Back to GetFilings.com
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, 2002
[ ] 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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
The number of shares of the Company's Common Stock outstanding as of February 7, 2003 was 29,657,550.
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 7
Item 3: Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited)
December 31, March 31,
2002 2002
Assets
Current assets:
Cash and cash equivalents $ 29,501,657 $ 87,555,189
Short-term investments 2,000,000 2,000,000
Restricted investments 15,616,000 11,574,000
Receivables, net of allowance for doubtful accounts of $357,000
and $155,000 at December 31, 2002 and March 31, 2002, respectively 26,119,616 28,536,313
Income taxes receivable 14,439,293 6,855,544
Maintenance deposits 41,299,207 36,046,157
Prepaid expenses and other assets 8,197,370 11,013,602
Inventories 7,990,313 6,604,378
Deferred tax assets 2,280,799 1,788,078
Deferred lease and other expenses 485,721 74,952
Total current assets 147,929,976 192,048,213
Property and equipment, net 298,267,592 142,861,771
Security, maintenance and other deposits 25,018,268 20,932,709
Aircraft pre-delivery payments 38,631,440 44,658,899
Deferred lease and other expenses 1,947,783 523,134
Restricted investments 11,810,344 12,660,210
$523,605,403 $413,684,936
===============================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 21,647,018 $ 23,185,266
Air traffic liability 50,852,562 61,090,705
Accrued maintenance expense 43,114,660 37,527,906
Other accrued expenses 21,659,601 22,060,082
Deferred stabilization act
compensation - 4,835,381
Current portion of long-term debt 9,261,294 3,225,651
Current portion of obligations under capital leases 111,602 138,604
Total current liabilities 146,646,737 152,063,595
Long-term debt 180,954,763 66,832,018
Accrued maintenance expense 15,184,132 15,796,330
Deferred tax liability 13,893,015 6,716,815
Deferred lease and other expenses 7,578,634 3,077,326
Obligations under capital leases, excluding current portion - 65,559
Total liabilities 364,257,281 244,551,643
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 shares; 29,651,550 and 29,421,331 shares issued and
outstanding at December 31, 2002 and March 31, 2002, respectively 29,652 29,421
Additional paid-in capital 87,051,275 85,867,487
Unearned ESOP shares - (2,119,670)
Retained earnings 72,267,195 85,356,055
159,348,122 169,133,293
$523,605,403 $413,684,936
================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
Revenues:
Passenger $ 117,752,421 $ 90,620,523 343,753,943 325,092,337
Cargo 1,353,403 1,268,503 4,299,590 4,806,967
Other 1,147,464 667,830 3,366,686 1,980,120
Total revenues 120,253,288 92,556,856 351,420,219 331,879,424
Operating expenses:
Flight operations 39,969,206 29,181,407 115,289,389 94,741,617
Aircraft fuel expense 21,947,566 11,818,671 60,675,688 46,954,254
Aircraft and traffic servicing 22,440,145 16,492,448 63,063,269 52,293,101
Maintenance 19,031,552 17,319,910 55,131,042 55,683,809
Promotion and sales 11,664,781 12,526,189 39,889,202 45,437,169
General and administrative 6,684,541 5,390,015 19,381,332 18,598,935
Depreciation and amortization 4,558,342 3,120,702 12,489,981 8,187,111
Total operating expenses 126,296,133 95,849,342 365,919,903 321,895,996
Operating income (loss) (6,042,845) (3,292,486) (14,499,684) 9,983,428
Nonoperating income (expense):
Interest income 328,303 826,464 1,523,063 3,473,444
Interest expense (1,993,971) (1,191,648) (5,148,950) (2,118,074)
Stabilization act compensation - 3,765,724 - 12,567,959
Early extinguishment of debt (1,774,311) - (1,774,311) -
Unrealized derivative gain 237,933 - 237,933 -
Other, net (240,000) (71,028) (678,322) (267,836)
Total nonoperating income (expense) net (3,442,046) 3,329,512 (5,840,587) 13,655,493
Income (loss) before income tax expense (9,484,891) 37,026 (20,340,271) 23,638,921
Income tax (benefit) expense (3,319,279) (871,597) (7,251,411) 7,712,118
Net income (loss) $ (6,165,612) $ 908,623 $(13,088,860) $ 15,926,803
================ ============== =============== =============
Earnings per share:
Basic $ (0.21) $0.03 $ (0.44) $0.56
================ ============== =============== ==============
Diluted $ (0.21) $0.03 $ (0.44) $0.54
================ ============== =============== ==============
Weighted average shares of
common stock outstanding
Basic 29,648,077 28,573,706 29,605,350 28,408,056
================ ============== =============== ==============
Diluted 29,648,077 29,610,062 29,605,350 29,442,019
================ ============== =============== ==============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Cash Flows
For the Nine Months Ended December 31, 2002 and 2001
(Unaudited)
2002 2001
Cash flows provided (used) by operating activities:
Net income (loss) $(13,088,860) $ 15,926,803
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Employee stock option plan compensation expense 2,119,670 1,662,087
Depreciation and amortization 13,369,006 8,252,487
Deferred tax expense 6,683,479 3,402,838
Impairment recorded on fixed assets - 1,511,642
Loss on disposal of equipment 234,797 254,104
Unrealized fuel hedging gain (237,933)
Changes in operating assets and liabilities:
Restricted investments (3,809,834) (4,866,952)
Receivables 2,416,697 10,638,154
Income taxes receivable (7,583,749) -
Security, maintenance and other deposits (8,109,209) (4,893,409)
Prepaid expenses and other assets 2,816,232 1,622,896
Inventories (1,385,935) (1,438,937)
Accounts payable (1,538,248) (8,065,358)
Air traffic liability (10,238,143) (14,747,971)
Other accrued expenses (484,470) 8,050,831
Deferred stabilization act compensation (4,835,381) 4,970,429
Accrued maintenance expense 4,974,556 5,401,853
Deferred lease and other expenses 4,501,308 2,325,430
Net cash provided (used) by operating activities (14,190,017) 30,006,927
Cash flows provided (used) by investing activities:
Aircraft lease and purchase deposits, net 4,792,059 (2,995,086)
Decrease in restricted investments 617,700 931,800
Proceeds from the sale of aircraft 29,750,000 -
Capital expenditures (197,880,599) (119,458,570)
Net cash used by investing activities (162,720,840) (121,521,856)
Cash flows provided (used) by financing activities:
Net proceeds from issuance of common stock 577,562 1,915,538
Proceeds from long-term borrowings 147,100,000 72,000,000
Payment of financing fees (1,786,064) (577,959)
Principal payments on long-term borrowings (26,941,612) (1,163,290)
Principal payments on obligations under capital leases (92,561) (76,165)
Net cash provided by financing activities 118,857,325 72,098,124
Net decrease in cash and cash equivalents (58,053,532) (19,416,805)
Cash and cash equivalents, beginning of period 87,555,189 109,251,426
Cash and cash equivalents, end of period $ 29,501,657 $ 89,834,621
===================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Financial Statements
December 31, 2002
(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, 2002. 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, 2002 are not necessarily
indicative of the results that will be realized for the full year.
Significant Accounting Policies
Fuel Hedging
The company has entered into derivative instruments which are intended to reduce the Company's exposure to
changes in fuel prices. The Company accounts for the derivative instruments entered into as trading instruments
under FAS133 and records the fair value of the derivatives as an asset or liability as of each balance sheet date.
The Company records any settlements received or paid as an adjustment to the cost of fuel. The results of
operations for the three and nine months ended December 31, 2002 include an unrealized derivative
gain of $237,933 which is included in nonoperating income (expense) and a realized gain of approximately
$68,000 in cash received from a counter-party recorded as a reduction of fuel expense. Changes in the fair
value of the derivative instruments attributable to future prices are recorded as nonoperating income.
The Company was not a party to any derivative contracts in the fiscal third quarter 2002.
In November 2002, the Company entered into two derivative contracts for Gulf Coast jet fuel with two counter-
parties. The first contract is a swap agreement for a notional volume of 770,000 gallons per month for the
period from December 1, 2002 to May 31, 2003. Under the swap agreement the Company receives the difference
between a fixed price of 72.25 cents per gallon and a price based on an agreed upon published spot price for
jet fuel if the index price is higher. If the index price is lower, the Company pays the difference.
This agreement is estimated to represent 10% of fuel purchases for that period. The second contract,
with a notional volume of 385,000 gallons per month for the period December 1, 2002 to November 30, 2003 is
a three-way collar. The volume of fuel covered by this contract is estimated to represent 5% of fuel purchases
for that period. The collar has a cap of 82 cents per gallon, and a secondary floor of 64.5 cents per gallon.
When the U.S. Gulf Coast Pipeline Jet index preice is above the cap, the Company receives the difference between
the index and the cap. When the index price is below the primary floor but above the secondary floor, the Company
pays the difference between the index and the primary floor. However, when the price is below the secondary floor,
the Company is inly obligated to pay the difference between 64.5 cents and 72 cents per gallon. No payments are
exchanged if the index price is between the cap and the primary floor.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" SFAS No. 143
addresses financial accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No.
143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company
does not currently have any obligations falling under the scope of SFAS No. 143, and therefore its
adoption did not have a material impact on its results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets
to be held and used or to be disposed of, and also broadens the definition of what constitutes a discontinued
operation and how the results of discontinued operations are to be measured and presented. The Company
adopted SFAS No. 144 in its fiscal 2003 and the adoption of SFAS No. 144 did not have a material impact on its
results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No.13, and Technical Corrections". This Statement rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt", SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This
statement amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. The Company early adopted SFAS
No. 145 in its fiscal year 2003. The Company classified its debt extinguishment costs as an expense from
operations in its statement of operations rather than as an extraordinary item as was previously required before
the issuance of SFAS No. 145.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
The Statement addresses financial accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Company does not currently
have any exit or disposal activities falling under the scope of SFAS No. 146, and therefore its adoption did not
have a material impact on its results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". This statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the disclosure requirements
of Statement 123 to require prominent disclosures in both annual and interim financial statements about
the method of accounting for stock based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002.
Reclassifications
Certain reclassifications have been made to the March 31, 2002 balances to conform to the December 31, 2002
presentation.
(2) Long-term Debt
During the year ended March 31, 2002, 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. During the nine
months ended December 31, 2002, we entered into a sales leaseback transaction for one of these purchased
aircraft and repaid the remaining loan with the proceeds of the sale. The Company received approximately
$5,300,000 from the sale of one of these aircraft in excess of the loan and the fees totaling $1,774,311
associated with the early extinguishment of the debt that collateralized this aircraft. The fees paid were
recorded as a loss on early extinguishment of debt and is included in nonoperating income (expense). The
Company recognized a gain of approximately $850,000 that has been deferred and will be amortized against
the lease expense over the five-year life of the lease. Each remaining aircraft loan has a term of 10 years
and is payable in equal monthly installments, including interest, payable in arrears. The aircraft secures
the loans. Each of the remaining loans provide for monthly principal and interest payments of $215,000
and $218,110, bears interest with rates of 6.71% and 6.54%, with maturities in May and August 2011, at which
time a balloon payment totaling $10,200,000 is due with respect to each aircraft loan.
During the nine months ended December 31, 2002, we entered into additional long-term debt obligations to
finance six additional Airbus aircraft with interest rates that adjust quarterly or semi-annually based
on LIBOR rates. At December 31, 2002 interest rates of these long-term debt obligations ranged between was
2.66% and 3.14%, each have a term of 12 years, and each have balloon payments ranging from $4,800,000 and
$7,700,000 at the end of the term. The loans are secured by these aircraft.
As of December 31, 2002, maturities of long-term debt for each calendar year are as follows:
2003 $ 9,261,294
2004 9,727,171
2005 10,234,983
2006 11,141,042
2007 11,340,729
Thereafter 138,510,838
--------------------
$190,216,057
====================
(3) Subsequent Events
In January 2003, the Company obtained a loan under one of its loan facilities totaling $24,000,000 for
the purchase on an Airbus aircraft. This loan is payable in quarterly installments, including interest,
payable in arrears, with a floating interest rate adjusted based on three month LIBOR rates. The loan
presently bears interest at a rate of 2.6%. The loan has a term of 12 years and matures in January 2015,
at which time a balloon payment of $7,000,000 is due. The loan is secured by the aircraft.
In February 2003, the Company sold its purchase commitment for an Airbus A319 aircraft to be delivered in
March 2003 and agreed to lease the aircraft from the purchaser for five years. The purchaser reimbursed
the Company approximately $7,100,000 of pre-delivery payments previously paid for that aircraft.
In December 2002, the Company entered into an engine maintenance agreement for the servicing, repair,
maintenance and functional testing of its aircraft engines used on our Airbus aircraft effective January 1,
2003. The agreement is for a 12 year period from the effective date for our owned aircraft or December 31,
2014, whichever comes first, and for each leased aircraft, the term coincides with the initial lease
term of 12 years. This agreement precludes the Company from using another third party for such services
during the term. This agreement requires monthly payments at a specified rate times the number of flight
hours flown on the aircraft during that month.
In February 2003, we amended our Code Share agreement with Mesa Air Group, from a prorate-based compensation
method to a revenue guarantee compensation method effective March 1, 2003 through August 1, 2003.
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, including the
current economic slowdown, which has put significant downward pressure on fares; 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 unavailability of, or inability to secure upon acceptable terms, financing necessary to purchase aircraft
that we have ordered; issues relating to our transition to an Airbus aircraft fleet; uncertainties
regarding aviation fuel prices; uncertainties regarding the cost and availability of insurance; 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, 2002 as they may be modified by the disclosures
contained in this report.
General
We are a scheduled passenger airline based in Denver, Colorado. As of February 7, 2003, we, in
conjunction with Frontier JetExpress operated by Mesa Air Group ("Mesa"), operate routes linking our Denver hub
to 37 cities in 20 states spanning the nation from coast to coast and to two cities in Mexico. We were organized
in February 1994 and we began flight operations in July 1994 with two leased Boeing 737-200 jets. We have since
expanded our fleet to 27 leased jets and nine owned Airbus aircraft, including four Boeing 737-200s, 16 larger
Boeing 737-300s, and 16 Airbus A319s. We plan to take delivery of one additional leased Airbus A319 aircraft
by the end of our fiscal year ending March 31, 2003. In May 2001, we began a fleet replacement plan to replace
our Boeing aircraft with new purchased and leased Airbus jet aircraft, a transition we expect to complete by
approximately the second quarter of calendar year 2006. During fiscal year 2002, we advanced the return of one
leased Boeing 737-300 aircraft to its owner from April 2002 to September 2001, and two leased Boeing 737-200
aircraft from September and November 2004 to November 2002 and January 2003, respectively. The return of these
aircraft was extended to January 2003 and February 2003, respectively. We have extended the lease of a Boeing
737-300 aircraft from February 2003 to November 2003. At the end of September 2002, we took two Boeing 737-200s
out of service and completed the process of bringing the aircraft into compliance with return conditions in
November 2002. Including the anticipated return of a Boeing 737-200 aircraft and the aircraft to be delivered
in March 2003, we plan to operate a fleet of three Boeing 737-200s, 16 Boeing 737-300s, and 17 Airbus A319s, or a
total of 36 aircraft during our fiscal year ending March 31, 2003.
We currently use up to 13 gates at our hub, Denver International Airport ("DIA"), where we operate
approximately 162 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. The reduced service was
entirely reinstated by February 2002. Since that time, we have re-established our long-term business plan of
moderate capacity increases by taking delivery of new Airbus A319 aircraft. We intend to continue to monitor
passenger demand and other competitive factors and adjust the number of flights we operate accordingly. During
the nine months ended December 31, 2002, we added service to Indianapolis, Indiana on May 23, 2002; Boise, Idaho
and Tampa, Florida on June 24, 2002; Tucson, Arizona, San Jose, California, Fort Myers, Florida, Wichita, Kansas
(operated by Frontier JetExpress) and Oklahoma City, Oklahoma and terminated service to Boston, Massachusetts and
St. Louis, Missouri (operated by Frontier JetExpress) on October 22, 2002; and added Cancun and Mazatlan, Mexico
on December 20 and 21, 2002, respectively.
We have filed an application for at least four slots at John Wayne International Airport in Santa Ana,
California (SNA), which would enable us to operate two daily non-stop flights between that airport and our
Denver hub. SNA airport officials have filed their proposed amendment to the John Wayne Airport access plan
with the U.S. District Court in Los Angeles, noting that all parties support the proposal. We are waiting for
SNA officials to communicate their formal Allocation Proposal. Once that process has been communicated,
SNA officials will likely begin implementing their proposed access plan in mid-year 2003. If we are successful
in obtaining approval to start service, we would plan to add service between Denver and SNA approximately 60 days
after notification.
In June 2002 we signed a letter of intent with LiveTV to bring DIRECTV AIRBORNE(TM)satellite programming to
every seatback in our Airbus fleet and in October 2002 we signed a purchase and long-term services agreement with
LiveTV for that system. As of February 7, 2003, we have completed the installation of the LiveTV system on
13 Airbus aircraft, and we plan to have all of our Airbus aircraft equipped with the LiveTV system by the end of
February 2003. The installed systems became operational upon receipt of regulatory approval in December 2002.
We have implemented a $5 per segment usage charge for access to the system to offset the usage costs for the system.
We believe the DIRECTV(TM)product represents a significant value to our customers and may encourage more
customers to choose Frontier over our competitors.
In September 2001, we entered into a codeshare agreement with Mesa. Under the terms of the agreement,
we market and sell flights operated by Mesa as Frontier JetExpress. This codeshare began February 17, 2002 with
service between Denver and San Jose, California, and with supplemental flights to our current service between
Denver and Houston, Texas. Frontier JetExpress currently provides service to San Diego, San Jose, Oakland,
and Ontario, California, and Wichita, Kansas using four 50-passenger Bombardier CRJ-200 regional jets. In
February 2003, we amended our Code Share agreement with Mesa Air Group, from a prorate-based compensation method
to a "revenue guarantee" compensation method effective March 1, 2003 through August 1, 2003. This arrangement
will allow us to have more control over scheduling, pricing and seat inventory.
Effective July 9, 2001, we began a codeshare agreement with Great Lakes Aviation, Ltd. ("Great Lakes")
by which Great Lakes provides daily service to 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 removed from the codeshare
agreement effective December 13, 2001.
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 "Stabilization Act"). The
Stabilization 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 Stabilization 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 Stabilization 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. During the fiscal year ended March 31,
2002, we recognized $12,703,000 of the federal grant as a result of the Stabilization Act to offset direct and
incremental losses we experienced as a result of the terrorist attacks on September 11, 2001. We had received a
total of $17,538,000; the remaining $4,835,000 represents amounts received in excess of estimated allowable
direct and incremental losses incurred from September 11, 2001 to December 31, 2001. We repaid the excess amounts
received during the nine months ended December 31, 2002. Our final filing relating to amounts we received
under the Stabilization Act is still subject to audit under the Stabilization Act.
Results of Operations
We had a net loss of $13,089,000 or 44(cent)per share for the nine months ended December 31, 2002 as
compared to net income of $15,927,000 or 54(cent)per diluted share for the nine months ended December 31, 2001.
We had a net loss of $6,166,000 or 21(cent)per share for the three months ended December 31, 2002 as compared to
net income of $909,000 or 3(cent)per diluted share for the three months ended December 31, 2001. During the nine
months ended December 31, 2002, as compared to the prior comparable period, we experienced lower average fares
as a result of the slowing economy, competitive pricing on discount fares available inside 14 days of travel
in our markets and low introductory fares by new carriers serving the Denver market. Our average fare was $109
for the nine months ended December 31, 2002, compared to $133 for the nine months ended December 31, 2001.
Additionally, we believe that passenger traffic was negatively impacted by the anniversary of the terrorist attacks
that occurred on September 11, 2001, and as a result, we canceled 42 scheduled flights on September 11, 2002 and
experienced unusually low load factors during the week in which September 11, 2002 fell. During the three and nine
months ended December 31, 2002, we completed a sales leaseback transaction of one of our purchased aircraft and
paid off the loan that was collateralized by this aircraft. As a result we incurred $1,774,000 in costs associated
with the early extinguishment of this debt. Excluding this unusual item, our net loss for the three and nine months
ended December 31, 2002, would have been $5,003,000 and $11,945,000, respectively, or 17(cent)and 40(cent)per share,
respectively.
For the nine months ended December 31, 2001, our passenger traffic was severely adversely impacted by the
events of September 11th. On that day, 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.
In total, 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, and reduced approximately 20.1% of
departures originally scheduled during that period. During the three months ended December 31, 2002, our daily
average aircraft block hour utilization increased to 9.5 from 7.8 for the prior comparable period ended December
31, 2001, as we reduced approximately 20.1% of departures originally scheduled during the prior period. Due to high
fixed costs, we continued to incur substantially all of our normal operating expenses during this period and generated
substantial operating losses. During the nine months ended December 31, 2001, we recognized $12,568,000 of the
federal cash grant we received as a result of the Stabilization Act. 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.
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 ("CASM") during the nine months ended December 31, 2001.
Our CASM for the nine months ended December 31, 2002 and 2001 was 8.22(cent)and 9.54(cent), respectively,
a decrease of 1.32(cent)or 13.4%. CASM excluding fuel for the nine months ended December 31, 2002 and 2001 was
6.85(cent)and 8.14(cent), respectively, a decrease of 1.29(cent)or 15.8%. Our CASM for the three months ended
December 31, 2002 and 2001 was 8.28(cent)and 9.34(cent), respectively, a decrease of 1.06(cent)or 11.3%. CASM
excluding fuel for the three months ended December 31, 2002 and 2001 was 6.84(cent)and 8.17(cent), respectively,
a decrease of 1.33(cent)or 16.2%. Our CASM decreased during the nine months ended December 31, 2002 as a
result of a reduced level of Airbus transition expenses, an increase in the average number of owned aircraft
from 1.7 to 5.5, a decrease in the cost per block hour on our Boeing fleet for rotable repairs and engine overhauls,
a decrease in our distribution expenses in relation to the reduction in the average fare and a reduction in travel
agency commissions as a result of the elimination of substantially all travel agency commissions effective
June 1, 2002, the lack of a bonus accrual as a result of the net loss for the period, an increase in aircraft
utilization, and economies of scale associated with the 32.6% increase in ASMs over the prior comparable period.
During the nine months ended December 31, 2002, we incurred approximately $2,800,000 in transition expenses
associated with the induction of the Airbus aircraft, as compared to $3,940,000 for the nine months ended
December 31, 2002, or a .06(cent)reduction per ASM. These reductions were partially offset by an increase of
..12(cent)per ASM as a result of an increase in war risk and hull and liability insurance premiums after the
events of September 11. Our CASM during the nine months ended December 31, 2001 was impacted by the terrorist
attacks and unusual weather conditions including an unusual spring blizzard and a hail storm that caused damage
to five of our aircraft during the nine months ended December 31, 2001, or approximately 20% of our fleet.
During the nine 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. Additionally, due to the flight cancellations as a result of the September 11 terrorist attacks
and the adverse 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 CASM for the period ending December 31, 2001.
During the nine months ended December 31, 2002, our average daily block hour utilization increased to 9.8 from
9.0 for the nine months ended December 31, 2001. During the three months ended December 31, 2002 our average daily
block hour utilization increased to 9.5 from 7.8 for the three months ended December 31, 2001. 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, and excludes aircraft
removed permanently from revenue service or new aircraft not yet placed in revenue service. In September 2001, we
grounded several aircraft as a result of the September 11, 2001 terrorist attacks, resulting in reduced aircraft
utilization during the 2001 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, 2002 and 2001, our break-even load factors were 63.9% and 58.5%, respectively, compared to our
achieved passenger load factors of 60.4% and 60.7%. For the three months ended December 31, 2002 and 2001, our break-
even load factors were 63.6% and 54.3%, respectively, compared to our achieved passenger load factors of 59.5%
and 52.4%. Our break-even load factor increased from the prior comparable period largely as a result of a
decrease in our average fare to $109 during the nine months ended December 31, 2002 from $133 during the nine
months ended December 31, 2001, offset by a decrease in our CASM to 8.22(cent)for the nine months ended December 31,
2002 from 9.54(cent) for the nine months ended December 31, 2001.
The following table provides certain of our financial and operating data for the three month and nine
month periods ended December 31, 2002 and 2001.
Three Months Ended December 31, Nine Months Ended December 31,
2002 2001 2002 2001
Selected Operating Data(1):
Passenger revenue (000s) (2) 117,752 90,621 343,754 325,092
Revenue passengers carried (000s) 999 623 2,915 2,271
Revenue passenger miles (RPMs) (000s) (3) 906,801 529,593 2,689,222 2,038,888
Available seat miles (ASMs) (000s) (4) 1,524,638 1,010,091 4,453,916 3,359,245
Passenger load factor (5) 59.5% 52.4% 60.4% 60.7%
Break-even load factor (6) 63.6% 54.3% 63.9% 58.5%
Block hours (7) 30,472 20,780 89,026 67,208
Departures 13,522 9,469 39,289 30,389
Average aircraft stage length 852 808 860 837
Average passenger length of haul 908 850 923 898
Average daily fleet block hour utilization (8) 9.5 7.8 9.8 9.0
Yield per RPM (cents) (9) 12.93 16.93 12.74 15.89
Total yield per RPM (cents) (10) 13.26 17.48 13.07 16.28
Yield per ASM (cents) (11) 7.69 8.88 7.69 9.65
Total yield per ASM (cents) (12) 7.89 9.16 7.89 9.88
Cost per ASM (cents) 8.28 9.34 8.22 9.54
Cost per ASM excluding fuel (cents) 6.84 8.17 6.85 8.14
Average fare (13) 111 134 109 133
Average aircraft in fleet 34.8 29.0 33.1 27.2
Aircraft in fleet at end of period 37.0 29.0 37.0 29.0
Average age of aircraft at end of period 7.9 10.4 7.9 10.4
EBITDAR (000s) (14) $ 14,608.00 $ 19,672 $ 48,246 $ 79,062
EBITDAR as a % of revenue 12.1% 21.3% 13.7% 23.8%
(1) The cost associated with the early extinguishment of debt totaling $1,774,000 has been excluded from the
break-even load factor calculation for the three and nine months ended December 31, 2002. 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, CASM and CASM excluding fuel for the three and nine months ended
December 31, 2001. The Stabilization Act compensation totaling $3,766,000 and $12,568,000 for the
three and nine months ended December 31, 2001, respectively, has been excluded from the calculation of the
break-even load factor
(2) "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.
(3) "Revenue passenger miles," or RPMs, are determined by multiplying the number of fare-paying passengers carried
by the distance flown.
(4) "Available seat miles," or ASMs, are determined by multiplying the number of seats available for passengers
by the number of miles flown.
(5) "Passenger load factor" is determined by dividing revenue passenger miles by available seat miles.
(6) "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
(7) "Block hours" represent the time between aircraft gate departure and aircraft gate arrival.
(8) "Average daily block hour utilization" represents the total block hours divided by the weighted average number
of aircraft days in service. The number of aircraft includes all aircraft on our operating certificate, which
includes scheduled aircraft, as well as aircraft out of service for maintenance and operation spare aircraft,
and excludes aircraft removed permanently from revenue service or new aircraft not yet placed in revenue service.
(9) "Yield per RPM" is determined by dividing passenger revenues by revenue passenger miles.
(10) "Total Yield per RPM" is determined by dividing total revenues by revenue passenger miles.
(11) "Yield per ASM" is determined by dividing passenger revenues by revenue passenger miles.
(12) "Total Yield per ASM" is determined by dividing total revenues by available seat miles.
(13) "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.
(14) "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, 2002 and 2001.
Three Months Ended December 31, Nine Months Ended December 31,
2002 2001 2002 2001
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 7.72 97.9% 8.97 97.9% 7.72 97.8% 9.68 98.0%
Cargo 0.09 1.1% 0.12 1.4% 0.10 1.2% 0.14 14.1%
Other 0.08 1.0% 0.07 0.7% 0.07 1.0% 0.06 0.6%
Total revenues 7.89 100.0% 9.16 100.0% 7.89 100.0% 9.88 100.0%
======================================== =======================================
Operating expenses:
Flight operations 2.62 33.2% 2.89 31.5% 2.59 32.8% 2.82 28.5%
Aircraft fuel expense 1.44 18.2% 1.17 12.8% 1.36 17.3% 1.40 14.1%
Aircraft and traffic servicing 1.47 18.7% 1.63 17.8% 1.42 17.9% 1.56 15.8%
Maintenance 1.25 15.8% 1.57 17.1% 1.24 15.7% 1.61 16.3%
Promotion and sales 0.76 9.7% 1.24 13.5% 0.90 11.3% 1.35 13.7%
General and administrative 0.44 5.6% 0.53 5.8% 0.43 5.5% 0.55 5.6%
Depreciation and
amortization 0.30 3.8% 0.31 3.4% 0.28 3.6% 0.25 2.5%
Total operating expenses 8.28 105.0% 9.34 101.9% 8.22 104.1% 9.54 96.5%
========================================= ======================================
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 depending on
the markets' locations.
Our average fare for the nine months ended December 31, 2002 and 2001 was $109 and $133, respectively, a
decrease of 18.1%. We believe that the decrease in the average fare during the nine months ended December 31,
2002 from the prior comparable period was principally a result of the slowing economy, competitive pricing on
discount fares available inside 14 days of travel in our markets and low introductory fares by new carriers serving
the Denver market.
Passenger Revenues. Passenger revenues totaled $343,754,000 for the nine months ended December 31,
2002 compared to $325,092,000 for the nine months ended December 31, 2001, or an increase of 5.7%, on increased
capacity of 1,094,671,000 ASMs or 32.6%. Passenger revenues totaled $117,752,000 for the three months ended
December 31, 2002 compared to $90,621,000 for the three months ended December 31, 2001, or an increase of 29.9%,
on increased capacity of 514,547,000 ASMs or 50.9%. The number of revenue passengers carried was 2,915,000 for
the nine months ended December 31, 2002 compared to 2,271,000 for the nine months ended December 31, 2001 or an
increase of 28.4%. The number of revenue passengers carried was 999,000 for the three months ended December 31,
2002 compared to 623,000 for the three months ended December 31, 2001 or an increase of 60.4%. We had an average
of 33.1 aircraft in our fleet during the nine months ended December 31, 2002 compared to an average of 27.2
aircraft during the nine months ended December 31, 2001, an increase of 21.7%. RPMs for the nine months ended
December 31, 2002 were 2,689,222,000 compared to 2,038,888,000 for the nine months ended December 31, 2001, an
increase of 31.9%. Our load factor decreased to 60.4% for the nine months ended December 31, 2002 from 60.7% for
the prior comparable period. We believe that our cancelled flights due to the terrorist attacks and weather had
an adverse effect on our revenue during the nine months ended December 31, 2001.
Cargo Revenues. Cargo revenues, consisting of revenues from freight and mail service, totaled $4,300,000
and $4,807,000, a decrease of 10.6%, for the nine months ended December 31, 2002 and 2001, respectively, representing
1.2% and 1.4%, respectively, of total revenues. Cargo revenues totaled $1,353,000 and $1,269,000, an increase
of 6.7% for the three months ended December 31, 2002 and 2001, representing 1.1% and 1.4%, respectively, of total
revenues. 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 $3,367,000 and $1,980,000, respectively, representing 1.0% and .6% of total revenues,
respectively, for the nine months ended December 31, 2002 and 2001, an increase of 70.1%. Other revenue
increased over the prior comparable period as a result of an increase in interline handling fees primarily
due to the Mesa codeshare agreement and an increase in ground handling for Mesa and other airlines.
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 $365,920,000 and $321,896,000 for the nine months ended December 31, 2002 and 2001
and represented 104.1% and 97.0% of revenue, respectively. Total operating expenses for the three months
ended December 31, 2002 and 2001 were $126,296,000 and $95,849,000 and represented 105.0% and 103.6% of revenue,
respectively. Operating expenses increased as a percentage of revenue during the three and nine months ended
December 31, 2002 as a result of the 17.2% and 18.1% decrease in the average fare, respectively, associated with the
slowing economy.
Flight Operations. Flight operations expenses of $115,289,000and $94,742,000 were 32.8% and 28.6% of
total revenue for the nine months ended December 31, 2002 and 2001, respectively. Flight operations expenses of
$39,969,000 and $29,181,000 were 33.2% and 31.5% of total revenue for the three months ended December 31, 2002 and
2001, respectively. Flight operations expenses include all expenses related directly to the operation of
the aircraft including 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 nine months ended December 31, 2002 were approximately $2,681,000 for Airbus training and related
travel expenses, as compared to $2,007,000 for the nine months ended December 31, 2001, respectively.
Aircraft lease expenses totaled $52,407,000 (14.9% of total revenue) and $48,590,000 (14.6% of total
revenue) for the nine months ended December 31, 2002 and 2001, respectively, an increase of 7.1%. Aircraft lease
expenses totaled $17,806,000 (14.8% of total revenue) and $16,148,000 (17.4% of total revenue) for the three
months ended December 31, 2002 and 2001, respectively, an increase of 10.3%. The increases are largely due to
an increase in the average number of leased aircraft to 28.3 from 25.7, or 10.1%, during the nine months ended
December 31, 2002. During the nine months ended December 31, 2001, we incurred short-term lease expenses of
$630,000 for aircraft to partially replace capacity of the damaged aircraft to minimize the number of flight
cancellations while our aircraft were being repaired following hail damage,
Aircraft insurance expenses totaled $8,327,000 (2.4% of total revenue) for the nine months ended
December 31, 2002. Aircraft insurance expenses for the nine months ended December 31, 2001 were $2,453,000 (.7%
of total revenue). Aircraft insurance expenses were .31(cent)and .12(cent)per RPM for the nine months ended December
31, 2002 and 2001, respectively. Aircraft insurance expenses totaled $3,161,000 (2.6% of total revenue) for the
three months ended December 31, 2002. Aircraft insurance expenses for the three months ended December 31, 2001 were
$608,000 (.7% of total revenue). Aircraft insurance expenses were .35(cent)and .12(cent)per RPM during the three
months ended December 31, 2002 and 2001. Aircraft insurance expenses during the three and nine months periods
ended December 31, 2001 had not been fully impacted by the result of the terrorist attacks on September 11, 2001.
Immediately following the events of September 11, our aviation war risk underwriters issued seven days notice
of cancellation to us and gave similar notices to other airlines. On September 24, 2001, these underwriters reinstated
war risk passenger liability coverage but limited third party bodily injury and property damage to $50 million per
occurrence. A special surcharge of $1.25 per passenger carried was established as the premium for this coverage by
our commercial underwriters. At the same time, the FAA provided us supplemental third party war risk coverage
from the $50 million limit to $1.6 billion. Effective December 16, 2002, the FAA amended their existing coverage
to include war risk hull as well as passenger, crew and property liability insurance, and extended the existing terms
of the third party liability already in effect until February 13, 2003. As of December 31, 2002, we still maintained
our existing commercial war risk coverage, because of certain perceived coverage gaps in the revised FAA policy relating
to third party liability coverage. On February 11, 2003, the FAA revised and amended the coverage in place as of
December 16, 2002. We believe this revision eliminates the perceived coverage gaps, and we expect to drop the commercial
policy in the near future. The premium for the revised FAA war risk coverage is derived from a formula that takes
into account total enplanements, total revenue passenger miles, and total revenue ton miles flown, and is significantly
less than the current commercial coverage premium. This revised amendment is to take effect on February 14, 2003
and is set to expire on April 14, 2003, unless renewed by Congress. We do not know whether the government will
extend the coverage, and if it does, how long the extension will last. We expect that if the government stops providing
excess war risk coverage to the airline industry, the premiums charged by aviation insurers for this coverage will be
substantially higher than the premiums currently charged by the government or the coverage will simply not be
available from reputable underwriters.
Pilot and flight attendant salaries before payroll taxes and benefits totaled $31,542,000 and $23,693,000,
or 9.2% and 7.3% of passenger revenue, for the nine months ended December 31, 2002 and 2001, respectively, an
increase of 33.1%. Pilot and flight attendant salaries before payroll taxes and benefits totaled $11,108,000 and
$7,512,000 or 9.4% and 8.3% of passenger revenue for the three months ended December 31, 2002 and 2001, respectively,
an increase of 47.9%. Pilot and flight attendant compensation increased as a result of an increase of 32.5% in block
hours, a general wage increase in pilot and flight attendant salaries, and additional crews required to replace
those attending training on the Airbus equipment. In order to maintain competitive pay for pilots, a revised
pilot pay schedule was negotiated with the Frontier Airline Pilots Association (FAPA) for an approximate 2.5%
increase in salaries. The union members accepted this proposal, which was effective August 1, 2002. We pay pilot
and flight attendant salaries for training, consisting of approximately six and three weeks, respectively, prior
to scheduled increases in service, which can cause the compensation expense during such periods to appear high in
relationship to the average number of aircraft in service. We expect these costs to continue to increase as we place
more aircraft into service. 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 Fuel Expense. 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 $60,676,000 for 66,606,000
gallons used and $46,955,000 for 51,954,000 gallons used resulted in an average fuel cost of 91.1(cent)and 90.4(cent)
per gallon, for the nine months ended December 31, 2002 and 2001, respectively. Aircraft fuel expense represented
17.3% and 14.2% of total revenue for the nine months ended December 31, 2002 and 2001, respectively. Aircraft fuel
expense of $21,948,000 for 22,577,000 gallons used and $11,820,000 for 15,060,000 gallons used resulted in an average
fuel expense of 97.2(cent)and 78.5(cent)per gallon for the three months ended December 31, 2002 and 2001,
respectively. Aircraft fuel costs represented 18.3% and 12.8% of total revenue for the three months ended December 31,
2002 and 2001, respectively. Fuel prices are subject to change weekly as we do not purchase supplies in advance for
inventory. We initiated a fuel hedging program in late November 2002, which allowed us to reduce fuel expenses during
the three months ended December 31, 2002 by $68,000. Fuel consumption for the nine months ended December 31, 2002
and 2001 averaged 748 and 773 gallons per block hour, respectively. Fuel consumption for the three months ended
December 31, 2002 and 2001 averaged 741 and 725 gallons per block hour, respectively. Fuel consumption decreased 3.2%
during the nine months ended December 31, 2002 from the prior comparable period because of the more fuel-efficient
Airbus aircraft added to our fleet, and a newly developed fuel conservation program implemented in August 2001. Fuel
consumption increased 2.2% during the three months ended December 31, 2002 from the prior comparable period as a result
of an increase in the number of hours flown with the Boeing 737-200 aircraft, which have a higher fuel burn rate than
the Boeing 737-300 and Airbus A319 aircraft. During the three months ended December 31, 2001, we minimized the use of
the Boeing 737-200 aircraft associated with the capacity reduction as a result of the September 11, 2001 terrorist attacks.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $63,063,000 and $52,293,000
(an increase of 20.6%) for the nine months ended December 31, 2002 and 2001, respectively, and represented 17.9% and
15.8% of total revenue. Aircraft and traffic servicing expenses were $22,440,000 and $16,492,000 (an increase of 36.1%)
for the three months ended December 31, 2002 and 2001, respectively, and represented 18.7% and 17.8% 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, 2002, our departures increased
to 39,289 from 30,389 for the nine months ended December 31, 2001, or 29.3%. Aircraft and traffic servicing expenses
were $1,605 per departure for the nine months ended December 31, 2002 as compared to $1,721 per departure for the
nine months ended December 31, 2001, or a decrease of $116 per departure. During the three months ended December 31,
2002, our departures increased to 13,522 from 9,469 or 42.8%. Aircraft and traffic servicing expenses were $1,660 per
departure for the three months ended December 31, 2002 as compared to $1,742 per departure for the three months ended
December 31, 2001, or a decrease of $82 per departure. Aircraft and traffic servicing expenses during the nine months
ended December 31, 2001 were adversely impacted as a result of expenses associated with deicing in April 2001 as a
result of an unusual spring blizzard 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, due to the number of
flight cancellations as a result of these weather conditions as well as the September 11 terrorist attacks, we had
fewer departures than we had planned, which we believe distorted our expenses per departure for the three and nine
months ended December 31, 2001.
Maintenance. Maintenance expenses of $55,131,000 and $55,684,000 were 15.7% and 16.8% of total revenue
for the nine months ended December 31, 2002 and 2001, respectively, a decrease of 1.0%. Maintenance expenses of
$19,032,000 and $17,320,000 were 15.8% and 18.7% of total revenue for the three months ended December 31, 2002 and
2001, respectively, an increase of 9.9%. 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, 2002 and 2001 were $619 and $829,
respectively. Maintenance cost per block hour for the three months ended December 31, 2002 and 2001 were $625 and
$833, respectively. Maintenance cost per block hour decreased as a result of decreases in maintenance on our Boeing
fleet for rotable repairs and engine overhauls, and the addition of new Airbus aircraft that are less costly to
maintain than our older Boeing aircraft. During the nine months ended December 31, 2002, we incurred approximately
$86,000 or $1 per block hour for Airbus training compared to $881,000 or $13 per block hour for 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.
Excluding the effect of this adjustment, our maintenance cost per block hour would have been $761 for the three months
ended December 31, 2001. During the nine months ended December 31, 2001, we had hail damage to five of our aircraft,
estimated at $491,000 ($7 per block hour). 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.
In July 2001, our mechanics voted to be represented by International Brotherhood of Teamsters. The first
bargaining agreement for the mechanics, which has a 3-year term, was ratified and made effective in July 2002.
The effect of this agreement increased mechanics' salaries by approximately 12% over the term of the agreement.
Salary increases for the first year of the agreement are approximately 5%.
Promotion and Sales. Promotion and sales expenses totaled $39,889,000 and $45,437,000 and were 11.4%
and 13.7% of total revenue for the nine months ended December 31, 2002 and 2001, respectively. Promotion and sales
expenses totaled $11,665,000 and $12,526,000 and were 9.7% and 13.5% of total revenue for the three months ended
December 31, 2002 and 2001, 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,
2002, promotion and sales expenses per passenger decreased to $13.68 from $20.01 for the nine months ended December 31,
2001. Promotion and sales expenses per passenger decreased as a result of variable expenses in relation to lower
average fares, an overall elimination of substantially all travel agency commissions effective on tickets sold on or
after June 1, 2002 and a decrease in advertising expenses. During the nine months ended December 31, 2001, we 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, 2002
and 2001 totaled $19,381,000 and $18,599,000 and were 5.5% and 5.6% of total revenue, respectively, an increase of 4.2%.
General and administrative expenses for the three months ended December 31, 2002 and 2001 totaled $6,685,000 and
$5,390,000 and were 5.6% and 5.8% of total revenue, respectively, an increase of 24.0%. During the nine months ended
December 31, 2001 we accrued for employee performance bonuses totaling $1,559,000, which was .5% of total revenue.
Bonuses are based on profitability. As a result of our pre-tax loss for the nine months ended December 31, 2002,
we did not accrue bonuses. 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 also 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 2,440 in December 2001 to approximately 3,020
in December 2002, an increase of 23.8%. Because of the increase in personnel, our health insurance benefit expenses,
workers compensation, and accrued vacation expense increased accordingly. During the nine months ended December 31,
2002, we brought revenue accounting in-house. We previously had outsourced this function. We have realized a
reduction in expenses associated with revenue accounting.
Depreciation and Amortization. Depreciation and amortization expenses of $12,490,000 and $8,187,000 were
3.6% and 2.5% of total revenue, respectively, for the nine months ended December 31, 2002 and 2001, an increase
of 52.6%. 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 due to an increase
in the number of Airbus A319 aircraft owned from three at December 31, 2001 to eight at December 31, 2002.
Nonoperating Income (Expense). Net nonoperating expense totaled $5,841,000 for the nine months ended
December 31, 2002 compared to net nonoperating income of $13,655,000 for the nine months ended December 31, 2001.
Interest income decreased to $1,523,000 during the nine months ended December 31, 2002 from $3,473,000 for 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, our net loss for the period and a decrease in interest rates. Interest expense increased
to $5,149,000 for the nine months ended December 31, 2002 from $2,118,000 for the prior period as a result of interest
expense associated with the financing of the purchased Airbus aircraft.
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 Stabilization 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 represented amounts received in excess of estimated allowable direct and
incremental losses incurred from September 11, 2001 to December 31, 2001. We repaid the excess amounts received
during the nine months ended December 31, 2002.
Income Tax Expense. We accrued an income tax benefit of $7,251,000 during the nine months ended
December 31, 2002 at a 35.6% effective tax rate, compared to an income tax expense accrual of $7,712,000 for the
nine months ended December 31, 2001, at a 38.8% effective tax rate. The expected benefit for the nine months ended
December 31, 2002 at a federal rate of 35% plus the blended state rate of 2.6% (net of federal tax benefit) is reduced
by the taxable effect of permanent differences of 2.0%. 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, our operating and capital
expenditures, the fares we charge, and financing activities. Also, we depend on lease or mortgage financing to
acquire all of our aircraft, including six additional Airbus aircraft as of January 31, 2003 scheduled for
delivery by the end of 2004. We seek to control our operating costs, but our airline, like other airlines, has many
fixed costs that cannot be reduced in the short-term.
We had cash and cash equivalents and short-term investments of $31,502,000 and $89,555,000 at December 31,
2002 and March 31, 2002, respectively. At December 31, 2002, total current assets were $147,930,000 as compared
to $146,647,000 of total current liabilities, resulting in working capital of $1,283,000. At March 31, 2002,
total current assets were $192,048,000 as compared to $152,064,000 of total current liabilities, resulting in
working capital of $39,984,000. The decrease in our cash and working capital from March 31, 2002 is largely a
result of cash used by investing activities, principally as a result of the purchase of six additional Airbus
A319 aircraft, partially offset by cash provided by financing activities to finance the aircraft purchases.
Pre-delivery payments previously made for purchased aircraft that were delivered to us during the nine months ended
December 31, 2002 were applied as down payments toward the mortgage financing of these aircraft.
Cash used by operating activities for the nine months ended December 31, 2002 was $14,190,000. This is
attributable to the net loss for the period, increases in restricted investments, receivables, security,
maintenance and other deposits, decreases in air traffic liability, and the repayment of excess Stabilization
Act compensation received, offset by a decrease in prepaid expenses and increases in accrued maintenance
expense and deferred lease and other expenses. Included in cash used by operating activities is a $4,835,000
repayment of the excess amounts received under the Stabilization Act. Cash provided by operating activities for
the nine months ended December 31, 2001 was $30,007,000. 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 Stabilization 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 Stabilization
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 operating activities for the nine months ended December 31,
2001 is $4,970,000 of amounts received in excess of allowable direct and incremental losses reimbursable under the
Stabilization Act incurred from September 11, 2001 to December 31, 2001.
Cash used by investing activities for the nine months ended December 31, 2002 was $162,721,000. We used
$197,881,000 for the purchase of six additional Airbus aircraft and to purchase rotable aircraft components,
leasehold improvements and other general equipment purchases. Net aircraft lease and purchase deposits and
restricted investments decreased by $4,792,000 and $618,000, respectively this period. During the nine months
ended December 31, 2002, we took delivery of six purchased Airbus aircraft and applied their respective
pre-delivery payments to the purchase of those aircraft. 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 provided by financing activities for the nine months ended December 31, 2002 and 2001 was $118,857,000
and $72,098,000, respectively. During the nine months ended December 31, 2002 and 2001, we borrowed $147,100,000
and $72,000,000, respectively, to finance the purchase of Airbus aircraft, of which $26,942,000 and $1,163,000
were repaid as principal payments during the respective periods. In December 2002, we entered into a sales
leaseback transaction for one of our purchased aircraft. We received net proceeds of approximately $5,300,000
from the sale of this aircraft, net of repayment of debt that collateralized this aircraft totaling $22,772,000
and payment of fees associated with the early extinguishments of the debt. We may seek to complete additional
sale/leaseback transactions of some or all of our owned aircraft or similar transactions in the future in
order to improve our short-term liquidity. During the nine months ended December 31, 2002 and 2001, we
received $578,000 and $1,916,000, respectively, from the exercise of common stock options.
In February 2003, we sold a purchase commitment for an Airbus A319 to be dleivered in March 2003 and agreed
to lease the aircraft form the purchaser for a period of five years. The purchaser reimbursed us approximately
$7,100,000 of pre-delivery payments previously paid for that aircraft.
On November 5, 2002 we received conditional approval from the Air Transportation Stabilization Board (ATSB)
for a $63 million federal loan guarantee of a $70 million commercial loan facility. Completion of this transaction
is subject to satisfaction of the conditions imposed by the ATSB, including negotiation of additional fees and
warrants requested by the ATSB, obtaining the necessary internal approvals, and completion of documentation.
There can be no assurance that we will be able to complete this transaction. We plan to use the proceeds, if received,
to enhance our liquidity.
We have been assessing our liquidity position in light of our aircraft purchase commitments and other
capital needs, the economy, our competition, the events of September 11, and other uncertainties surrounding
the airline industry. We believe it may be appropriate to enhance our liquidity, and have been actively pursuing
several financing alternatives, including the federal loan guarantee. We also filed a shelf registration with
the Securities and Exchange Commission in April 2002 that would allow us to sell equity or debt securities from time
to time as market conditions permit. Subsequent to this shelf registration filing, our financial performance along
with bankruptcies and the threat of bankruptcies of other airlines has had a significant adverse effect on our
access to the capital markets. Although the commercial loan facility secured in part by the federal loan guarantee
will improve our liquidity if it is completed, we may need to continue to explore avenues to sustain our
liquidity in the current economic and operating environment. We intend to continue to pursue domestic or
foreign bank aircraft financing, bank lines of credit and aircraft sale/leasebacks and other transactions as
necessary to support our capital and operating needs.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2002:
Less than 1-3 4-5 After
1 year years years 5 years Total
Long-term debt (1) $ 9,261,294 $ 19,962,154 $ 22,112,879 $ 138,879,730 $ 190,216,057
Capital lease obligations 111,602 111,602
Operating leases (2) 82,325,664 139,372,553 109,121,380 339,806,110 670,625,707
Unconditional purchase obligations(3) 144,107,118 34,718,982 178,826,100
Total contractual cash obligations $ 235,805,678 $ 194,053,689 $ 131,234,259 $ 478,685,840 $ 1,039,779,466
===============================================================================
(1) During the year ended March 31, 2002, 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. During the
nine months ended December 31, 2002, we entered into a sales leaseback transaction for one of these purchased
aircraft and repaid the remaining loan with the proceeds of the sale. Each remaining aircraft loan has a term of
10 years and is payable in equal monthly installments, including interest, payable in arrears. The aircraft
secure the loans. Each of the remaining loans provide for monthly principal and interest payments of
$215,000 and $218,110, bears interest with rates of 6.71% and 6.54%, with maturities in May and August 2011, at
which time a balloon payment totaling $10,200,000 is due with respect to each aircraft loan.
During the nine months ended December 31, 2002, we entered into additional long-term debt obligations to
finance six additional Airbus aircraft with interest rates that adjust quarterly or semi-annually based on
LIBOR rates. At December 31, 2002 interest rates for these long-term debt obligations ranged between was 2.66%
and 3.81%, each have a term of 12 years and each have balloon payments ranging from $4,800,000 to $7,700,000 at
the end of the term. The loans are secured by these aircraft.
(2) As of December 31, 2002, we lease seven Airbus 319 type aircraft and 20 Boeing 737 type aircraft under operating
leases with expiration dates ranging from 2003 to 2014. Under these leases, we have made cash security deposits
or arranged for letters of credit representing approximately two months of lease payments per aircraft. At
December 31, 2002, we had made cash security deposits and had arranged for issuance of letters of credit totaling
$5,983,449 and $8,459,100, respectively. Our restricted cash balance includes $8,459,100 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 table above. At December 31, 2002, we had remaining unused maintenance
deposits of $55,234,000 classified as an asset on our balance sheet. During the nine months ended December 31, 2002,
we returned two leased Boeing 737 aircraft to the aircraft lessor.
As a complement to our Airbus purchase agreement, in April and May 2000 we signed two agreements, as subsequently
amended, to lease 15 new Airbus aircraft for a term of 12 years. As of December 31, 2002, we have made
cash security deposits on the remaining 10 aircraft we agreed to lease and have made cash security deposits
and arranged for issuance of letters of credit totaling $400,000 and $2,059,000, respectively, to secure these
leases. Our restricted cash balance includes $2,059,000 that collateralizes the outstanding letters of credit.
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
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 table above.
Denver International Airport (DIA), our primary hub for operations, has developed preliminary plans for a
significant expansion of Concourse A, where our aircraft gates are located. The expansion will add as many as
10 gates for full-size commercial jet aircraft and several more gates for smaller regional jets. We have
expressed preliminary interest in entering into a long-term lease arrangement with the airport authority
for the use of additional aircraft gates in connection with our overall expansion plans. The amount we would be
charged under this lease will depend on the ultimate cost of the project, the amount of space to which we commit,
the financing structure and interest cost and the final method by which the airport authority allocates the
construction costs among the airlines. The current state of the industry and uncertainties involving United
Airlines, DIA's dominant carrier, have placed these expansion plans on temporary hold.
(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 31 new Airbus aircraft. As of January 31, 2003, we did not exercise purchase options as
they became due on 4 Airbus aircraft. We are currently discussing with Airbus the possibility of
obtaining an extension on these options. Included in the purchase commitment 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 17 of these aircraft, and have options to purchase up to an additional
10 aircraft. As of December 31, 2002, we had taken delivery of ten of these aircraft, one of which we sold
in December 2002 and agreed to lease back from the purchaser. In February 2003, we completed the assignment
of our March 2003 aircraft purchase commitment and agreed to lease back the aircraft from the purchaser over
a five-year term. The purchase commitment for this aircraft has been excluded from the purchase commitment
amounts in this table. 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, 2002,
we had made pre-delivery payments on future deliveries totaling $38,631,000 to secure these aircraft and option
aircraft.
In October 2002 we entered into a purchase and long-term services agreement with LiveTV to bring DIRECTV
AIRBORNE(TM)satellite programming to every seatback in our Airbus fleet. As of February 7, 2003, we have
completed the installation of the LiveTV system on 13 Airbus aircraft, and we plan to have all of our Airbus
aircraft equipped with the LiveTV system by the end of February 2003. We have agreed to the purchase of 46
units of the hardware, however, we have the option to cancel up to a total of 14 units by providing written
notice of cancellation at least 12 months in advance of installation. The table includes the purchase commitment
amount for 32 units.
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
two months of rent. As of December 31, 2002, we had outstanding letters of credit, bonds, and cash security deposits
totaling $11,645,000, $4,120,802, and $7,594,840, 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, 2003, and another credit
agreement with a second financial institution for up to $20,000,000, which expires December 31, 2003. 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, 2002, we have drawn $11,645,000 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 the Airline 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, 2002, 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 January 1, 2003, the coverage would be increased
to $4,252,000 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 provide a letter of credit, which would likely require us to purchase a certificate
of deposit to collateralize the letter of credit.
Our agreement with our Visa and MasterCard processor requires us to provide collateral for Visa and
MasterCard sales transactions equal to 50% of our air traffic liability associated with these transactions.
As of December 31, 2002, we had established collateral for these transactions totaling $15,616,000. If we are
unable to meet the collateral requirements or if it is determined that we have experienced a material adverse change
in our financial position, we may be subject to a 100% holdback of cash from Visa and MasterCard transactions until
the passenger is flown, or potentially, termination of the contract.
Immediately following the events of September 11, our aviation war risk underwriters issued seven days notice
of cancellation to us and gave similar notices to other airlines. On September 24, 2001, these underwriters
reinstated war risk passenger liability coverage but limited third party bodily injury and property damage to
$50 million per occurrence. A special surcharge of $1.25 per passenger carried was established as the premium
for this coverage by our commercial underwriters. At the same time, the FAA provided us supplemental third
party war risk coverage from the $50 million limit to $1.6 billion. Effective December 16, 2002, the FAA amended
their existing coverage to include war risk hull as well as passenger, crew and property liability insurance, and
extended the existing terms of the third party liability already in effect until February 13, 2003. As of December 31,
2002, we still maintained our existing commercial war risk coverage, because of certain perceived coverage gaps
in the revised FAA policy relating to third party liability coverage. On February 11, 2003, the FAA revised and
amended the coverage in place as of December 16, 2002. We believe this revision eliminates the perceived coverage
gaps, and we expect to drop the commercial policy in the near future. The premium for the revised FAA war risk
coverage is derived from a formula that takes into account total enplanements, total revenue passenger miles,
and total revenue ton miles flown, and is significantly less than the current commercial coverage premium. This
revised amendment is to take effect on February 14, 2003 and is set to expire on April 14, 2003, unless renewed by
Congress. We do not know whether the government will extend the coverage, and if it does, how long the extension
will last. We expect that if the government stops providing excess war risk coverage to the airline industry,
the premiums charged by aviation insurers for this coverage will be substantially higher than the premiums currently
charged by the government or the coverage will simply not be available from reputable underwriters.
In December 2002, we entered into an engine maintenance agreement for the servicing, repair, maintenance
and functional testing of our aircraft engines used on our Airbus aircraft effective January 1, 2003. The
agreement is for a 12 year period from the effective date for our owned aircraft or December 31, 2014, whichever
comes first, and for each leased aircraft, the term coincides with the initial lease term of 12 years. This
agreement precludes us from using another third party for such services during the term. This agreement
requires monthly payments at a specified rate times the number of flight hours flown on the aircraft during that month.
In attempting to accelerate our fleet replacement plan, we may from time to time endeavor to return certain
leased Boeing 737 aircraft to their owners on dates before the currently scheduled lease expiration dates for these
aircraft. If we early return these aircraft from service and are unable to 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 we enter into the agreement. We have entered into an
agreement to early return two Boeing 737-200 aircraft to the lessor, for which we recorded an unusual charge of
approximately $3,000,000, net of income taxes, against earnings in our year ended March 31, 2002. Under the early
return agreement, the two aircraft originally scheduled to be returned to the lessor in November 2002 and
January 2003, were postponed to January and February 2003, respectively.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Passenger, cargo, and other revenues are recognized when the transportation is provided or after
the tickets expire, one year after date of issuance, and are net of excise taxes, passenger facility charges
and security fees. Proceeds from the sale of tickets that have been deferred are included in the accompanying
balance sheet as air traffic liability.
Maintenance
Routine maintenance and repairs are charged to operations as incurred.
Under the terms of our aircraft lease agreements, we are required to make monthly maintenance
deposits to the lessor and a liability for accrued maintenance is established based on aircraft usage. The
deposits are applied against the cost of major airframe maintenance checks, landing gear overhaul and engine
overhauls. Deposit balances remaining at lease termination remain with the lessor and any remaining liability
for maintenance checks is reversed against the deposit balance. Additionally, a provision is made for the
estimated costs of scheduled major overhauls required to be performed on leased aircraft and components under
the provisions of the aircraft lease agreements if the required monthly deposit amounts are not adequate to
cover the entire cost of the scheduled maintenance. We also accrue for major airframe maintenance checks,
landing gear overhauls and engine overhauls on our owned aircraft. Accrued maintenance expense expected
to be incurred beyond one year is classified as long-term. The amounts accrued for maintenance are based on
estimates of the time required to complete the procedures and cost of parts used. Additional maintenance
accruals may be required if these estimates prove to be inadequate.
Fuel Hedging
We have entered into derivative instruments which are intended to reduce our exposure to changes in fuel
prices. We account for the derivative instruments entered into as trading instruments under FAS133 and record
the fair value of the derivatives as an asset or liablity as of each balalnce sheet date. We record any
settlements received or paid as an adjustment to the cost of fuel. The results of operations for the three
and nine months ended December 31, 2002 include an unrealized derivative gain of $237,933 which is
included in nonoperating income (expense) and a realized gain of approximately $68,000 in cash received
from a counter-party recorded as a reduction of fuel expense. Changes in the fair value of the derivative
instruments attributable to future prices are recorded as nonoperating income. We were not a party to any
derivative contracts in the fiscal third quarter 2002.
In November 2002, we entered into two derivative contracts for Gulf Coast jet fuel with two
counter-parties. The first contract is a swap agreement for a notional volume of 770,000 gallons per month
for the period from December 1, 2002 to May 31, 2003. Under the swap agreement we receive the difference
between a fixed price of 72.25 cents per gallon and a price based on an agreed upon published spot price for
jet fuel if the index price is higher. If the index price is lower, we pay the difference. This agreement is
estimated to represent 10% of fuel purchases for that period. The second contract, with a notional volume of
385,000 gallons per month for the period December 1, 2002 to November 30, 2003 is a three-way collar
estimated to represent 5% of fuel purchases for that period. The collar has a cap of 82 cents per gallon
and a floor of 72 cents per gallon, and a secondary floor of 64.5 cents per gallon. When the U.S. Gulf Coast
Pipeline Jet index price is above the cap, the Company receives the difference between the index and the cap.
When the index cap price is below the primary floor but above the secondary floor, the Company pays the
difference between the index and primary floor. However, when the price is below the secondary floor, then
Company is only obligated to pay the difference between 64.5 and 72 cents per gallon. No payments are exchanged
if the index price is betwwen the cap and the primary floor.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143
addresses financial accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition, construction, development ]
and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not currently
have any obligations falling under the scope of SFAS No. 143, and therefore its adoption did not have a material
impact on our results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets to be
held and used or to be disposed of, and also broadens the definition of what constitutes a discontinued operation
and how the results of discontinued operation are to be measured and presented. We adopted SFAS No. 144 in
our fiscal 2003 and the adoption of SFAS No. 144 did not have a material impact on our results of operations
or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections". This Statement rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt", SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers"
and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This statement
amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. We early adopted SFAS No. 145 in our fiscal
year 2003. We classified our debt extinguishment costs as an expense from operations in our statement of
operations rather than as an extraordinary item as was previously required before the issuance of SFAS No. 145.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". The Statement addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." We do
not currently have any exit or disposal activities falling under the scope of SFAS No. 146, and therefore its
adoption did not have a material impact on our results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure". This statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation",
to provide alternative methods of transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim financial statements about the method
of accounting for stock based employee compensation and the effect of the method used on reported results.
SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The risk inherent in our market risk sensitive position is the potential loss arising from an adverse
change in the price of fuel as described below. The sensitivity analysis presented does not consider either
the effect that such an adverse change may have on overall economic activity or additional action management
may take to mitigate our exposure to such a change, including the fuel hedging program discussed below. Actual
results may differ from the amounts disclosed.
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, 2002. Based on fiscal year 2002 actual fuel usage, such an increase would have resulted in an
increase to aircraft fuel expense of approximately $6,482,000 in fiscal year 2002. Comparatively, based on
projected fiscal year 2003 fuel usage, such an increase would result in an increase to aircraft fuel expense
of approximately $7,709,503 in fiscal year 2003. The increase in exposure to fuel price fluctuations in
fiscal year 2003 is due to the increase of our average aircraft fleet size during the year ended March 31, 2002,
projected increases to our fleet during the year ended March 31, 2003 and related gallons purchased.
Additionally, in November 2002, our Board of Directors authorized us to enter into derivative
contracts that is intended to manage the risk and effect of fluctuating jet fuel prices on our business. Our
derivative contracts are intended to reduce the risk of changing prices in jet fuel costs. Our current derivative
contracts are for approximately 15% of our jet fuel purchases through May 2003 and 5% from June 2003 through
November 2003. We do not expect our fuel price risk management to fully protect us against increasing jet
fuel costs because our contracts will not likely cover all of our fuel volumes and not necessarily be 100%
effective. The effectiveness of our derivative contracts may also be negatively impacted by a commencement
of hostilities against Iraq and terrorist activity.
We will be susceptible to market risk associated with changes in interest rates on expected future long-
term debt obligations to fund the purchases of our Airbus aircraft. Interest expense on seven of our owned
Airbus A319 aircraft is subject to interest rate adjustments every three to six months depending upon changes
in the applicable LIBOR rate. A change in the base LIBOR rate of 50 basis points (.05 percent) would have the
effect of increasing or decreasing our annual interest expense by $726,000 assuming the loans outstanding that
are subject to interest rate adjustments at December 31, 2002 totaling $145,228,000 are outstanding for the
entire period.
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized and completely and accurately reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to the date we carried out this evaluation.
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
Exhibit
Numbers
(a) Exhibits
99.1 Certification of President and Chief Executive Officer, Jeff S. Potter. (1)
99.2 Certification of Chief Financial Officer, Paul H. Tate. (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 13, 2003 By: /s/ Paul H. Tate
Paul H. Tate, Vice President and
Chief Financial Officer
Date: February 13, 2003 By: /s/ Elissa A. Potucek
Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer
Certification
I, Jeff S. Potter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontier Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other inancial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a. designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses in internal controls;
and
b. any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
By: /s/ Jeff S. Potter
Jeff S. Potter
President and Chief Executive Officer
Certification
I, Paul Tate, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontier Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other inancial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a. designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses in internal controls;
and
b. any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
By: /s/ Paul H. Tate
Paul H. Tate
Chief Financial Officer