.09 97.9%
Cargo 0.13 1.4% 0.20 1.8% 0.14 1.4% 0.17 1.5%
Other 0.07 0.7% 0.07 0.7% 0.06 0.6% 0.06 0.6%
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total revenues 9.16 100.0% 10.66 100.0% 9.88 100.0% 11.32 100.0%
========== ========= ========== ========= ========== ========= ========== =========
Operating expenses:
Flight operations 4.06 44.3% 4.48 42.0% 4.22 42.7% 4.18 36.9%
Aircraft and traffic
servicing 1.63 17.8% 1.43 13.4% 1.56 15.8% 1.38 12.2%
Maintenance 1.71 18.7% 1.49 13.9% 1.66 16.8% 1.53 13.5%
Promotion and sales 1.24 13.5% 1.23 11.6% 1.35 13.7% 1.30 11.5%
General and
administrative 0.53 5.8% 0.54 5.0% 0.55 5.6% 0.58 5.1%
Depreciation and
amortization 0.31 3.4% 0.13 1.2% 0.24 2.5% 0.12 1.0%
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total operating expenses 9.49 103.6% 9.29 87.2% 9.58 97.0% 9.09 80.3%
========== ========= ========== ========= ========== ========= ========== =========
Total ASMs (000s) 1,010,091 1,071,714 3,359,245 3,162,972
Revenues
Our revenues are highly sensitive to changes in fare levels.
Competitive fare pricing policies have a significant impact on our revenues.
Because of the elasticity of passenger demand, we believe that increases in
fares may at certain levels result in a decrease in passenger demand in many
markets. We cannot predict future fare levels, which depend to a substantial
degree on actions of competitors and the economy. When sale prices or other
price changes are initiated by competitors in our markets, we believe that we
must, in most cases, match those competitive fares in order to maintain our
market share. Passenger revenues are seasonal in leisure travel markets
depending on the markets' locations and when they are most frequently
patronized.
Effective February 17, 2002, the DOT will either be providing security
services through the newly established Transportation Security Agency or will
be assuming many of the contracts and overseeing those security vendors that
we and other carriers use to provide airport security services. Additionally,
the DOT will reimburse us, as well as all other air carriers, for certain
security services provided by our own personnel. In order to be able to
provide and fund these security services, the DOT has imposed a $2.50 security
service fee per passenger segment flown, not to exceed $5.00 for one-way
travel or $10.00 for a round trip, on tickets purchased on and after February
1, 2002. We are unable to predict the effect that these additional fees may
have on future fare or passenger traffic levels.
Our average fare for the nine months ended December 31, 2001 and 2000
was $133 and $146, respectively, a decrease of 8.9%. We believe that the
decrease in the average fare during the nine months ended December 31, 2001
from the prior comparable period was principally a result of the slowing
economy. During the nine months ended December 31, 2000, we experienced an
increase in the number of passengers that a major competitor directed to us
because of delays and cancellations that airline experienced. We estimate
that the additional passenger traffic received from that airline had the
effect of increasing our load factor and average fare for the nine months
ended December 31, 2000 by approximately .7 load factor points and .2%,
respectively.
Passenger Revenues. Passenger revenues totaled $325,092,000 for the
nine months ended December 31, 2001 compared to $350,690,000 for the nine
months ended December 31, 2000, or a decrease of 7.3%, on increased capacity
of 196,273,000 ASMs or 6.2%. Passenger revenues totaled $90,621,000 for the
three months ended December 31, 2001 compared to $111,319,000 for the three
months ended December 31, 2000, or a decrease of 18.6%, on decreased capacity
of 61,623,000 ASMs or 5.7%. The number of revenue passengers carried was
2,271,000 for the nine months ended December 31, 2001 compared to 2,289,000
for the nine months ended December 31, 2000 or a decrease of less than 1%.
The number of revenue passengers carried was 623,000 for the three months
ended December 31, 2001 compared to 750,000 for the three months ended
December 31, 2000 or a decrease of 16.9%. We had an average of 27.2 aircraft
in our fleet during the nine months ended December 31, 2001 compared to an
average of 24.3 aircraft during the nine months ended December 31, 2000, an
increase of 11.9%. RPMs for the nine months ended December 31, 2001 were
2,038,888,000 compared to 2,113,107,000 for the nine months ended December 31,
2000, a decrease of 3.5%. We believe that our cancelled flights due to the
terrorist attacks and weather had an adverse effect on our revenue during the
period.
Cargo Revenues. Cargo revenues, consisting of revenues from freight
and mail service, totaled $4,807,000 and $5,375,000, a decrease of 10.6%, for
the nine months ended December 31, 2001 and 2000, respectively, representing
1.4% and 1.5%, respectively, of total revenues. Cargo revenues totaled
$1,269,000 and $2,102,000, a decrease of 39.6% for the three months ended
December 31, 2001 and 2000, representing 1.4% and 1.8%, respectively, of total
revenues. We believe that our cargo revenues have been impacted by the
slowing economy as well as the flight cancellations as a result of the
terrorist attacks, and the limitations placed on cargo service as a result of
that. This adjunct to the passenger business is highly competitive and
depends heavily on aircraft scheduling, alternate competitive means of same
day delivery service and schedule reliability.
Other Revenues. Other revenues, comprised principally of interline
handling fees, liquor sales and excess baggage fees, totaled $1,980,000 and
$2,039,000, each .6% of total revenues for the nine months ended December 31,
2001 and 2000, a decrease of 2.9%.
Operating Expenses
Operating expenses include those related to flight operations, aircraft
and traffic servicing, maintenance, promotion and sales, general and
administrative and depreciation and amortization. Total operating expenses
were $321,896,000 and $287,475,000 for the nine months ended December 31, 2001
and 2000 and represented 97.0% and 80.3% of revenue, respectively. Total
operating expenses for the three months ended December 31, 2001 and 2000 were
$95,849,000 and $99,550,000 and represented 103.6% and 87.2% of revenue,
respectively. Operating expenses increased as a percentage of revenue during
the three and nine months ended December 31, 2001 as a result of the 18.6% and
7.3% decrease in passenger revenues, respectively, associated with the slowing
economy and the September 11 terrorist attacks. For a discussion of steps we
have taken to reduce our expenses as a result of the September 11, 2001
terrorist attacks, see " Liquidity and Capital Resources" below.
Flight Operations. Flight operations expenses of $141,696,000 and
$132,090,000 were 42.7% and 36.9% of total revenue for the nine months ended
December 31, 2001 and 2000, respectively. Flight operations expenses of
$41,000,000 and $48,003,000 were 44.3% and 42% of total revenue for the three
months ended December 31, 2001 and 2000, respectively. Flight operations
expenses include all expenses related directly to the operation of the
aircraft including fuel, lease and insurance expenses, pilot and flight
attendant compensation, in-flight catering, crew overnight expenses, flight
dispatch and flight operations administrative expenses. Included in flight
operations expenses during the three and nine months ended December 31, 2001
are approximately $264,000 and $2,007,000, respectively, for Airbus training
and related travel expenses.
Aircraft fuel expenses include both the direct cost of fuel, including
taxes, as well as the cost of delivering fuel into the aircraft. Aircraft
fuel expense of $46,955,000 for 51,954,000 gallons used and $53,278,000 for
49,595,000 gallons used resulted in an average fuel cost of 90.4(cent)and $1.07
per gallon, for the nine months ended December 31, 2001 and 2000,
respectively. Aircraft fuel expense represented 33.1% and 40.3% of total
flight operations expenses or 14.2% and 14.9% of total revenue for the nine
months ended December 31, 2001 and 2000, respectively. Aircraft fuel expense
of $11,820,000 for 15,060,000 gallons used and $20,550,000 for 16,900,000
gallons used resulted in an average fuel expense of 78.5(cent)and $1.22 per gallon
for the three months ended December 31, 2001 and 2000, respectively. Aircraft
fuel costs represented 28.8% and 42.8% of total flight operations expenses for
the three months ended December 31, 2001 and 2000, respectively, or 12.8% and
18% of total revenue. Fuel prices are subject to change weekly as we do not
purchase supplies in advance for inventory. Fuel consumption for the nine
months ended December 31, 2001 and 2000 averaged 773 and 801 gallons per block
hour, respectively. Fuel consumption for the three months ended December 30,
2001 and 2000 averaged 725 and 802 gallons per block hour, respectively. Fuel
consumption decreased from the prior comparable periods because of a decrease
in our load factors, the more fuel- efficient Airbus aircraft added to our
fleet, and a newly developed fuel conservation program implemented in August
2001. Fuel consumption decreased 9.6% during the three months ended December
31, 2001 from the prior comparable period also as a result of decreased use of
the Boeing 737-200 aircraft, which have a higher fuel burn rate than the
Boeing 737-300 and Airbus A319 aircraft. During the nine months ended
December 31, 2000, a major competitor directed passengers to us because of an
increase in the number of delays and cancellations that airline experienced.
Because of this we increased the speeds we flew our aircraft to mitigate
flight delays, which increased our fuel burn rate. We do not hedge our fuel
expense exposure.
Aircraft lease expenses totaled $48,590,000 (14.6% of total revenue)
and $45,472,000 (12.7% of total revenue) for the nine months ended December
31, 2001 and 2000, respectively, an increase of 6.9%. Aircraft lease expenses
totaled $16,148,000 (17.4% of total revenue) and $15,570,000 (13.6% of total
revenue) for the three months ended December 31, 2001 and 2000, respectively,
an increase of 3.7%. The increase is largely due to an increase in the
average number of aircraft to 27.2 from 24.3, or 11.9%, during the nine months
ended December 31, 2001 compared to the same period in 2000. During the nine
months ended December 31, 2001, to minimize the number of flight cancellations
while our aircraft were being repaired following hail damage, we incurred
short-term lease expenses of $630,000 for aircraft to partially replace
capacity of the damaged aircraft. During the nine months ended December 31,
2001, we also added our first three purchased Airbus aircraft to our fleet.
These aircraft do not have lease expenses associated with them.
Aircraft insurance expenses totaled $2,453,000 (.7% of total revenue)
for the nine months ended December 31, 2001. Aircraft insurance expenses for the
nine months ended December 31, 2000 were $2,448,000 (.7% of total revenue).
Aircraft insurance expenses were .12(cent)per RPM for each of the nine months
ended December 31, 2001 and 2000, respectively. Aircraft insurance expenses
totaled $608,000 (.7% of total revenue) for the three months ended December
31, 2001. Aircraft insurance expenses for the three months ended December 31,
2000 were $831,000 (.7% of total revenue). Aircraft insurance expenses were
.12(cent)per RPM for each of the three months ended December 31, 2001 and 2000.
Aircraft insurance expenses during the three and nine month periods ended
December 31, 2001 have not been fully impacted by the result of the terrorist
attacks on September 11, 2001. Shortly after the attacks, we were required to
purchase two supplemental war risk insurance policies. Only one of these
policies is eligible for reimbursement by the Federal government. We expect
these expenses to significantly increase beginning in the fiscal year ending
March 31, 2003. The Act allows the Secretary of Transportation to reimburse
airlines for a period of up to 180 days after enactment of the Act for the
incremental increases in war risk insurance premiums as a result of the
September 11, 2001 terrorist attacks. While we are currently being partially
reimbursed for such increased premiums, reimbursement is scheduled to terminate
on March 20, 2002. Upon the renewal of our hull and liability insurance policy
on June 7, 2002, we expect a significant increase in these premiums.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $23,693,000 and $16,126,000, or 7.3% and 4.6% of passenger revenue,
for the nine months ended December 31, 2001 and 2000, respectively, an
increase of 46.9%. Pilot and flight attendant salaries before payroll taxes
and benefits totaled $7,512,000 and $5,804,000 or 8.3% and 5.2% of passenger
revenue for the three months ended December 31, 2001 and 2000, respectively,
an increase of 29.4%. In November 1998, our pilots voted to be represented by
an independent union, the Frontier Airline Pilots Association. The first
bargaining agreement for the pilots, which has a 5-year term, was ratified and
made effective in May 2000. In May 2001, we agreed to reconsider the current
rates of pay under our collective bargaining agreement with our pilots.
During the past year, several pilot unions at other air carriers received wage
increases, which caused our pilot salaries to be substantially below those
paid by certain of our competitors. We submitted a revised pilot pay proposal
to the Frontier Airline Pilots Association ("FAPA"), and its members accepted
this proposal and was made effective May 2001. Pilot and flight attendant
compensation also increased as a result of an 11.9% increase in the average
number of aircraft in service, an increase of 8.6% in block hours, a general
wage increase in flight attendant salaries, and additional crews required to
replace those attending training on the Airbus equipment. During the three
months ended December 31, 2001, FAPA agreed to an 11% decrease in salaries for
all pilots in lieu of furloughs as a result of the September 11, 2001
terrorist attacks. The pilot salary levels were reinstated effective January
1, 2002.
Aircraft and Traffic Servicing. Aircraft and traffic servicing
expenses were $52,293,000 and $43,768,000 (an increase of 19.5%) for the nine
months ended December 31, 2001 and 2000, respectively, and represented 15.8%
and 12.2% of total revenue. Aircraft and traffic servicing expenses were
$16,492,000 and $15,280,000 (an increase of 7.9%) for the three months ended
December 31, 2001 and 2000, respectively, and represented 17.8% and 13.4% of
total revenue. Aircraft and traffic servicing expenses include all expenses
incurred at airports including landing fees, facilities rental, station labor,
ground handling expenses, and interrupted trip expenses associated with
delayed or cancelled flights. Interrupted trip expenses are amounts paid to
other airlines to reaccomodate passengers as well as hotel, meal and other
incidental expenses. Aircraft and traffic servicing expenses increased with
the addition of new cities and departures to our route system. During the
nine months ended December 31, 2001, our departures increased to 30,389 from
28,656 for the nine months ended December 31, 2000, or 6.0%. Aircraft and
traffic servicing expenses were $1,721 per departure for the nine months ended
December 31, 2001 as compared to $1,527 per departure for the nine months
ended December 31, 2000, or an increase of $194 per departure. During the
three months ended December 31, 2001, our departures decreased to 9,469 from
9,755 or 2.9%. Aircraft and traffic servicing expenses were $1,742 per
departure for the three months ended December 31, 2001 as compared to $1,566
per departure for the three months ended December 31, 2000, or an increase of
$176 per departure. Aircraft and traffic servicing expenses increased as a
result of expenses associated with deicing in April 2001 as a result of an
unusual spring blizzard, a general wage rate increase, and an increase in
interrupted trip expenses as a result of the number of flight cancellations
related to the aircraft out of service for repair of hail damage.
Additionally, our security expenses increased substantially during the three
months ended December 31, 2001, or approximately 62% greater than those
incurred during the three months ended September 30, 2001, as a result of the
September 11, 2001 terrorist attacks. Additionally, due to the number of
flight cancellations as a result of weather conditions, as well as the
September 11 terrorist attacks, the number of departures were less than we had
planned, which caused our fixed costs to be spread over fewer departures and,
we believe, distorted our expenses per departure for the three and nine months
ended December 31, 2001.
Effective February 17, 2002, the DOT will either be providing security
services through the newly established Transportation Security Agency or will
be assuming many of the contracts and overseeing those security vendors that
we and other carriers use to provide airport security services. Additionally,
the DOT will reimburse us, as well as all other air carriers, for certain
security services provided by our own personnel. In order to be able to
provide and fund these security services, the DOT has imposed a $2.50 security
service fee per passenger segment flown, not to exceed $5.00 for one-way
travel or $10.00 for a round trip, on tickets purchased on and after February
1, 2002. As a result of these actions, we expect our expenses associated with
security services to be significantly reduced after February 17, 2002. During
the three and nine months ended December 31, 2001, total security related
expenses approximated $1,221,000 and $2,537,000, respectively.
Maintenance. Maintenance expenses of $55,684,000 and $48,517,000 were
16.8% and 13.5% of total revenue for the nine months ended December 31, 2001
and 2000, respectively, an increase of 14.8%. Maintenance expenses of
$17,320,000 and $15,927,000 were 18.7% and 13.9% of total revenue for the three
months ended December 31, 2001 and 2000, respectively, an increase of 8.7%.
These include all labor, parts and supplies expenses related to the
maintenance of the aircraft. Routine maintenance is charged to maintenance
expense as incurred while major engine overhauls and heavy maintenance check
expense is accrued monthly with variances from accruals recognized at the time
of the check. Maintenance cost per block hour for the nine months ended
December 31, 2001 and 2000 were $829 and $784, respectively. Maintenance cost
per block hour for the three months ended December 31, 2001 and 2000 were $833
and $756, respectively. During the three months ended December 31, 2001, we
wrote down the carrying value of spare parts that support the Boeing 737-200
aircraft by $1,512,000 as a result of diminished demand for that aircraft
type. Excluding the effect of this adjustment, our maintenance cost per block
hour would have been $761 for the three months ended December 31, 2001.
Maintenance costs per block hour increased as a result of hail damage to five
of our aircraft during the nine months ended December 31, 2001, estimated at
$491,000 ($7 per block hour), excluding in house labor, and a general wage
rate increase effective April 2001. During the nine months ended December 31,
2001, we incurred approximately $881,000 for Airbus training or $13 per block
hour. The increase in our maintenance costs was offset by a heavy maintenance
check performed on the airframe of one of our leased aircraft during the three
months ended December 31, 2001, which will be reimbursed by the aircraft
owner, thereby reducing our labor costs by $543,000, or $26 per block hour for
the three months ended December 31, 2001. Also, during the three months ended
December 31, 2001, we decreased the number of our departures as a result of
decreased consumer demand for air travel and reduced the utilization of our
Boeing 737-200 aircraft, which are more costly to maintain. We also incurred
increased costs in personnel, training and information technology expenses for
implementation of new maintenance and engineering software and in preparation
for the Airbus transition. Additionally, due to the flight cancellations as a
result of the September 11 terrorist attacks and these weather conditions, our
block hours were less than we had planned, which caused our fixed costs to be
spread over fewer block hours and, we believe, distorted our cost per block
hour for the three months and nine months ended December 31, 2001.
Promotion and Sales. Promotion and sales expenses totaled $45,437,000
and $41,042,000 and were 13.7% and 11.5% of total revenue for the nine months
ended December 31, 2001 and 2000, respectively. Promotion and sales expenses
totaled $12,526,000 and $13,221,000 and were 13.5% and 11.6% of total revenue
for the three months ended December 31, 2001 and 2000, respectively. These
include advertising expenses, telecommunications expenses, wages and benefits
for reservationists and reservations supervision as well as marketing
management and sales personnel, credit card fees, travel agency commissions
and computer reservations costs. During the nine months ended December 31,
2001, promotion and sales expenses per passenger increased to $20.01 compared
to $17.93 for the nine months ended December 31, 2000. Promotion and sales
expenses increased largely as a result of an increase in advertising expenses
to stimulate traffic in a slowing economy. Additionally, we have incurred
costs associated with the start-up and promotion of our frequent flyer program
as well as the redesign of our web site.
General and Administrative. General and administrative expenses for
the nine months ended December 31, 2001 and 2000 totaled $18,599,000 and
$18,384,000 and were 5.6% and 5.1% of total revenue, respectively, an increase
of 1%. General and administrative expenses for the three months ended
December 31, 2001 and 2000 totaled $5,390,000 and $5,738,000 and were 5.8% and
5.0% of total revenue, respectively, a decrease of 6.1%. During the nine months
ended December 31, 2001 and 2000, we accrued for employee performance bonuses
totaling $1,559,000 and $5,615,000, respectively, which were .5% and 1.6% of
total revenue, a decrease of 72.2%. As a result of the terrorist attacks of
September 11, 2001, w temporarily suspended the bonus program from September
11, 2001 through December 31, 2001. General and administrative expenses
include the wages and benefits for several of our executive officers and
various other administrative personnel including legal, accounting,
information technology, aircraft procurement, corporate communications,
training and human resources and other expenses associated with these
departments. Employee health benefits, accrued vacation and bonus expenses,
general insurance expenses including worker's compensation, and write-offs
associated with credit card and check fraud are als included in general and
administrative expenses. We experienced increases in our human resources,
training and information technology expenses as a result of an increase in
employees from approximately 2,300 in December 2000 to approximately 2,440 in
December 2001, an increase of 6.1%. Also, the cost of health insurance
premiums increased to $2,571,000 during the nine months ended December 31,
2001 from $1,646,000 during the prior comparable period, an increase of
56.2%. Because of the increase in personnel, our health insurance benefits
expenses and accrued vacation expense increased accordingly.
Depreciation and Amortization. Depreciation and amortization expenses
of $8,187,000 and $3,674,000 were 2.5% and 1.0% of total revenue, respectively,
for the nine months ended December 31, 2001 and 2000, an increase of 122.8%.
These expenses include depreciation of aircraft and aircraft components,
office equipment, ground station equipment and other fixed assets.
Depreciation expense increased over the prior year as a result of depreciation
expense associated with our first three purchased aircraft, an increase in our
spare parts inventory including spare engines and parts for the Airbus fleet,
ground handling equipment, and computers to support new employees as well as
replacement computers for those with outdated technology.
Nonoperating Income (Expense). Net nonoperating income totaled
$13,655,000 for the nine months ended December 31, 2001 compared to $5,898,000
for the nine months ended December 31, 2000. Interest income decreased to
$3,473,000 from $6,002,000 during the nine months ended December 31, 2001 from
the prior period due to a decrease in cash balances as a result of cash used
for pre-delivery payments for future purchases of aircraft, spare parts
inventories largely for the new Airbus fleet and a decrease in interest
rates. Interest expense increased to $2,118,000 for the nine months ended
December 31, 2001 from $56,000 as a result of interest expense associated with
the financing of the first three purchased Airbus aircraft received in May,
August and September 2001.
During the three and nine months ended December 31, 2001, we recognized
$3,766,000 and $12,568,000 of a federal grant as a result of the Act to offset
direct and incremental losses we experienced as a result of the terrorist
attacks on September 11, 2001. We received a total of $17,538,000 as of
December 31, 2001; the remaining $4,970,000 represents amounts received in
excess of estimated allowable direct and incremental losses incurred from
September 11, 2001 to December 31, 2001 and is included as a deferred
liability on our balance sheet.
Income Tax Expense. We accrued income taxes of $7,712,000 and
$29,601,000 at 38.8% and 38.7% of income during the nine months ended
December 31, 2001 and 2000, respectively. During the three and nine months
ended December 31, 2001, we recorded a credit to income tax expense totaling
$886,000 and $1,327,000, respectively, and revised our effective tax rate from
38.25% to 38.8%. During the year ended March 31, 2001, we accrued income tax
expense at the rate of 38.7% which was greater than the actual effective tax
rate of 37.6% determined as a result of the completion and filing of the
income tax returns in December 2001. During the nine months ended December
31, 2001, we also recorded a $441,000 reduction to income tax expense as a
result of a review and revision of state tax apportionment factors used in
filing our amended state tax returns for 2000.
Liquidity and Capital Resources
Our liquidity depends to a large extent on the number of passengers who
fly with us and the fares we charge. Also, we depend on financing to acquire
many of our aircraft, including 12 aircraft scheduled for delivery by 2005. We
incurred $72,000,000 in debt during the nine months ended December 31, 2001 to
finance three Airbus aircraft. We seek to control our operating costs, but our
airline, like other airlines, has many fixed costs.
Our balance sheet reflected cash and cash equivalents and short-term
investments of $91,835,000 and $111,251,000 at December 31, 2001 and March 31,
2001, respectively. At December 31, 2001, total current assets were
$176,585,000 as compared to $132,895,000 of total current liabilities,
resulting in working capital of $43,690,000. At March 31, 2001, total current
assets were $199,794,000 as compared to $136,159,000 of total current
liabilities, resulting in working capital of $63,635,000. The decrease in our
cash and working capital from March 31, 2001 is largely a result of cash used
by investing activities, principally the purchase of our first three Airbus
aircraft and spare parts for the new Airbus fleet.
Cash provided by operating activities for the nine months ended
December 31, 2001 was $29,429,000. This is attributable to our net income for
the period, increase in depreciation expense, increase in deferred tax
expense, decreases in trade receivables and increases in other accrued
expenses, federal grant monies including those received in excess of our
direct and incremental expenses allowable under the Act, and accrued
maintenance expenses, offset by increases in restricted investments, security,
maintenance and other deposits, and decreases in accounts payable and air
traffic liability. The increase in other accrued expenses was largely a
result of the deferral of payment permitted by the Act of excise taxes
totaling approximately $8,819,000 as of December 31, 2001. These taxes were
paid in full on January 15, 2002. Also, included in cash provided by
operations is $4,970,000 of amounts received in excess of allowable direct and
incremental losses reimbursable under the Act incurred from September 11, 2001
to December 31, 2001. This amount also is included as a liability on our
balance sheet as of December 31, 2001. Cash provided by operating activities
for the nine months ended December 31, 2000 was $52,359,000. This is
attributable to our net income for the period, decreases in receivables and
increases in accrued expenses, income taxes payable and accrued maintenance
expense, offset by increases in restricted investments, security, maintenance
and other deposits, and inventories and decreases in accounts payable and air
traffic liability.
Cash used by investing activities for the nine months ended December
31, 2001 was $121,522,000. Net aircraft lease and purchase deposits increased
by $2,995,000. During the nine months ended December 31, 2001, we exercised
purchase options for three Airbus A319 aircraft, and advanced their delivery
dates from the third and fourth calendar quarters of 2004 to May and June
2002, which required deposits of $9,603,000. We also used $119,459,000 for
the purchase of our first three Airbus aircraft and to purchase rotable
aircraft components to support the Airbus fleet, as well as a spare engine for
the Boeing fleet, leasehold improvements for our new reservations center,
computer software for the new maintenance and accounting systems, and other
general equipment purchases. Cash used by investing activities for the nine
months ended December 31, 2000 was $16,862,000. We had maturities of
$13,760,000 in short-term investments, net of purchases, comprised of
certificates of deposit and government-backed agencies with maturities of one
year or less. During the nine months ended December 31, 2000, we made cash
security deposits and aircraft pre-delivery payments totaling $16,432,000 and
an increase in restricted investments totaling $3,581,000 associated with two
leased Boeing 737-300 aircraft delivered during the nine months ended December
31, 2000, the 16 Airbus aircraft we have agreed to lease, and the 12 Airbus
aircraft we have agreed to purchase. During the nine months ended December
31, 2000, we used $10,610,000 for capital expenditures for rotable aircraft
components, maintenance equipment and tools, aircraft leasehold costs and
improvements, computer equipment and software for enhancements to our internet
booking site, our reservations system and a replacement aircraft maintenance
tracking system.
Cash provided by financing activities for the nine months ended
December 31, 2001 and 2000 was $72,676,000 and $927,000, respectively. During
the nine months ended December 31, 2001, we borrowed $72,000,000 to finance
the purchase of our first three Airbus aircraft, of which $1,163,000 was
repaid during the nine months ended December 31, 2001. During the nine months
ended December 31, 2001 and 2000, we received $1,916,000 and $1,010,000,
respectively, from the exercise of common stock options and warrants.
Contractual Obligations
The following table summarizes our contractual obligations as of
December 31, 2001:
Less than 1-3 4-5 After
1 year years years 5 years Total
------------------------------------------------------------------------------
Long-term debt (1) $ 3,169,914 $ 6,968,597 $ 7,946,144 $ 52,752,055 $ 70,836,710
Capital lease obligations 169,470 83,780 253,250
Operating leases (2)(4) 78,616,875 156,155,488 110,719,734 381,085,553 726,577,650
Unconditional purchase obligations(3) 125,200,000 222,100,000 347,300,000
------------------------------------------------------------------------------
Total contractual cash obligations $ 207,156,259 $ 385,307,865 $ 118,665,878 $ 433,837,608 $ 1,144,967,610
==============================================================================
(1) In May 2001, we entered into a credit agreement to borrow up to
$72,000,000 for the purchase of three Airbus aircraft with a maximum
borrowing of $24,000,000 per aircraft. Each aircraft loan has a term of
120 months and is payable in equal monthly installments, including
interest, payable in arrears. The loans are secured by the aircraft.
The credit agreement contains certain events of default, including events
of default for failure to make payments when due or to comply with
covenants in the agreement. As of December 31, 2001, we had borrowed
$72,000,000 for purchase of these three Airbus aircraft. Each loan
provides for monthly principal and interest payments ranging from
$205,579 to $218,109, bears interest with rates ranging from 6.05% to
6.71%, averaging 6.43% for the three aircraft loans, with maturities in
May, August, and September 2011, at which time a balloon payment
totaling $10,200,000 is due with respect each aircraft loan.
(2) As of December 31, 2001, we lease two Airbus 319 type aircraft and 24
Boeing 737 type aircraft under operating leases with expiration dates
ranging from 2002 to 2013. Under these leases, we are required to make
cash security deposits or issue letters of credit representing
approximately two months of lease payments per aircraft. At December
31, 2001, we had made cash security deposits and had arranged for
issuance of letters of credit totaling $4,881,000 and $9,489,000,
respectively. Accordingly, our restricted cash balance includes
$9,489,000 that collateralizes the outstanding letters of credit.
Additionally, we make deposits to cover the cost of major scheduled
maintenance overhauls of these aircraft. These deposits are based on the
number of flight hours flown and/or flight departures and are not
included as an obligation in the above schedule. At December 31, we had
remaining unused maintenance deposits of $48,105,000.
As a complement to our Airbus purchase agreement, in April and May 2000
we signed two agreements to lease 16 new Airbus aircraft, two of which
had been delivered to us as of December 31, 2001 for a term of 12 years.
As of December 31, 2001, we had made cash security deposits on the
remaining 14 aircraft we agreed to lease and had arranged for issuance of
letters of credit totaling $400,000 and $2,676,700, respectively, to
secure these leases.
We also lease office and hangar space, spare engines and office equipment
for our headquarters and airport facilities, and certain other equipment
with expiration dates ranging from 2002 to 2014. In addition we also
lease certain airport gate facilities on a month-to-month basis. Amounts
for leases that are on a month-to-month basis are not included as an
obligation in the above schedule.
We expect, in the near future, to embark on a program to expand our
gates, ticket counter and back office facilities at DIA. The actual cost
of completing such a plan has yet to be determined.
(3) We have adopted a fleet replacement plan to phase out our Boeing 737
aircraft and replace them with a combination of Airbus A319 and A318
aircraft. In March 2000, we entered into an agreement, as subsequently
amended, to purchase up to 29 new Airbus aircraft. Included in the
purchase commitment amount are amounts for spare aircraft components to
support the aircraft. We are not under any contractual obligations with
respect to spare parts. We have agreed to firm purchases of 15 of these
aircraft, and have options to purchase up to an additional 14 aircraft.
During the nine months ended December 31, 2001, we took delivery of the
first three purchased aircraft. Under the terms of the purchase
agreement, we are required to make scheduled pre-delivery payments for
these aircraft. These payments are non-refundable with certain
exceptions. As of December 31, 2001, we had made pre-delivery payments
on future deliveries totaling $30,582,000 to secure these aircraft and
option aircraft. As of February 2002, it appears likely that delivery of
the Airbus A318 aircraft, as powered with the Pratt and Whitney engines we
have selected, will be delayed until as late as mid-2006. We have agreed
to purchase five of these aircraft and lease a sixth, all of which were
originally scheduled to be delivered to us between February 2003 and
August 2004. Purchase amounts for the Airbus A318 aircraft are included
in the purchase commitment amounts. As of December 31, 2001, we have
made pre-delivery payments for these aircraft totaling $4,099,000. As of
February 10, 2002 we have deferred scheduled pre-delivery payments
totaling $2,066,000 as a result of the anticipated delay of these
aircraft. In view of the likely delay in delivery of these aircraft to
us, we are currently evaluating the alternatives that may be available to
us in order to maintain our planned capacity increases including the
substitution of Airbus A319 aircraft for Airbus A318s and the possibility
of selecting a different engine type for the Airbus A318. We do not
expect the delay in delivery of the Airbus A318 to have a material
adverse effect on us. We expect to be operating up to 37 purchased and
leased Airbus aircraft, by the first quarter of calendar 2005.
As discussed below, we have secured a financing commitment for the first
three purchased Airbus A319 aircraft. To complete the purchase of the
remaining aircraft we must secure additional aircraft financing. We are
exploring various financing alternatives, including, but not limited to,
domestic and foreign bank financing, public debt financing such as
enhanced equipment trust certificates, leveraged lease arrangements,
government guaranteed financing, and a public debt or stock offering.
The additional amount of financing required will depend on the number of
aircraft purchase options we exercise and the amount of cash generated by
operations prior to delivery of the aircraft. While we believe that such
financing will be available to us, there can be no assurance,
particularly in view of the September 11 terrorist attacks, that
financing will be available when required, or on acceptable terms. The
inability to secure such financing could result in delays in or our
inability to take delivery of Airbus aircraft we have agreed to purchase,
which would have a material adverse effect on us.
(4) Included in this table are monthly rental payments for two 737-200
aircraft with lease termination dates of September 2004 and November
2004. As of February 14, 2002, we signed an amendment to these lease
agreements whereby these two aircraft will be returned to their lessor
approximately 22 months sooner than their respective original lease termination
dates. We have paid the lessor approximately $3,700,000 and have
committed to pay at the early return date as much as an additional
$1,200,000 for the right to early return these two aircraft. We expect to
record in our fourth quarter ended March 31, 2002 an unusual charge against
earnings of approximately $3,100,000 net of taxes to reflect this transaction.
Commercial Commitments
As we enter new markets, increase the amount of space leased, or add
leased aircraft, we are often required to provide the lessor with a letter of
credit, bond, or cash security deposits. These generally approximate up to
three months of rent and fees. As of December 31, 2001, we had outstanding
letters of credit, bonds, and cash security deposits totaling $13,145,000,
$2,351,000, and $5,457,000, respectively. In order to meet these
requirements, we have a credit agreement with a financial institution, for up
to $1,500,000, which expires August 31, 2002, and another credit agreement
with a second financial institution for up to $20,000,000, which expires
November 30, 2002. These credit lines can be used solely for the issuance of
standby letters of credit. Any amounts drawn under the credit agreements are
fully collateralized by certificates of deposit, which are carried as
restricted investments on our balance sheet. As of December 31, 2001, we have
drawn $13,145,000 under these credit agreements for standby letters of credit
that collateralize certain leases. In the event that these credit agreements
are not renewed beyond their present expiration dates, the certificates of
deposit would be redeemed and paid to the various lessors as cash security
deposits in lieu of standby letters of credit. As a result there would be no
impact on our liquidity if these agreements were not renewed. In the event
that the surety companies determined that issuing bonds on our behalf were a
risk they were no longer willing to underwrite, we would be required to
collateralize certain of these lease obligations with either cash security
deposits or standby letters of credit, which would decrease our liquidity.
We use Airlines Reporting Corporation ("ARC") to provide reporting and
settlement services for travel agency sales and other related transactions.
In order to maintain the minimum bond (or irrevocable letter of credit)
coverage of $100,000, ARC requires participating carriers to meet, on a
quarterly basis, certain financial tests such as, but not limited to, net
profit margin percentage, working capital ratio, and percent of debt to debt
plus equity. As of December 31, 2001, we met these financial tests and
presently are only obligated to provide the minimum amount of $100,000 in
coverage to ARC. If we were to fail the minimum testing requirements, we
would be required to increase our bonding coverage to four times the weekly
agency net cash sales (sales net of refunds and agency commissions). Based on
net cash sales remitted to us for the week ended February 8, 2002, the
coverage would be increased to $1,700,000 if we failed the tests. If we were
unable to increase the bond amount as a result of our then financial
condition, we could be required to issue a letter of credit, that would
restrict cash in an amount equal to the letter of credit.
In attempting to maximize the efficiency of our fleet replacement plan,
we continue to endeavor to return certain leased B737 aircraft to their owners
on dates before the currently scheduled lease expiration dates for these
aircraft. We returned one Boeing aircraft during the nine months ended
December 31, 2001. If we remove these aircraft from service and are unable to
negotiate earlier return dates with the aircraft owners, or sublease these
aircraft to third parties, we may incur additional expense, or pay the lessor
all or a portion of the remaining lease payments, that could result in a
charge against earnings in the period in which the agreement was signed. We have
entered into an agreement to early return two 737-200 aircraft to the lessor, for
which we expect to record an unusual change against earnings in our fiscal fourth
quarter ended March 31, 2002. [see note (4) above]
We expect to incur significant costs, as well as realize certain cost
savings, in connection with our transition from a Boeing to an Airbus aircraft
fleet. Reference is made to Exhibit 99.1 filed with our report on Form 10-Q
for the quarter ended September 30, 2001 for a discussion of these costs and
savings.
Air Transportation Safety and Stabilization Act
As a result of the September 11, 2001 terrorist attacks on the United
States, on September 22, 2001 President Bush signed the Act into law. The Act
includes for all U.S. airlines and air cargo carriers the following key
provisions: (i) $5 billion in cash compensation, of which $4.5 billion is
available to commercial passenger airlines and is allocated based on the
lesser of each airline's share of available seat miles during August 2001 or
the direct and incremental losses (including lost revenues) incurred by the
airline from September 11, 2001 through December 31, 2001; (ii) subject to
certain conditions the availability of up to $10 billion in federal government
guarantees of certain loans made to air carriers for which credit is not
reasonably available as determined by a newly established Air Transportation
Stabilization Board; (iii) the authority of the Secretary of Transportation to
reimburse air carriers (which authority expires 180 days after the enactment
of the Act) for increases in the cost of war risk insurance over the premium
in effect for the period September 4, 2001 to September 10, 2001; (iv) at the
discretion of the Secretary of Transportation, a $100 million limit on the
liability of any air carrier to third parties with respect to acts of
terrorism committed on or to such air carrier during the 180 day period
following enactment of the Act; and (v) the extension of the due date for the
payment by air carriers of certain payroll and excise taxes until November 15,
2001 and January 15, 2002, respectively.
We were entitled to receive up to approximately $20,200,000 from the $5
billion in authorized grants, of which $17,538,000 was received as of December
2001. We recognized $3,766,000 and $12,568,000 of the grant during the three
and nine months ended December 31, 2001, which is included in nonoperating
income and expenses. The remaining $4,970,000 represents amounts received in
excess of allowable direct and incremental losses incurred from September 11,
2001 to December 31, 2001 and is included as a liability on our balance sheet
as of December 31, 2001. As of December 31, 2001, we had deferred the payment
of $8,819,000 in excise taxes, as permitted by the Act. These taxes were paid
on January 15, 2002.
We may apply under the Act for a guaranteed loan, although we have not
determined whether we will apply or the nature or amount of our application.
A newly created Air Transportation Stabilization Board has the authority to
set all terms and conditions, including determining the amounts and recipients
of the loans. The federal government may receive as collateral an equity
stake in the airlines receiving federal loan guarantees. If we apply for a
guaranteed loan, we may also be required to obtain concessions from key
constituents, including aircraft lessors, vendors and other creditors. There
can be no assurance that an application by us would be successful; however, we
believe that our inability to secure a guaranteed loan under the provision of
the Act would not have a material adverse effect on our business or operations.
Impact of the September 11, 2001 Terrorist Attacks, Our Response, and Fourth
Quarter Outlook
Among the effects experienced by us from the September 11, 2001 terrorist
attacks have been significant flight disruption costs caused by the FAA's
temporary grounding of the U.S. airline industry's fleet, significantly
increased security, insurance and other costs, significantly higher ticket
refunds and significantly reduced load factors. These and other associated
factors affected our results of operations and liquidity during the last four
months of 2001. Further terrorist attacks using commercial aircraft in flight
could result in another grounding of our fleet, and could result in additional
reductions in load factor and yields, along with increased ticket refunds,
security and other costs. The worldwide aviation insurance market may not be
able to sustain another terrorist attack on the same magnitude as the event of
September 11th without further material increases in premiums or cutback in
coverages. In addition, terrorist attacks not involving commercial aircraft,
or the general increase in hostilities relating to reprisals against terrorist
organizations or otherwise, could result in decreased load factors and yields
for airlines, including us, and increased costs.
Immediately following the terrorist attacks on September 11, 2001, we
took several steps to reduce our operating expenses. We reduced our capacity
by approximately 20%. We also reduced our costs by offering voluntary leaves
of absences and early retirements, and by furloughs, totaling approximately
405 employees; by reducing salaries for company officers by 20 to 40%, and
reducing the salaries of 650 other employees by three to 15%; by eliminating
food service provided on our flights; and by deferring nonessential capital
spending and significantly reducing all nonessential operating expenses. We
also have experienced lower fuel prices since the end of September 2001.
These cost savings were offset by increased security costs and higher
insurance premiums. We have not altered the Airbus delivery schedule and our
intent is to continue with the fleet transition plan in place prior to
September 11, 2001, subject to the likely delay in the delivery of the A318
model aircraft discussed above.
As of March 5, 2002, we expect to restore service to our pre-September
11, 2001 levels. As of February 10, 2002, we had recalled approximately 360
employees as a result of the increases in capacity, that were phased in
beginning November 15, 2001, additional personnel requirements for enhanced
security measures, and maintenance personnel to provide heavy maintenance
checks on the additional aircraft that will fly the increased schedule. In
mid December 2001, we restored essentially all of our pre September 11, 2001
food service. During the three months ended December 31, 2001, we
reinstated salaries for all employees except pilots, director level employees
and officers. Pilots, officers and director level employees' salaries were
reinstated to their pre-September 11, 2001 levels effective January 1, 2002.
After the events of September 11, 2001, many domestic airlines began
working with the FAA to increase the security of aircraft flight decks. A
variety of security enhancements were introduced, ranging from Level 1 through
Level 4. Level 4 has the most comprehensive enhancements. We also began
exploring additional security measures and, working with our aircraft
manufacturers and the FAA, developed enhanced flight deck door security
measures that are consistent with Level 2. All of our Boeing aircraft are
currently Level 2 compliant. We expect our six Airbus aircraft will be Level 1
compliant by approximately March 1, 2002, and, pending FAA approvals, will be
Level 4 compliant by approximately May 15, 2002. The federal government has
established a fund from which participating airlines are reimbursed to some
extent, not yet determined, for the additional flight deck security
enhancements. We intend to participate in that reimbursement program.
After September 11, 2001, and with the subsequent decline in the flying
public's confidence in air travel safety and security, we implemented several
marketing programs designed to assist in restoring consumer confidence in air
travel. These initiatives have helped us experience a slow but steady
increase in load factors and booking levels. Some of these initiatives were
as follows:
o Marketing programs that used direct mail, Internet fare sales, travel
agent promotions and enhanced frequent flyer program benefits;
o A community relations outreach program called Seats for Sharing that
offered complimentary seats to eligible non-profit organizations,
including schools and religious organizations;
o Communication programs that included letters to various school
administrators and employee-led visits to local schools, as well as
increased unpaid media efforts designed to educate and inform the
public on increased security;
o An employee campaign that increased employee reduced rate "buddy"
passes, designed to enable employees to encourage their friends and
family members to fly again.
The impact of the terrorist attacks of September 11, 2001 and their
aftermath on us and the domestic economy, and the sufficiency of our financial
resources to absorb that impact will depend on a number of factors, including:
(i) the magnitude and duration of the adverse impact of the terrorist attacks
on the economy in general, and the airline industry in particular; (ii) our
ability to reduce our operating costs and conserve our financial resources,
taking into account the increased costs we will incur as a consequence of the
attacks, (iii) the higher costs associated with new airline security
directives and any other increased regulation of air carriers; (iv) the
significantly higher costs of aircraft insurance coverage for future claims
caused by acts of war, terrorism, sabotage, hijacking and other similar
perils, and the extent to which such insurance will continue to be available;
(v) our ability to raise additional financing; (vi) the price and availability
of jet fuel, in light of current industry conditions; (vii) the extent of the
benefits received by us under the Act, taking into account any challenges to
and interpretations or amendments of the Act or regulations issued pursuant
thereto; and (ix) the timing and health of an economic recovery or the lack
thereof.
Our load factor for January 2002 was 51.9% compared to 54.1% in January
2001. As of February 10, 2002, advance booking levels were down 4.0 and 3.7
points in February and April, respectively, and up 2.2 points in March,
compared to the same date and for the same periods last year. Yields may also
decline in our fourth fiscal quarter ending March 31, 2002 and our first
fiscal quarter of the fiscal year ending March 31, 2003 if our competitors
continue to discount their fares or we offer lower fares to boost traffic.
At this point, due principally to the lack of predictability of future
industry traffic and yields, we continue to be unable to fully estimate the
impact on us of the events of September 11 and their consequences, and the
sufficiency of our financial resources to absorb that impact.
We are assessing our liquidity position in light of our aircraft
purchase commitments and other capital needs, the economy, the events of
September 11, and other uncertainties surrounding the airline industry. We
believe it may be appropriate to enhance our liquidity, and are actively
considering several financing alternatives, including filing a shelf
registration statement that would allow us to sell equity or debt securities
from time to time as market conditions permit, or a public offering of equity
or debt securities. In addition, we may pursue domestic and foreign bank
financing such as enhanced equipment trust certificates, leveraged lease
arrangements or government guaranteed financing. We have no agreements or
arrangements to offer such securities or which provide financing and we cannot
predict whether we will undertake any of these alternatives or their timing.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
which requires the use of the purchase method and eliminates the option of
using the pooling-of-interests method of accounting for all business
combinations. The provisions in this statement apply to all business
combinations initiated after June 30, 2001, and all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) which
requires that all intangible assets acquired, other than those acquired in a
business combination, be initially recognized and measured based on the
asset's fair value. We are required to adopt the provisions of SFAS 142
effective January 1, 2002. Goodwill and certain identifiable intangible
assets will not be amortized under SFAS 142, but instead will be reviewed for
impairment at least annually in accordance with the provisions of this
statement. This accounting pronouncement presently has no impact on us as we
do not have any intangible assets on our balance sheet.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations,
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The standard applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the
carrying amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, we will recognize
a gain or loss on settlement. We do not expect the impact of adopting SFAS
143 to be significant.
In October 2001, the FASB issued Statement of Financial Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
addressed financial accounting and reporting for the impairment or disposal of
long-lived assets. While Statement No. 144 supersedes Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of, it retains many of the fundamental provisions of that
Statement. Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of A Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. We do not expect the impact of
adopting SFAS No. 144 to be significant.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk arising from a change in the price of
fuel. The sensitivity analysis presented does not consider either the effect
that such a change may have on overall economic activity or additional actions
management may take to mitigate our exposure to such a change. Actual results
may differ from the amounts disclosed. At the present time, we do not utilize
fuel price hedging instruments to reduce our exposure to fluctuations in fuel
prices.
Our earnings are affected by changes in the price and availability of
aircraft fuel. Market risk is estimated as a hypothetical 10 percent increase
in the average cost per gallon of fuel for the year ended March 31, 2001.
Based on fiscal year 2001 actual fuel usage, such an increase would have
resulted in an increase to aircraft fuel expense of approximately $7,104,000
in fiscal year 2001. Comparatively, based on projected fiscal year 2002 fuel
usage, such an increase would result in an increase to aircraft fuel expense
of approximately $7,062,000 in fiscal year 2002. The increase in exposure to
fuel price fluctuations in fiscal year 2002 is due to the increase of our
average aircraft fleet size during the year ended March 31, 2001, projected
increases to our fleet during the year ended March 31, 2002 and related
gallons purchased.
Our average cost per gallon of fuel for the nine months ended December
31, 2001 decreased 15.9% from the average cost for the nine months ended
December 31, 2000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Operating Expenses."
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
Exhibit
Numbers
(a) Exhibits
10.37(a) Amendment No. 2 dated as of February 14, 2002 between
Wells Fargo Bank Northwest, N.A. (formerly First Security
Bank National Association), as Lessor and Frontier Airlines,
Inc., as Lessee and Triton Aviation Finance to the Aircraft
Lease Agreement (MSN 23004)dated as of February 26, 1999.
Portions of this exhibit have been excluded from the
publicly available document and an application for
confidental treatment of the excluded material has been
requested. (1)
10.38(a) Amendment No. 1 dated as of February 14, 2002 between
Wells Fargo Bank Northwest, N.A.(formerly First Security
Bank National Association), as Lessor and Frontier Airlines,
Inc. as Lessee and Triton Aviation Finance to the Aircraft
Lease Agreement (MSN 23007)dated as of February 26, 1999.
Portions of this exhibit have been excluded from the
publicly available document and an application for
confiental treatment of the excluded material has been
requested. (1)
10.51(d) Amendment No. 4 to Airbus A318/319 Purchase Agreement
dated as of March 10, 2000 between AVSA, S.A.R.L.,
Seller, and Frontier Airlines, Inc., Buyer. Portions of
this exhibit have been excluded from the publicly
available document and an application for an order
granting confidential treatment of the excluded material
has been requested. (1)
10.62(a)Amendment No. 1 to the Codeshare Agreement dated as of
May 30, 2001 between Frontier Airlines, Inc., and Great
Lakes Aviation, Ltd. Portions of this exhibit have been
excluded from the publicly available document and an
order granting confidential treatment of the excluded
material has been requested. (1)
10.65(a)Amendment No. 1 to the Codeshare Agreement dated as of
September 4, 2001 between Mesa Airlines, Inc., and
Frontier Airlines, Inc. Portions of this exhibit have
been excluded from the publicly available document and
an order granting confidential treatment of the excluded
material has been requested. (1)
10.66 Employee Stock Ownership Plan of Frontier Airlines, Inc.
as amended and restated, effective January 1, 1997 and
executed February 5, 2002. (1)
10.66(a)Amendment of the Employee Stock Ownership Plan of
Frontier Airlines, Inc. as amended and restated,
effective January 1, 1997 and executed February 5, 2002
for EGTRRA. (1)
(1) Filed herewith.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FRONTIER AIRLINES, INC.
Date: February 14, 2002 By: /s/ Paul H. Tate
Paul H. Tate, Vice
President and
Chief Financial Officer
Date: February 14, 2002 By: /s/ Elissa A. Potucek
Elissa A. Potucek, Vice
President, Controller,
Treasurer and Principal
Accounting Officer