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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2003
[ ] 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)
Registrant's telephone number including area code: (720) 374-4200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Title of Class
Indicate by check mark whether the Registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by checkmark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes X No __
The aggregate market value of common stock held by non-affiliates of the Company
computed by reference to the last quoted price at which such stock sold on such date
as reported by the Nasdaq National Market as of June 30, 2002 was $240,376,304.
The number of shares of the Company's common stock outstanding as of June 23, 2003 is
30,022,018.
Documents incorporated by reference - Certain information required by Part II and III
is incorporated by reference to the Company's 2003 Proxy Statement.
TABLE OF CONTENTS
Page
PART I
Item 1: Business..........................................................3
Item 2: Properties ......................................................16
Item 3: Legal Proceedings................................................17
Item 4: Submission of Matters to a Vote of Security Holders..............17
PART II
Item 5: Market for Common Equity and Related Stockholder Matters.........17
Item 6: Selected Financial Data..........................................19
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................21
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.......39
Item 8: Financial Statements.............................................40
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................40
PART III
Item 10: Directors and Executive Officers of the Registrant...............40
Item 11: Executive Compensation...........................................40
Item 12: Security Ownership of Certain Beneficial Owners and Management...40
Item 13: Certain Relationships and Related Transactions...................41
Item 14: Controls and Procedures..........................................41
Item 15 Principal Accountant Fees and Services...........................41
PART IV
Item 16(a): Exhibits, Financial Statement Schedules and Reports on Form 8-K..41
PART I
This report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 that describe the business and prospects of
Frontier Airlines, Inc. ("Frontier" or the "Company") and the expectations of our
Company and management. All statements, other than statements of historical facts,
included in this report that address activities, events or developments that we
expect, believe, intend or anticipate will or may occur in the future, are
forward-looking statements. When used in this document, the words "estimate,"
"anticipate," "project" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are inherently subject to risks
and uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. These risks and uncertainties include, but are not
limited to: the timing of, and expense associated with, expansion and modification of
our operations in accordance with our business strategy or in response to competitive
pressures or other factors; general economic factors and behavior of the fare-paying
public and its potential impact on our liquidity; terrorist attacks or other incidents
that could cause the public to question the safety and/or efficiency of air travel;
operational disruptions, including weather; industry consolidation; the impact of
labor disputes; enhanced security requirements; changes in the government's policy
regarding relief or assistance to the airline industry; the economic environment of
the airline industry generally; 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 competitor and other actions taken by United Airlines either
in or out of bankruptcy protection; the availability of suitable aircraft, which may
inhibit our ability to achieve operating economies and implement our business
strategy; the unavailability of, or inability to secure upon acceptable terms,
financing necessary to purchase aircraft which we have ordered; issues relating to our
transition to an Airbus aircraft fleet; uncertainties regarding aviation fuel prices;
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
Item 1: Business
General
We are a scheduled passenger airline based in Denver, Colorado. We are the
second largest jet service carrier at Denver International Airport ("DIA"). As of
June 23, 2003, we, in conjunction with Frontier JetExpress operated by Mesa Air Group
("Mesa"), operate routes linking our Denver hub to 38 cities in 22 states spanning the
nation from coast to coast and to two cities in Mexico. We are a low cost, affordable
fare airline operating in a hub and spoke fashion connecting points coast to coast.
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 28 leased jets
and nine owned Airbus aircraft; including three Boeing 737-200s, 16 larger Boeing
737-300s, and 18 Airbus A319s. 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 of the end of calendar year 2005.
During the years ended March 31, 2003 and 2002, we increased capacity by 30.9% and
7.8%, respectively. During the year ended March 31, 2002, as a result of the
September 11 terrorist attacks, we reduced our planned increase in capacity of
approximately 20% as a result of decreased air travel demand.
We currently use up to 16 gates at DIA, where we operate approximately 168 daily
system flight departures and arrivals and 30 Frontier JetExpress 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 to the extent possible. During the year ended March 31,
2003, we added service to Indianapolis, Indiana on May 23, 2002; Boise, Idaho and
Tampa, Florida on June 24, 2002; Wichita, Kansas (operated by Frontier JetExpress) on
September 18, 2002; Tucson, Arizona, Oakland, California (operated by Frontier
JetExpress), San Jose, California, Fort Myers, Florida and Oklahoma City, Oklahoma and
Cancun and Mazatlan, Mexico on December 20 and 21, 2002, respectively. During the
year ended March 31, 2003, we terminated service to Boston, Massachusetts and St.
Louis, Missouri (operated by Frontier JetExpress) on October 22, 2002. We intend to
begin service to Orange County, California and Milwaukee, Wisconsin on August 31, 2003
with two and three round-trips, respectively.
In October 2002 we signed a purchase and long-term services agreement with
LiveTV to bring DIRECTV AIRBORNE(TM)satellite programming to every seatback in our
Airbus fleet. In February 2003, we completed the installation of the LiveTV system on
all Airbus aircraft. 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 offers a
competitive advantage for our company.
In September 2001, we entered into a codeshare agreement with Mesa. Under the
terms of the agreement, we will 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. Effective May 4, 2003, Frontier Jet Express replaced our
mainline service to Tucson, Arizona, Oklahoma City, Oklahoma and Boise, Idaho and
terminated service to Oakland, California. Frontier JetExpress currently provides
service to San Diego, San Jose, and Ontario, California, and Wichita, Kansas using
five 50-passenger Bombardier CRJ-200 regional jets. In February 2003, we amended our
codeshare agreement with Mesa from a prorate-based compensation method to a "revenue
guarantee" compensation method effective March 1, 2003 through August 31, 2003. This
arrangement will allow us to have more control over scheduling, pricing and seat
inventory. We are in on-going negotiations with Mesa and other regional jet carriers
regarding codeshare arrangements beyond August 31, 2003.
Effective July 9, 2001, we began a codeshare agreement with Great Lakes
Aviation, Ltd. ("Great Lakes") by which Great Lakes initially provided daily service
to seven regional markets from our Denver hub. We have expanded the codeshare
agreement, which presently includes Page and Phoenix, Arizona; Alamosa, Cortez, Pueblo
and Telluride, Colorado; Dodge City, Garden City, Hays, and Liberal, Kansas;
Farmington and Santa Fe, New Mexico; Alliance, Chadron, Grand Island, Kearney, McCook,
Norfolk, North Platte, and Scottsbluff, Nebraska; Dickinson and Williston, North
Dakota; Amarillo, Texas; Pierre, South Dakota; Moab and Vernal, Utah; and Casper,
Cody, Gillette, Cheyenne, Laramie, Riverton, Rock Springs, Sheridan, and Worland,
Wyoming.
Our President and Chief Operating Officer, Jeff Potter, assumed the additional
title and responsibilities of Chief Executive Officer on April 1, 2002, replacing
Chairman and former Chief Executive Officer Sam Addoms who retired as Chief Executive
Officer but remains as Chairman of our Board of Directors.
Our filings with the Securities and Exchange Commission are available at no cost
on our website, www.frontierairlines.com, in the Investor Relations folder contained
in the section titled "About Frontier". These reports include our annual report on
Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16
reports on Forms 3, 4 and 5, and any related amendments or other documents, and are
made available as soon as reasonably practicable after we file the materials with the
SEC.
Our corporate headquarters are located at 7001 Tower Road, Denver, Colorado
80249. Our administrative office telephone number is 720-374-4200 and our
reservations telephone number is 800-432-1359.
Business Strategy and Markets
Our business strategy is to provide air service at affordable fares to high volume
markets from our Denver hub. Our strategy is based on the following factors:
o Stimulate demand by offering a combination of low fares, quality service and
frequent flyer credits in our frequent flyer program, EarlyReturns.
o Expand our Denver hub operation and increase connecting traffic by adding
additional high volume markets to our current route system and by code sharing
agreements with two commuter carriers and possible new alliances with other
carriers.
o Continue filling gaps in flight frequencies to current markets from our Denver
hub.
Route System Strategy
Our route system strategy encompasses connecting our Denver hub to top
business and leisure destinations. We currently serve 18 of the top 25 destinations
from Denver, as defined by the U.S. Department of Transportation's Origin and
Destination Market Survey. In addition, as we bring additional aircraft into our
fleet and add new markets to our route system, connection opportunities increase.
Connection opportunities for our passengers connecting through DIA increased from an
average of 8.9 flights as of March 31, 2002 to 11.5 flights as of March 31, 2003,
which includes connecting passengers from our commuter affiliate, Frontier JetExpress.
Marketing and Sales
Our sales efforts are targeted to price-sensitive passengers in both the
leisure and corporate travel markets. In the leisure market, we offer discounted
fares marketed through the Internet, newspaper, radio and television advertising along
with special promotions. We market these activities in Denver and in cities
throughout our route system.
In order to increase connecting traffic, we began two code share agreements,
one with Great Lakes in July 2001 and the other with Mesa Air Group, operating as
Frontier JetExpress, in February 2002. We have also negotiated interline agreements
with approximately 130 domestic and international airlines serving cities on our route
system. Generally, these agreements include joint ticketing and baggage services and
other conveniences designed to expedite the connecting process.
To balance the seasonal demand changes that occur in the leisure market, we
have introduced programs over the past several years that are designed to capture a
larger share of the corporate market, which tends to be less seasonal than the leisure
market. These programs include negotiated fares for large companies that sign
contracts committing to a specified volume of travel, future travel credits for small
and medium size businesses contracting with us, and special discounts for members of
various trade and nonprofit associations. As of June 23, 2003, we had signed
contracts with over 11,600 companies. We estimate that business customers represent
approximately 60% of our passengers.
We also pursue sales opportunities with meeting and convention arrangers and
government travel offices. The primary tools we use to attract this business include
personal sales calls, direct mail and telemarketing. In addition, we offer air/ground
vacation packages to many destinations on our route system under contracts with
various tour operators.
Our relationship with travel agencies is important to us and other airlines.
In March 2002, several of the major airlines eliminated travel agency "base"
commissions but continued to pay individually negotiated incentive commissions to
select agents. Effective June 1, 2002, we also eliminated travel agency base
commissions. We have implemented marketing strategies designed to maintain and
encourage relationships with travel agencies throughout our route system. We
communicate with travel agents through personal visits by Company executives and sales
managers, sales literature mailings, trade shows, telemarketing and advertising in
various travel agent trade publications.
We participate in the four major computer reservation systems used by travel
agents to make airline reservations: Amadeus, Galileo, Worldspan and Sabre. We
maintain reservation centers in Denver, Colorado and Las Cruces, New Mexico, operated
by our employees.
In April 1999, we began offering "Spirit of the Web" fares via our Web site,
which permits customers to make "close in" bookings beginning on Wednesdays for the
following weekend. This is intended to fill seats that might otherwise remain unused.
As a percentage of total flown revenue, the percentage of flown revenue generated from
our own Web site (www.frontierairlines.com) increased from 23% during March 2002 to
31% during March 2003.
Customer Loyalty Programs
Effective February 1, 2001, we commenced EarlyReturns, our own frequent flyer
program. As of March 31, 2003, there are approximately 533,000 EarlyReturns members.
We believe that our frequent flyer program offers some of the most generous benefits
in the industry, including a free round trip after accumulating only 15,000 miles
(25,000 miles to our destinations in Mexico). There are no blackout dates for award
travel. Additionally, members who earn 25,000 or more annual credited EarlyReturns
flight miles attain Summit Level status, which includes a 25% mileage bonus on each
paid Frontier flight, priority check-in and boarding, complimentary on-board alcoholic
beverages, extra allowance on checked baggage and priority baggage handling,
guaranteed reservations on any Frontier flight when purchasing an unrestricted coach
class ticket at least 72 hours prior to departure, standby at no charge on return
flights the day before, the day of, and the day after, and access to an exclusive
Summit customer service toll-free phone number. Members earn one mile for every mile
flown on Frontier plus additional mileage with program partners, which presently
include Midwest Airlines, Virgin Atlantic Airways, Alamo, Hertz, National and Payless
Car Rentals, Kimpton Boutique Hotels, Inverness Hotel & Golf Resort, Peaks at Vail
Resorts, The Flower Club and Citicorp Diners Club, Inc. Effective September 2002, our
reciprocal frequent flyer agreement with Continental Airlines ended. To apply for the
EarlyReturns program, customers may visit our Web site at www.frontierairlines.com,
obtain an EarlyReturns enrollment form at any of our airport counters or call our
EarlyReturns Service Center toll-free hotline at 866-26-EARLY, or our reservations at
800-4321-FLY.
In March 2003 we entered into an agreement with Juniper Bank
(www.juniperbank.com), a full-service credit card issuer, to exclusively offer Frontier
MasterCard products to consumers, customers and Frontier's EarlyReturns frequent flyer
members. We believe that the Frontier/Juniper Bank co-branded MasterCard will offer
one of the most aggressive affinity card programs because free travel can be earned
for as little as 15,000 miles.
Product Pricing
On February 6, 2003, we unveiled a new, simplified pricing structure for all
domestic local and connecting fares. As part of the new structure, our highest-level
business fares were reduced by 25 to 45 percent, and our lowest available walk-up
fares were reduced by 38 to 77 percent. The new fare structure, which is comprised of
six fare categories, caps all fares to and from Denver at $399 or $499 one-way,
excluding passenger facility, security or segment fees, depending on length of haul.
Unlike other airlines, these fares can be booked each way, allowing customers to get
the best price on both the inbound and outbound portion of their itinerary with no
round-trip purchase required. Our new fare structure removes the advance purchase
requirements of past pricing structures, and there are no Saturday night stayovers
required.
Competition
The Airline Deregulation Act of 1978 produced a highly competitive airline
industry, freed of certain government regulations that for 40 years prior to the
Deregulation Act had dictated where domestic airlines could fly and how much they
could charge for their services. Since then, we and other smaller carriers have
entered markets long dominated by larger airlines with substantially greater
resources, such as United Airlines, American Airlines, Northwest Airlines and Delta
Air Lines.
We compete principally with United Airlines, the dominant carrier at DIA.
During the month of March 2003, United and its commuter affiliates had a total market
share at DIA of approximately 63.5%. This gives United a significant competitive
advantage compared to us and other carriers serving DIA. We believe our market share,
including our codeshare affiliates, at DIA for the month of March 2003 approximated
13.1%. We compete with United primarily on the basis of fares, fare flexibility and
the quality of our customer service.
At the present time, three domestic airports, including New York's LaGuardia and
John F. Kennedy International Airports and Washington, D.C.'s Ronald Reagan Washington
National Airport, are regulated by means of "slot" allocations, which represent
government authorization to take off or land at a particular airport within a
specified time period. Federal Aviation Administration ("FAA") regulations require the
use of each slot at least 80% of the time and provide for forfeiture of slots in
certain circumstances. We were originally awarded six high-density exemption slots at
LaGuardia, and at the present time, we utilize four of those slots to operate two
daily round-trip flights between Denver and LaGuardia. In addition to slot
restrictions, Washington National is limited by a perimeter rule, which limits flights
to and from Washington National to 1,250 miles. In April 2000, the Wendell H. Ford
Aviation Investment and Reform Act for the 21st Century, or AIR 21, was enacted. AIR
21 authorizes the Department of Transportation ("DOT") to grant up to 12 slot
exemptions beyond the 1,250-mile Washington National perimeter, provided certain
specifications are met. We are presently authorized to operate one daily round-trip
flight between Denver and Washington National. During the year ended March 31, 2003,
we requested authority to operate a second round-trip flight in this market but were
denied. Currently, draft legislation exists in both the U.S. Senate and House of
Representatives that may provide for additional beyond perimeter flights at National
Airport. If additional beyond perimeter slots at Washington National Airport are
authorized, we expect to file an application requesting use of at least two additional
beyond perimeter slots. Until there are additional beyond perimeter flights
authorized, or another carrier currently authorized to operate beyond perimeter slots
rejects those slots, we will not be able to add frequency at Washington National
Airport.
Other airports around the country, such as John Wayne International Airport in
Santa Ana, California (SNA) are also slot controlled at the local level as mandated by
a federal court order. We have filed an application for, and received approval for,
six arrival and departure slots at SNA. We plan to begin operating service with two
daily flights at SNA on August 31, 2003. Because there is limited availability of
overnight facilities at SNA, we anticipate adding a third daily flight at SNA when an
overnight parking position becomes available, which we anticipate will occur during
our fiscal fourth quarter 2004.
Maintenance and Repairs
All of our aircraft maintenance and repairs are accomplished in accordance with
our maintenance program approved by the FAA. We maintain spare or replacement parts
primarily in Denver, Colorado. Spare parts vendors supply us with certain of these
parts, and we purchase or lease others from other airline or vendor sources.
Since mid-1996, we have trained, staffed and supervised our own maintenance work
force at Denver, Colorado. We sublease a portion of Continental Airlines' hangar at
DIA where we currently perform our own maintenance through the "D" check level. Other
major maintenance, such as major engine repairs, is performed by outside FAA approved
contractors. We also maintain line maintenance facilities at El Paso, Texas and
Phoenix, Arizona. We have announced our plans to close the El Paso, Texas maintenance
facility effective August 30, 2003 and transfer the functions to the Facilities in
Denver and Phoenix.
Under our aircraft lease agreements, we pay all expenses relating to the
maintenance and operation of our aircraft, and we are required to pay supplemental
monthly rent payments to the lessors based on usage. Supplemental rents are applied
against the cost of scheduled major maintenance. To the extent not used for major
maintenance during the lease terms, excess supplemental rents remain with the aircraft
lessors after termination of the lease.
Our monthly completion factors for the years ending March 31, 2003, 2002, and
2001 ranged from 98.2% to 99.7%, from 97.3 to 99.8%, and from 98.6 to 99.8%,
respectively. The completion factor is the percentage of our scheduled flights that
were operated by us (i.e., not canceled). Canceled flights were principally as a
result of mechanical problems, and, to a lesser extent, weather. We believe that our
new Airbus aircraft are improving our aircraft reliability.
In December 2002, we entered into an engine maintenance agreement with GE Engine
Services, Inc. (GE) 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 calendar years ended December 31, 1999 through 2002, our maintenance and
engineering department received the Federal Aviation Administration's highest award,
the Diamond Certificate of Excellence, in recognition of 100 percent of our
maintenance and engineering employees completing advanced aircraft maintenance
training programs. The Diamond Award recognizes advanced training for aircraft
maintenance professionals throughout the airline industry. We are the first Part 121
domestic air carrier to achieve 100 percent participation in this training program by
our maintenance employees.
Fuel
During the years ending March 31, 2003, 2002, and 2001, jet fuel accounted for
17.2%, 14.3%, and 18.1%, respectively, of our operating expenses. We have
arrangements with major fuel suppliers for substantial portions of our fuel
requirements, and we believe that these arrangements assure an adequate supply of fuel
for current and anticipated future operations. Jet fuel costs are subject to wide
fluctuations as a result of sudden disruptions in supply beyond our control.
Therefore, we cannot predict the future availability and cost of jet fuel with any
degree of certainty. Fuel prices increased significantly in fiscal 2003. Our average
fuel price per gallon including taxes and into-plane fees was 96(cent)for the year ended
March 31, 2003, with the monthly average price per gallon during the same period
ranging from a low of 82(cent)to a high of $1.26. Our average fuel price per gallon
including taxes and into-plane fees was 87(cent)for the year ended March 31, 2002, with
the monthly average price per gallon during the same period ranging from a low of 72(cent)
to a high of $1.01. As of June 23, 2003, the price per gallon was 95(cent)excluding the
impact of fuel hedges. We implemented a fuel hedging program in 2003, under which we
enter into Gulf Coast jet fuel option contracts to partially protect us against
significant increases in fuel prices. Our fuel hedging program is limited in fuel
volume and duration. As of June 23, 2003, we had hedged approximately 15.7% of our
projected fiscal 2004 fuel requirements with 26.2% in the quarter ending June 30,
2003, 18.5% in the quarter ending September 30, 2003, 18.3% in the quarter ending
December 31, 2003, and none in the quarter ending March 31, 2004.
Increases in fuel prices or a shortage of supply could have a material adverse
effect on our operations and financial results. Our ability to pass on increased fuel
costs to passengers through price increases or fuel surcharges may be limited,
particularly given our affordable fare strategy.
Insurance
We carry insurance limits of $800 million per aircraft per occurrence in
property damage and passenger and third-party liability insurance, and insurance for
aircraft loss or damage with deductible amounts as required by our aircraft lease
agreements, and customary coverage for other business insurance. While we believe
such insurance is adequate, there can be no assurance that such coverage will
adequately protect us against all losses that we might sustain. Our next scheduled
aircraft hull and liability coverage renewal date is June 7, 2004.
In December 2002, through authority granted under the Homeland Security Act of
2002, the U.S. government expanded its insurance program to enable airlines to elect
either the government's excess third-party war risk coverage or for the government to
become the primary insurer for all war risks coverage. We elected to take primary
government coverage in February 2003 and dropped the commercially available war risk
coverage. While the Appropriations Act of 2002 authorized the government to offer
both policies through August 31, 2004, the current policies are in effect until August
12, 2003. We cannot assure you that any extension will occur, or if it does, how long
the extension will last. We expect that if the government stops providing 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.
Employees
As of June 23, 2003, we had 3,380 employees, including 2,651 full-time and 729
part-time personnel. Our employees included 422 pilots, 561 flight attendants, 728
customer service agents, 534 ramp service agents, 272 reservations agents, 340
mechanics and related personnel, and 523 general management and administrative
personnel. We consider our relations with our employees to be good.
We have established a compensation philosophy that we will pay competitive wages
compared to other airlines of similar size and other employers with which we compete
for our labor supply. Employees have the opportunity to earn above market rates
through the payment of performance bonuses.
Three of our employee groups have voted for union representation: our pilots
voted in November 1998 to be represented by an independent union, the Frontier Airline
Pilots Association, our dispatchers voted in September 1999 to be represented by the
Transport Workers Union, and our mechanics voted in July 2001 to be represented by the
International Brotherhood of Teamsters. The first bargaining agreement for the
pilots, which has a five-year term, was ratified and became effective in May 2000.
The first bargaining agreement for the dispatchers, which has a three-year term, was
ratified and became effective in September 2000. The first bargaining agreement for
the mechanics, which has a three-year term, was ratified and became effective in July
2002. Since 1997, we have had other union organizing attempts that were defeated by
our flight attendants, ramp service agents, and stock clerks.
Effective May 2000, we enhanced our 401(k) Retirement Savings Plan by announcing
an increased matching contribution by the Company. Participants may receive a 50%
Company match for contributions up to 10% of salary. This match is discretionary and
is approved on an annual basis by our Board of Directors. The Board of Directors has
approved the continuation of the match through the plan year ended December 31, 2003.
We believe that the match and related vesting schedule of 20% per year may reduce our
employee turnover rates.
All new employees are subject to pre-employment drug testing. Those employees
who perform safety sensitive functions are also subject to random drug and alcohol
testing, and testing in the event of an accident.
Training, both initial and recurring, is required for many employees. We train
our pilots, flight attendants, ground service personnel, reservations personnel and
mechanics. FAA regulations require pilots to be licensed as commercial pilots, with
specific ratings for aircraft to be flown, to be medically certified or physically
fit, and have recent flying experience. Mechanics, quality control inspectors and
flight dispatchers must be licensed and qualified for specific aircraft. Flight
attendants must have initial and periodic competency, fitness training and
certification. The FAA approves and monitors our training programs. Management
personnel directly involved in the supervision of flight operations, training,
maintenance and aircraft inspection must meet experience standards prescribed by FAA
regulations.
Government Regulation
General. All interstate air carriers are subject to regulation by the DOT, the
FAA and other state and federal government agencies. In general, the amount of
regulation over domestic air carriers in terms of market entry and exit, pricing and
inter-carrier agreements has been greatly reduced since the enactment of the
Deregulation Act.
U.S. Department of Transportation. The DOT's jurisdiction extends primarily to
the economic aspects of air transportation, such as certification and fitness,
insurance, advertising, computer reservation systems, deceptive and unfair competitive
practices, and consumer protection matters such as on-time performance, denied
boarding and baggage liability. The DOT also is authorized to require reports from
air carriers and to investigate and institute proceedings to enforce its economic
regulations and may, in certain circumstances, assess civil penalties, revoke
operating authority and seek criminal sanctions. We hold a Certificate of Public
Convenience and Necessity issued by the DOT that allows us to engage in air
transportation.
Transportation Security Administration. On November 19, 2001, in response to
the terrorist acts of September 11, 2001, the President of the United States signed
into law the Aviation and Transportation Security Act ("ATSA"). The ATSA created the
Transportation Security Administration ("TSA"), an agency within the DOT, to oversee,
among other things, aviation and airport security. The ATSA provided for the
federalization of airport passenger, baggage, cargo, mail and employee and vendor
screening processes. The ATSA also enhanced background checks, provided federal air
marshals aboard flights, improved flight deck security, and enhanced security for
airport perimeter access. The ATSA also required that all checked baggage be screened
by explosive detection systems by December 31, 2002.
U.S. Federal Aviation Administration. The FAA's regulatory authority relates
primarily to flight operations and air safety, including aircraft certification and
operations, crew licensing and training, maintenance standards, and aircraft
standards. The FAA also oversees aircraft noise regulation, ground facilities,
dispatch, communications, weather observation, and flight and duty time. It also
controls access to certain airports through slot allocations, which represent
government authorization for airlines to take off and land at controlled airports
during specified time periods. The FAA has the authority to suspend temporarily or
revoke permanently the authority of an airline or its licensed personnel for failure
to comply with FAA regulations and to assess civil and criminal penalties for such
failures. We hold an operating certificate issued by the FAA pursuant to Part 121 of
the Federal Aviation Regulations. We must have and we maintain FAA certificates of
airworthiness for all of our aircraft. Our flight personnel, flight and emergency
procedures, aircraft and maintenance facilities and station operations are subject to
periodic inspections and tests by the FAA.
As a result of the events of September 11, 2001, the FAA developed requirements
to increase the security of aircraft flight decks. A variety of security enhancements
were introduced, ultimately requiring all airlines to install the highest level of
secure flight deck doors. As of April 9, 2003 all of our Boeing and Airbus aircraft
have FAA-approved flight deck doors installed and operational.
Environmental Matters. The Aviation Safety and Noise Abatement Act of 1979, the
Airport Noise and Capacity Act of 1990 and Clean Air Act of 1963 oversee and regulate
airlines with respect to aircraft engine noise and exhaust emissions. We are required
to comply with all applicable FAA noise control regulations and with current exhaust
emissions standards. Our fleet is in compliance with the FAA's Stage 3 noise level
requirements. In addition, various elements of our operation and maintenance of our
aircraft are subject to monitoring and control by federal and state agencies
overseeing the use and disposal of hazardous materials and storm water discharge. We
believe we are currently in substantial compliance with all material requirements of
such agencies.
Railway Labor Act/National Mediation Board. Three of our employee groups have
voted for union representation: our are represented by an independent union, the
Frontier Airline Pilots Association, our dispatchers are represented by the Transport
Workers Union, and our mechanics are represented by the International Brotherhood of
Teamsters. Our labor relations with respect to the these unions are covered under
Title II of the Railway Labor Act and are subject to the jurisdiction of the National
Mediation Board.
Foreign Operations. The availability of international routes to U.S. carriers
is regulated by treaties and related agreements between the United States and foreign
governments. The United States typically follows the practice of encouraging foreign
governments to enter into "open skies" agreements that allow multiple carrier
designation on foreign routes. In some cases, countries have sought to limit the
number of carriers allowed to fly these routes. Certain foreign governments impose
limitations on the ability of air carriers to serve a particular city and/or airport
within their country from the U.S. For a U.S. carrier to fly to any such
international destination, it must first obtain approval from both the U.S. and the
"foreign country authority". For those international routes where there is a limit to
the number of carriers or frequency of flights, studies have shown these routes have
more value than those without restrictions. In the past, U.S. government route
authorities have been sold between carriers.
Foreign Ownership. Pursuant to law and DOT regulation, each United States air carrier
must qualify as a United States citizen, which requires that its President and at least
two-thirds of its Board of Directors and other managing officers be comprised of United
States citizens, that not more than 25% of its voting stock may be owned by foreign
nationals, and that the carrier not be otherwise subject to foreign control.
Miscellaneous. We are also subject to regulation or oversight by other federal
and state agencies. Antitrust laws are enforced by the U.S. Department of Justice and
the Federal Trade Commission. All air carriers are subject to certain provisions of
the Communications Act of 1934 because of their extensive use of radio and other
communication facilities, and are required to obtain an aeronautical radio license
from the Federal Communications Commission. The Immigration and Naturalization
Service, the U.S. Customs Service and the Animal and Plant Health Inspection Service
of the U.S. Department of Agriculture each have jurisdiction over certain aspects of
our aircraft, passengers, cargo and operations.
Risk Factors
In addition to the other information contained in this Form 10-K, the following
risk factors should be considered carefully in evaluating our business and us.
We may be subject to terrorist attacks or other acts of war and increased costs or
reductions in demand for air travel due to hostilities in the Middle East or other
parts of the world.
On September 11, 2001, four commercial aircraft were hijacked by terrorists and
crashed into The World Trade Center in New York City, the Pentagon in Northern
Virginia and a field in Pennsylvania. These terrorists attacks resulted in an
overwhelming loss of life and extensive property damage. Immediately after the
attacks, the FAA closed U.S. airspace, prohibiting all flights to, from and within the
United States of America. Airports reopened on September 13, 2001, except for
Washington D.C.'s Ronald Reagan Washington National Airport, which partially reopened
on October 4, 2001.
The September 11 terrorist attacks, and more recently the war in Iraq created
fear among consumers and resulted in significant negative economic impacts on the
airline industry. Primary effects were substantial loss of revenue and flight
disruption costs, increased security and insurance costs, increased concerns about the
potential for future terrorist attacks, airport shutdowns and flight cancellations and
delays due to additional screening of passengers and baggage, security breaches and
perceived safety threats, and significantly reduced passenger traffic and yields due
to the subsequent drop in demand for air travel.
Given the magnitude and unprecedented nature of the September 11 attacks, the
uncertainty and fear of consumers resulting from the war in Iraq, or the potential for
other hostilities in other parts of the world, it is uncertain what long-term impact
these events will or could have on the airline industry in general and on us in
particular. These factors could affect our operating results and financial condition
by creating weakness in demand for air travel, increased costs due to new security
measures and the potential for new or additional government mandates for security
related measures, increased insurance premiums, increased fuel costs, and uncertainty
about the continued availability of war risk coverage or other insurances.
In addition, although the entire industry is substantially enhancing security
equipment and procedures, it is impossible to guarantee that additional terrorist
attacks or other acts of war will not occur. Given the weakened state of the airline
industry, if additional terrorist attacks or acts of war occur, particularly in the
near future, it can be expected that the impact of those attacks on the industry may
be similar in nature to but substantially greater than those resulting from the
September 11 terrorist attacks.
Our insurance costs have increased substantially as a result of the September 11th
terrorist attacks, and further increases in insurance costs would harm our business.
Following the September 11 terrorist attacks, aviation insurers dramatically
increased airline insurance premiums and significantly reduced the maximum amount of
insurance coverage available to airlines for liability to persons other than
passengers for claims resulting from acts of terrorism, war or similar events to $50
million per event and in the aggregate. In light of this development, under the Air
Transportation Safety and Stabilization Act ("Stabilization Act"), the government has
provided domestic airlines with excess war risk coverage above $50 million up to an
estimated $1.6 billion per event for us.
In December 2002, via authority granted under the Homeland Security Act of 2002,
the U.S. government expanded its insurance program to enable airlines to elect either
the government's excess third-party coverage or for the government to become the
primary insurer for all war risk coverage. We elected to take primary government
coverage in February 2003 and discontinued the commercially available war risk
coverage. While the Appropriations Act authorized the government to offer both
policies through August 31, 2004, the current policies are in effect until August 12,
2003. We cannot assure you that any extension will occur, or if it does, how long the
extension will last. We expect that if the government stops providing 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. Significant increases in insurance premiums would harm our financial
condition and results of operations.
We may not be able to obtain or secure new aircraft financing.
We have agreed to purchase six additional new Airbus A319 and A318
aircraft. We have secured firm financing commitments for 4 of the six aircraft. To
complete the purchase of the remaining aircraft, we must secure aircraft financing,
which we may not be able to obtain on terms acceptable to us, if at all. The amount
of financing required will depend on the required down payment on mortgaged financed
aircraft and the extent of leasing compared to purchasing the aircraft. We are
exploring various financing alternatives, including, but not limited to, domestic and
foreign bank financing, leveraged lease arrangements or sales/leaseback transactions.
There can be no guaranty that additional financing will be available when required or
on acceptable terms. The inability to secure the financing could have a material
adverse effect on our cash balances or result in delays in or our inability to take
delivery of Airbus aircraft that we have agreed to purchase, further impairing the our
strategies for long-term growth.
The airline industry is seasonal and cyclical, resulting in unpredictable liquidity
and earnings.
Because the airline industry is seasonal and cyclical, our liquidity and
earnings will fluctuate and be unpredictable. Our operations primarily depend on
passenger travel demand and seasonal variations. Our weakest travel periods are
generally during the quarters ending in June and December. The airline industry is
also a highly cyclical business with substantial volatility. Airlines frequently
experience short-term cash requirements. These requirements are caused by seasonal
fluctuations in traffic, which often reduce cash during off-peak periods, and various
other factors, including price competition from other airlines, national and
international events, fuel prices, and general economic conditions including
inflation. Our operating and financial results are likely to be negatively impacted
by the continued stagnation in national or regional economic conditions in the United
States, and particularly in Colorado. Airlines require substantial liquidity to
continue operating under most conditions. The airline industry also has low operating
profit margins and revenues that vary to a substantially greater degree than do the
related costs. Therefore, a significant shortfall from expected revenue levels could
have a material adverse effect on us.
We, like many in the industry, are seeing a negative impact to passenger
traffic caused by the war with Iraq, the slowing economy, as well as threats of
further terrorist activities. The impact has been more prevalent with our business
traffic, which is higher yield traffic that books closer to the date of departure,
than with our leisure customers. Even though the slowing economy has impacted us, we
believe that the larger, more established carriers are being impacted to a greater
extent as the discretionary business travelers who typically fly these carriers are
looking for affordable alternatives similar to the service we provide. The larger
carriers have reduced their "close-in" fare structure to more aggressively compete for
this traffic. Aggressive pricing tactics by our major competitors has had and could
also have an impact in the future on the leisure component.
We are in a high fixed cost business, and any unexpected decrease in revenues would
harm us.
The airline industry is characterized by low profit margins and high fixed
costs primarily for personnel, fuel, aircraft ownership costs and other rents. The
expenses of an aircraft flight do not vary significantly with the number of passengers
carried and, as a result, a relatively small change in the number of passengers or in
pricing would have a disproportionate effect on the airline's operating and financial
results. Accordingly, a shortfall from expected revenue levels can have a material
adverse effect on our profitability and liquidity.
We have a significant amount of fixed obligations and we will incur significantly more
fixed obligations, which could increase the risk of failing to meet payment
obligations.
As of March 31, 2003, maturities of our long-term debt were $20,473,000 in
2004, $16,864,000 in 2005, $22,139,000 in 2006, $22,725,000 in 2007, $45,776,000 in
2008 and an aggregate of $154,235,000 for the years thereafter. In addition to
long-term debt, we have a significant amount of other fixed obligations under
operating leases related to our aircraft, airport terminal space, other airport
facilities and office space. As of March 31, 2003, future minimum lease payments
under noncancelable operating leases were approximately $83,326,000 in 2004,
$76,791,000 in 2005, $61,478,000 in 2006, $56,340,000 in 2007, $55,420,000 in 2008 and
an aggregate of $328,518,000 for the years thereafter. As of March 31, 2003, we had
commitments of approximately $142,375,000 to purchase six additional aircraft over the
next 13 months, including estimated amounts for contractual price escalations, spare
parts to support these aircraft and to equip the aircraft with LiveTV. We will incur
additional debt or long-term lease obligations as we take delivery of new aircraft and
other equipment and continue to expand into new markets.
If we fail to comply with financial covenants, some of our financing agreements may be
terminated.
Under our commercial loan facility "Government Guaranteed Loan", guaranteed in
part by the federal government, we are required to comply with specified financial and
other covenants. We cannot assure you that we will be able to comply with these
covenants or provisions or that these requirements will not limit our ability to
finance our future operations or capital needs. Our inability to comply with the
required financial covenants or provisions could result in a default under this
financing agreement. In the event of any such default and our inability to obtain a
waiver of the default, all amounts outstanding under the agreements could be declared
to be immediately due and payable. In addition, other financial arrangements that
contain cross-default provisions could also be declared in default and all amounts
outstanding could be declared immediately due and payable. If we did not have
sufficient available cash to pay all amounts that become due and payable, we would
have to seek additional debt or equity financing, which may not be available on
acceptable terms, or at all. If such financing were not available, we would have to
sell assets in order to obtain the funds required to make accelerated payments.
Increases in fuel costs affect our operating costs and competitiveness.
We cannot predict our future cost and availability of fuel, which affects our
ability to compete. Fuel is a major component of our operating expenses. Both the
cost and availability of fuel are influenced by many economic and political factors
and events occurring in oil producing countries throughout the world, and fuel costs
fluctuate widely. Fuel accounted for 17.2% of our total operating expenses for the
year ended March 31, 2003. The unavailability of adequate fuel supplies could have a
material adverse effect on our operations and profitability. In addition, larger
airlines may have a competitive advantage because they pay lower prices for fuel. We
generally follow industry trends by raising fares in response to significant fuel
price increases. However, our ability to pass on increased fuel costs through fare
increases may be limited by economic and competitive conditions. In addition,
although we implemented a fuel hedging program in 2003, under which we enter into Gulf
Coast jet fuel option contracts to partially protect against significant increases in
fuel prices, our fuel hedging program is limited in fuel volume and duration. Our
fuel hedging program is not sufficient to protect us against the majority of increases
in the price of fuel.
We are subject to strict federal regulations, and compliance with federal regulations
increases our costs and decreases our revenues.
Airlines are subject to extensive regulatory and legal requirements that
involve significant compliance costs. In the last several years, Congress has passed
laws and the DOT and FAA have issued regulations relating to the operation of airlines
that have required significant expenditures. For example, the President signed into
law the ATSA in November 2001. This law federalizes substantially all aspects of
civil aviation security and requires, among other things, the implementation of
certain security measures by airlines and airports, including a requirement that all
passenger baggage be screened. Funding for airline and airport security under the law
is primarily provided by a new $2.50 per enplanement ticket tax effective February 1,
2002, with authority granted to the TSA to impose additional fees on air carriers if
necessary. Under the Emergency Wartime Supplemental Appropriations Act
(Appropriations Act) enacted on April 16, 2003, the $2.50 enplanement tax was
temporarily suspended on ticket sales from June 1, 2003 through August 31, 2003. In
addition, the acquisition, installation and operation of the required baggage
screening systems by airports will result in capital expenses and costs by those
airports that will likely be passed on to the airlines through increased use and
landing fees. It is impossible to determine at this time exactly what the cost impact
will be of the increased security measures imposed by the ATSA. On February 17, 2002,
the ATSA imposed a base security infrastructure fee on commercial operators in an
amount equal to the calendar year 2000 airport security expenses. The infrastructure
fee for us is $1,625,000 annually.
In addition, although we have obtained the necessary authority from the DOT
and the FAA to conduct flight operations and are currently obtaining such authority
from the FAA with respect to Airbus aircraft that we are adding to our fleet, we must
maintain this authority by our continued compliance with applicable statutes, rules,
and regulations pertaining to the airline industry, including any new rules and
regulations that may be adopted in the future. We believe that the FAA strictly
scrutinizes smaller airlines like ours, which makes us susceptible to regulatory
demands that can negatively impact our operations. We may not be able to continue to
comply with all present and future rules and regulations. In addition, we cannot
predict the costs of compliance with these regulations and the effect of compliance on
our profitability, although these costs may be material. We also expect substantial
FAA scrutiny as we transition from our Boeing fleet to an all Airbus fleet. An
accident or major incident involving one of our aircraft would likely have a material
adverse effect on our business and results of operations.
We experience high costs at DIA, which may impact our results of operations.
We operate our hub of flight operations from DIA where we experience high
costs. Financed through revenue bonds, DIA depends on landing fees, gate rentals,
income from airlines, the traveling public, and other fees to generate income to
service its debt and to support its operations. Our cost of operations at DIA will
vary as traffic increases or diminishes at that airport. We believe that our
operating costs at DIA substantially exceed those that other airlines incur at most
hub airports in other cities, which decreases our ability to compete with other
airlines with lower costs at their hub airports. In addition, United Airlines,
currently operating under the protection of Chapter 11 of the Bankruptcy Code,
represents a significant tenant at DIA. If United Airlines fails to meet a
significant portion of its payment obligations relating to its operations at DIA, or
significantly reduces its operations, the resulting decrease in revenues available to
DIA may result in a proportionate increase in the operating costs of all other
airlines continuing to operate at DIA.
We face intense competition and market dominance by United Airlines and uncertainty
with respect to their ability to emerge from Chapter 11 successfully; we also face
competition from other airlines at DIA.
The airline industry is highly competitive, primarily due to the effects of
the Deregulation Act, which substantially eliminated government authority to regulate
domestic routes and fares and increased the ability of airlines to compete with
respect to flight frequencies and fares. We compete with United Airlines in our hub
in Denver, and we anticipate that we will compete principally with United Airlines in
our future market entries. United Airlines and its commuter affiliates are the
dominant carriers out of DIA, accounting for approximately 63.5% of all passenger
boardings for the month of March 2003. Fare wars, "capacity dumping" in which a
competitor places additional aircraft on selected routes, and other activities could
adversely affect us. The future activities of United Airlines and other carriers may
have a material adverse effect on our revenues and results of operations. Most of our
current and potential competitors have significantly greater financial resources,
larger route networks, and superior market identity. In addition, United Airlines is
currently operating under the protection of Chapter 11 of the Bankruptcy Code. As it
seeks to develop a plan or reorganization, United Airlines has expressed an interest
in creating a low-cost operation in order to compete more effectively with us and
other low-cost carriers. The uncertainty regarding United Airlines' business plan,
its ability to restructure under Chapter 11, and its potential for placing to place
downward pressure on air fares charged in the Denver market are risks on our ability
to maintain yields required for profitable operations.
Our operating results may suffer from other low-fare carriers entering DIA and other
markets we serve.
The airline industry, in general, and the low-fare sector in particular, is highly
competitive and is served by numerous companies. More recently, Delta Airlines recently
formed a subsidiary named “Song Airlines” to compete in the low-fare sector. In
addition, a number of other airlines have commenced service at DIA. These airlines have
offered low introductory fares and compete on several of our routes. We may also face
greater competition in the future. Competition from these airlines could adversely affect
us.
We could lose airport and gate access thereby decreasing our competitiveness.
We could encounter barriers to airport slot or airport gate access that would
deny or limit our access to the airports that we currently use or intend to use in the
future. A slot is an authorization to schedule a takeoff or landing at the designated
airport within a specific time window. The FAA must be advised of all slot transfers
and can disallow any such transfer. In the United States, the FAA currently regulates
slot allocations at O'Hare International Airport in Chicago, JFK and LaGuardia
Airports in New York City, and Ronald Reagan National Airport in Washington D.C. We
use LaGuardia Airport and Ronald Reagan National Airport in our current operations.
The FAA's slot regulations require the use of each slot at least 80% of the time,
measured on a monthly basis. Failure to comply with these regulations may result in a
recall of the slot by the FAA. In addition, the slot regulations permit the FAA to
withdraw the slots at any time without compensation to meet the DOT's operational
needs. Our ability to increase slots at the regulated airports is affected by the
number of slots available for takeoffs and landings.
In addition, the number of gates available to us at some airports,
particularly at DIA, may be limited to the restricted capacity or by disruptions
caused by major renovation projects. Available gates may not provide for the best
overall service to our customers, and may prevent us from scheduling our flights
during peak or opportune times. Any failure to obtain gate access at the airports
that we serve could adversely affect our operations. These barriers may in turn
materially adversely affect our business and competitiveness.
Our transition to an Airbus fleet creates risks.
We currently operate 19 Boeing aircraft and 18 Airbus aircraft. Our long-term
strategy is to transition our fleet so that we are operating only Airbus aircraft by
the end of calendar year 2005. One of the key elements of this strategy is to produce
cost savings because crew training is standardized for aircraft of a common type,
maintenance issues are simplified, spare parts inventory is reduced, and scheduling is
more efficient. However, during our transition period we will be incurring additional
costs associated with retraining our Boeing crews in the Airbus aircraft. We may be
faced with retiring the Boeing aircraft in advance of the end of the lease agreements
for these aircraft, thus resulting in recognizing remaining lease obligations as
expense in the current period.
Once we operate only Airbus aircraft, we will be dependent on a single
manufacturer for future aircraft acquisitions or deliveries, spare parts or warranty
service. If Airbus is unable to perform its obligations under existing purchase
agreements, or is unable to provide future aircraft or services, whether by fire,
strike or other events that affect its ability to fulfill contractual obligations or
manufacture aircraft or spare parts, we would have to find another supplier for our
aircraft. Currently, Boeing is the only other manufacturer from which we could
purchase or lease alternate aircraft. If we were forced to acquire Boeing aircraft,
we would need to address fleet transition issues, including substantial costs
associated with retraining our employees, acquiring new spare parts, and replacing our
manuals. Also, the fleet efficiency benefits described above would no longer be
available.
In addition, once we operate only Airbus aircraft we will be particularly
vulnerable to any problems that might be associated with these aircraft. Our business
would be significantly disrupted if an FAA airworthiness directive or service bulletin
were issued, resulting in the grounding of all Airbus aircraft of the type we operate
while the defect is being corrected. Our business could also be harmed if the public
avoids flying Airbus aircraft due to an adverse perception about the aircraft's safety
or dependability, whether real or perceived, in the event of an accident or other
incident involving an Airbus aircraft of the type we fly.
Our maintenance expenses may be higher than we anticipate.
We may incur higher than anticipated maintenance expenses. We bear the cost
of all routine and major maintenance on our owned aircraft. Under our leased aircraft
lease agreements, we are required to bear all routine and major maintenance expenses.
Maintenance expenses comprise a significant portion of our operating expenses. In
addition, we are required periodically to take aircraft out of service for heavy
maintenance checks, which can adversely increase costs and reduce revenue. We also
may be required to comply with regulations and airworthiness directives the FAA
issues, the cost of which our aircraft lessors may only partially assume depending
upon the magnitude of the expense. Although we believe that our purchased and leased
aircraft are currently in compliance with all FAA issued airworthiness directives,
there is a high probability that additional airworthiness directives will be required
in the future necessitating additional expense.
Our landing fees may increase because of local noise abatement procedures.
Compliance with local noise abatement procedures may lead to increased landing
fees. As a result of litigation and pressure from airport area residents, airport
operators have taken local actions over the years to reduce aircraft noise. These
actions have included regulations requiring aircraft to meet prescribed decibel limits
by designated dates, curfews during night time hours, restrictions on frequency of
aircraft operations, and various operational procedures for noise abatement. The
Airport Noise and Capacity Act of 1990 recognized the right of airport operators with
special noise problems to implement local noise abatement procedures as long as the
procedures do not interfere unreasonably with the interstate and foreign commerce of
the national air transportation system.
An agreement between the City and County of Denver and another county adjacent
to Denver specifies maximum aircraft noise levels at designated monitoring points in
the vicinity of DIA with significant payments payable by Denver to the other county
for each substantiated noise violation under the agreement. DIA has incurred such
payment obligations and likely will incur such obligations in the future, which it
will pass on to us and other air carriers serving DIA by increasing landing fees.
Additionally, noise regulations could be enacted in the future that would increase our
expenses and have a material adverse effect on our operations.
We have a limited number of aircraft, and any unexpected loss of any aircraft could
disrupt and harm our operations.
Because we have a limited number of aircraft, if any of our aircraft
unexpectedly are taken out of service, our operations may be disrupted. We can
schedule all of our aircraft for regular passenger service and only maintain limited
spare aircraft capability should one or more aircraft be removed from scheduled
service for unplanned maintenance repairs or for other reasons. The unplanned loss of
use of one or more of our aircraft for a significant period of time could have a
material adverse effect on our operations and operating results. A replacement
aircraft may not be available or we may not be able to lease or purchase additional
aircraft on satisfactory terms or when needed. The market for leased or purchased
aircraft fluctuates based on worldwide economic factors that we cannot control.
Unionization affects our costs and may affect our operations.
Three of our employee groups have voted for union representation: our pilots,
dispatchers, and mechanics. In addition, since 1997 we have had union organizing
attempts that were defeated by our flight attendants, ramp service agents, and stock
clerks. The collective bargaining agreements we have entered into with our pilots,
dispatchers, and mechanics have increased our labor and benefit costs, and additional
unionization of our employees could increase our overall costs. If any group of our
currently non-unionized employees were to unionize and we were unable to reach
agreement on the terms of their and other currently unionized employee groups'
collective bargaining agreements or we were to experience widespread employee
dissatisfaction, we could be subject to work slowdowns or stoppages. In addition, we
may be subject to disruptions by organized labor groups protesting certain groups for
their non-union status. Any of these events would be disruptive to our operations and
could harm our business.
Our reputation and financial results could be harmed in the event of an accident or
incident involving our aircraft.
An accident or incident involving one of our aircraft could involve repair or
replacement of a damaged aircraft and its consequential temporary or permanent loss
from service, and significant potential claims of injured passengers and others. We
are required by the DOT to carry liability insurance. Although we believe we
currently maintain liability insurance in amounts and of the type generally consistent
with industry practice, the amount of such coverage may not be adequate and we may be
forced to bear substantial losses from an accident. Substantial claims resulting from
an accident in excess of our related insurance coverage would harm our business and
financial results. Moreover, any aircraft accident or incident, even if fully
insured, could cause a public perception that we are less safe or reliable than other
airlines, which would harm our business.
Item 2: Properties
Aircraft
As of June 23, 2003, we operate 19 Boeing 737 and 18 Airbus A319 aircraft in
all-coach seating configurations. The age of these aircraft, their passenger
capacities and expiration years for the leased aircraft are shown in the following
table:
Approximate
Number of
Aircraft No. of Year of Passenger Lease
Model Aircraft Manufacture Seats Expiration
B-737-200A 3 1978-1983 119 2003-2005
B-737-300 16 1985-1998 136 2003-2006
A319 9 2001-2003 132 owned
A319 9 2001-2003 132 2013-2015
In March 2000, we entered into an agreement, as subsequently amended, to
purchase up to 31 new Airbus aircraft. We have agreed to firm purchases of 17 of
these aircraft, and have options to purchase up to an additional 14 aircraft. We have
exercised options to purchase five Airbus aircraft. As of June 23, 2003, we did not
exercise purchase options as they became due on seven of the remaining nine
unexercised options on Airbus aircraft. We are currently discussing with Airbus the
possibility of replacing these options with purchase rights. As a complement to this
purchase order, in April 2000 we signed an agreement to lease 15 new Airbus aircraft
for delivery in our fiscal years 2002 through 2005. As of March 31, 2003, we had
taken delivery of 10 purchased aircraft, one of which we sold and agreed to lease back
from the purchaser, and six additional leased aircraft. During the year ended March
31, 2003, we assigned one of our purchase commitments to an aircraft lessor. We
agreed to lease this aircraft for a term of five years. These commitments contemplate
a fleet replacement plan by which we will phase out our Boeing 737 aircraft and
replace them with a combination of Airbus A319 and A318 aircraft. The A319 and A318
aircraft are configured with 132 and 114 passenger seats, respectively, with a 33-inch
seat pitch. We believe that operating new Airbus aircraft will result in significant
operating cost savings and an improved product for our customers.
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 the two Boeing 737-200 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. During the year ended March 31, 2003,
we took four Boeing 737-200s and one Boeing 737-300 out of service and completed the
process of bringing the aircraft into compliance with return conditions. Including
the anticipated return of nine Boeing aircraft, we plan to operate a fleet of 10
Boeing 737-300s, four Airbus 318s and 24 Airbus A319s, or a total of 38 aircraft, by
the end of our fiscal year ending March 31, 2004.
In June 2003, we agreed to lease two additional Airbus 318 aircraft, scheduled
for delivery in May 2004 and March 2005, and one additional Airbus 319 aircraft,
scheduled for delivery in February 2005. We plan to operate a minimum of 35 purchased
and leased Airbus aircraft by the fiscal year ended March 31, 2005. Upon completion of
our fleet transition, we expect our owned and leased fleet to be comprised of
approximately 80 percent A319 aircraft and 20 percent A318 aircraft.
Facilities
In January 2001, we moved our general and administrative offices to a new
headquarters facility near DIA, where we lease approximately 70,000 square feet of
space for a lease term of 12 years at an average annual rental of approximately
$965,000 plus operating and maintenance expenses.
The Denver reservations facility relocated in July 2001 to a 16,000 square foot
facility, also in Denver, which we have leased for a 10-year lease term at an average
annual rental of approximately $140,000 plus operating and maintenance expenses. In
August 2000, we established a second reservations center facility in Las Cruces, New
Mexico. This facility is approximately 12,000 square feet and is leased for a term of
122 months at an average annual rental of approximately $129,000 plus operating and
maintenance expenses.
We have entered into an airport lease and facilities agreement expiring in 2010
with the City and County of Denver at DIA for ticket counter space, ten gates and
associated operations at a current annual rental rate of approximately $7,142,000 for
these facilities. We also sublease a portion of Continental Airlines' hangar at DIA
until February 28, 2007 for an annual rental of approximately $2,776,000. Upon 18
months written notice, either party can terminate the agreement.
Each of our airport locations requires leased space associated with gate
operations, ticketing and baggage operations. We either lease the ticket counters,
gates and airport office facilities at each of the airports we serve from the
appropriate airport authority or sublease them from other airlines. Total annual rent
expense for these facilities, excluding DIA, is approximately $7,860,000 based on
rents paid for the month of March 2003. Additionally, we lease maintenance facilities
in El Paso, Texas and Phoenix, Arizona at a current annual rental of approximately
$201,000 for these facilities.
Item 3: Legal Proceedings
From time to time, we are engaged in routine litigation incidental to our
business. We believe there are no legal proceedings pending in which we are a party
or of which any of our property is the subject that are not adequately covered by
insurance maintained by us or which have sufficient merit to result in a material
adverse affect upon our business or financial condition.
Item 4: Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, we did not
submit any matters to a vote of our security holders through the solicitation of
proxies or otherwise.
PART II
Item 5: Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock
The following table shows the range of high and low bid prices per share for our
common stock for the periods indicated and as reported by Nasdaq through June 23,
2003. Market quotations listed here represent prices between dealers and do not
reflect retail mark-ups, markdowns or commissions. As of June 23, 2003, there were
1,271 holders of record of our common stock.
Price Range of
Common Stock
Quarter Ended High Low
June 30, 2001 $ 16.71 $ 10.31
September 30, 2001 15.78 6.77
December 31, 2001 17.40 8.00
March 31, 2002 23.75 17.02
June 30, 2002 17.95 8.13
September 30, 2002 8.60 4.56
December 31, 2002 8.00 4.02
March 31, 2003 7.10 3.67
June 30, 2003 9.87 5.15
(through June 23, 2003)
Recent Sales of Securities
During the period April 1, 2002 through June 23, 2003, we have not sold any shares of
our common stock.
Dividend Policy
We have not declared or paid cash dividends on our common stock. We currently
intend to retain any future earnings to fund operations and the continued development
of our business, and, thus, do not expect to pay any cash dividends on our common
stock in the foreseeable future. Future cash dividends, if any, will be determined by
our Board of Directors and will be based upon our earnings, capital requirements,
financial condition and other factors deemed relevant by the Board of Directors.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this Item is incorporated herein by reference to the
data under the heading "Securities Authorized for Issuance Under Equity Compensation
Plans" in the Proxy Statement to be used in connection with the solicitation of
proxies for our annual meeting of shareholders to be held on September 4, 2003. We
will file the definitive Proxy Statement with the Commission on or before July 29,
2003.
Item 6: Selected Financial Data
The following selected financial and operating data as of and for each of the
years ended March 31, 2003, 2002, 2001, 2000, and 1999 are derived from our audited
financial statements. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and the
financial statements and the related notes thereto included elsewhere in this report.
Year Ended March 31,
2003 2002 2001 2000 1999
(Amounts in thousands except per share amounts)
Statement of Operations Data:
Total operating revenues $ 469,936 $ 445,075 $ 472,876 $ 329,820 $ 220,608
Total operating expenses 500,560 428,689 392,155 290,511 195,928
Operating income (loss) (30,624) 16,386 80,721 39,309 24,680
Income (loss) before income tax expense
(benefit) and cumulative effect of change
in accounting principle (39,509) 24,832 88,332 43,415 25,086
Income tax expense (benefit) (14,655) 8,282 33,465 16,954 (5,480)
Income (loss) before cumulative effect of
change in accounting principle (24,854) 16,550 54,868 26,460 30,566
Cumulative effect of change in
accounting principle 2,011 - - 549 -
Net income (loss) (22,843) 16,550 54,868 27,010 30,566
Income (loss) per share before cumulative
effect of a change in accounting
principle:
Basic (0.84) 0.58 2.02 1.02 1.43
Diluted (0.84) 0.56 1.90 0.94 1.32
Net income (loss) per share:
Basic (0.77) 0.58 2.02 1.04 1.43
Diluted (0.77) 0.56 1.90 0.95 1.32
Pro forma amounts assuming the new
method of accounting for maintenance
is applied retroactively:
Net income - 17,661,307 55,119,366 - -
Earnings per share:
Basic - 0.62 2.03 - -
Diluted - 0.60 1.91 - -
Balance Sheet Data:
Cash and cash equivalents $ 102,880 $ 87,555 $ 109,251 $ 67,851 $ 47,289
Current assets 190,838 193,393 199,794 140,361 94,209
Total assets 587,844 413,685 295,317 187,546 119,620
Current liabilities 130,047 152,064 136,159 98,475 68,721
Long-term debt 261,739 66,832 204 329 435
Total liabilities 428,877 244,552 150,538 106,501 75,230
Stockholders' equity 158,967 169,133 144,779 81,045 44,391
Working capital 60,791 41,329 63,635 41,886 25,488
Year Ended March 31,
2003 2002 2001 2000 1999
Selected Operating Data:
Passenger revenue (000s) (1) 460,188 435,946 462,609 320,850 214,311
Revenue passengers carried (000s) 3,926 3,069 3,017 2,284 1,664
Revenue passenger miles(RPMs)(000s)(2) 3,599,553 2,756,965 2,773,833 2,104,460 1,506,597
Available seat miles (ASMs) (000s) (3) 6,013,261 4,592,298 4,260,461 3,559,595 2,537,503
Passenger load factor (4) 59.9% 60.0% 65.1% 59.1% 59.4%
Break-even load factor (5) (6) 64.7% 57.6% 52.7% 51.1% 52.4%
Block hours (7) 120,297 92,418 83,742 71,276 52,789
Departures 53,081 41,736 38,556 33,284 25,778
Average seats per departure 132 132 132 129 125
Average stage length 858 834 837 829 787
Average length of haul 917 898 919 921 905
Average daily block hour utilization (8) 9.8 9.1 9.4 9.9 9.6
Yield per RPM (cents) (9) 12.74 15.78 16.66 15.23 14.19
Total yield per RPM (cents) (10) 13.06 16.14 17.05 15.67 14.64
Yield per ASM (cents) (11) 7.63 9.47 10.85 9.00 8.42
Total yield per ASM (cents) (12) 7.81 9.69 11.10 9.27 8.69
Cost per ASM (cents) 8.32 9.33 9.20 8.16 7.72
Cost per ASM excluding fuel (cents) 6.90 8.00 7.54 6.91 6.82
Average fare (13) $ 109 $ 132 $ 146 $ 134 $ 123
Average aircraft in service 33.8 27.8 24.5 19.7 15.0
Aircraft in service at end of year 36.0 30.0 25.0 23.0 17.0
Average age of aircraft at end of year 7.4 10.6 11.4 10.5 14.7
(1) "Passenger revenue" includes revenues for non-revenue passengers, administrative
fees, and revenue recognized for unused tickets that are greater than one year
from issuance date.
(2) "Revenue passenger miles," or RPMs, are determined by multiplying the number of
fare-paying passengers carried by the distance flown.
(3) "Available seat miles," or ASMs, are determined by multiplying the number of seats
available for passengers by the number of miles flown.
(4) "Passenger load factor" is determined by dividing revenue passenger miles by
available seat miles.
(5) "Break-even load factor" is the passenger load factor that will result in
operating revenues being equal to operating expenses, assuming constant revenue
per passenger mile and expenses.
(6) 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 year ended
March 31, 2003. The write-down of the carrying values of the Boeing aircraft parts
totaling $2,478,000 has been excluded from the calculation of the break-even load
factor for the year ended March 31, 2003. The write-down of the carrying values
of the Boeing aircraft parts totaling $1,512,000 during the year ended March 31,
2002 has been excluded from the calculation of the break-even load factor. The
Stabilization Act compensation totaling $12,703,000 for the year ended March 31,
2002, has been excluded from the calculation of the break-even load factor.
(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 number of aircraft days in service, divided by the weighted average of aircraft
in our fleet during that period. 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.
(9) "Yield per RPM" is determined by dividing passenger revenues (excluding charter
revenue) 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 (excluding charter
revenue) by available seat miles.
(12) "Total yield per ASM" is determined by dividing passenger 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.
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
Selected Operating Statistics
The following table provides our operating revenues and expenses expressed as
cents per total available seat miles ("ASM") and as a percentage of total operating
revenues, as rounded, for the years ended March 31, 2003, 2002, and 2001.
2003 2002 2001
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 7.65 97.9% 9.49 97.9% 10.86 97.8%
Cargo 0.09 1.2% 0.14 1.5% 0.18 1.6%
Other 0.07 0.9% 0.05 0.6% 0.06 0.6%
Total revenues 7.81 100.0% 9.68 100.0% 11.10 100.0%
===================================================================
Operating expenses:
Flight operations 2.59 33.2% 2.83 29.2% 2.54 22.9%
Aircraft fuel expense 1.43 18.3% 1.33 13.7% 1.67 15.0%
Aircraft and traffic servicing 1.44 18.4% 1.53 15.8% 1.42 12.8%
Maintenance 1.26 16.1% 1.53 15.8% 1.54 13.9%
Promotion and sales 0.88 11.3% 1.29 13.4% 1.31 11.8%
General and administrative 0.43 5.5% 0.57 5.9% 0.59 5.3%
Depreciation and amortization 0.29 3.7% 0.25 2.6% 0.13 1.2%
Total operating expenses 8.32 106.5% 9.33 96.4% 9.20 82.9%
===================================================================
Results of Operations - Year Ended March 31, 2003 Compared to Year Ended March 31, 2002
General
We are a scheduled passenger airline based in Denver, Colorado. We were
organized in February 1994 and we began flight operations in July 1994 with two leased
Boeing 737-200 jets. We have since expanded our fleet to 28 leased jets and nine
owned Airbus aircraft, including three Boeing 737-200s, 16 larger Boeing 737-300s and
17 Airbus A319s as of March 31, 2003. As a result of expansion of our operations, the
September 11, 2001 terrorist attacks, transition costs associated with our fleet
replacement plan, the slowing economy and the war in Iraq, we do not believe our
results of operations for the year ended March 31, 2003 and 2002 are comparable to
each other or are indicative of future operating results.
Small fluctuations in our yield per revenue passenger mile ("RPM") or cost per
available seat mile ("ASM") can significantly affect operating results because we,
like other airlines, have high fixed costs in relation to revenues. Airline operations
are highly sensitive to various factors, including the actions of competing airlines
and general economic factors, which can adversely affect our liquidity, cash flows and
results of operations.
Results of Operations
We had a net loss of $22,843,000 or 77(cent)per share for the year ended March 31,
2003 as compared to net income of $16,550,000 or 56(cent)per diluted share for the year
ended March 31, 2002. Our net loss for the year ended March 31, 2003 included a $2.0
million after-tax credit for the cumulative effect of a change in accounting for major
aircraft overhauls from the accrual method to the expense as incurred method. The net
loss before the cumulative effect of the change in accounting was $24,854,000, or
$0.84 per common share. During the year ended March 31, 2003, as compared to the
prior comparable period, we experienced lower average fares as a result of the slowing
economy, United's competitive pricing on discount fares available inside 14 days of
travel, principally in our Denver market, and low introductory fares by new carriers
serving the Denver market. Our average fare was $109 for the year ended March 31,
2003, compared to $132 for the year ended March 31, 2002. We also believe that
passenger traffic during the year ended March 31, 2003 was impacted by the threat of
war with Iraq, which began in March 2003. During March 2003, the Denver area also
experienced an unusual blizzard, which caused DIA to be closed for approximately two
days. During the year ended March 31, 2003, 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. Additionally, we wrote down
the value of our Boeing spare parts inventory by $2,478,000.
Our cost per ASM ("CASM") for the year ended March 31, 2003 and 2002 was 8.32(cent)
and 9.33(cent), respectively, a decrease of 1.01(cent)or 10.8%. CASM excluding fuel for the
year ended March 31, 2003 and 2002 was 6.90(cent)and 8.00(cent), respectively, a decrease of
1.10(cent)or 13.8%. Our CASM decreased during the year ended March 31, 2003 as a result
of an increase in the average number of owned aircraft from 2.0 to 6.3, 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 an
employee bonus accrual as a result of the net loss for the period, an increase in
aircraft utilization, and economies of scale associated with lower increases in
indirect costs compared to the 30.9% increase in ASMs over the prior comparable
period. These reductions were partially offset by an increase of .07(cent)per ASM as a
result of an increase in war risk and hull and liability insurance premiums after the
events of September 11. Due to the flight cancellations as a result of the September
11 terrorist attacks during the year ended March 31, 2002, 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 year ended March 31, 2002.
During the year ended March 31, 2003, our average daily block hour utilization
increased to 9.8 from 9.1 for the year ended March 31, 2002. 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
temporarily grounded four aircraft as a result of the September 11, 2001 terrorist
attacks, resulting in reduced aircraft utilization during the 2002 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 year ended March 31, 2003 and 2002,
our break-even load factors were 64.7% and 57.6%, respectively, compared to our
achieved passenger load factors of 59.9% and 60.0%. 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 year ended March 31, 2003 from $132 during the year
ended March 31, 2002, partially offset by a decrease in our CASM to 8.32(cent)for the year
ended March 31, 2003 from 9.33(cent)for the year ended March 31, 2002.
Revenues
Industry fare pricing behavior has a significant impact on our revenues.
Because of the elasticity of passenger demand, we believe that increases in fares may
at certain levels result in a decrease in passenger demand in many markets. We cannot
predict future fare levels, which depend to a substantial degree on actions of
competitors and the economy. When sale prices or other price changes are initiated by
competitors in our markets, we believe that we must, in most cases, match those
competitive fares in order to maintain our market share. Passenger revenues are
seasonal in leisure travel markets depending on the markets' locations.
Our average fare for the year ended March 31, 2003 and 2002 was $109 and $132,
respectively, a decrease of 17.4%. We believe that the decrease in the average fare
during the year ended March 31, 2003 from the prior comparable period was principally
a result of the slowing economy, the threat of a war with Iraq which began in March
2003, United's competitive pricing on discount fares available inside 14 days of
travel, principally in our Denver market, and low introductory fares by new carriers
serving the Denver market.
Effective February 17, 2002, the DOT began to provide security services through
the TSA and assumed many of the contracts and oversight of security vendors that we
and other carriers use to provide airport security services. Additionally, the DOT is
to reimburse us, as well as all other air carriers, for certain security services
provided by our own personnel. In order to be able to provide and fund these security
services, the DOT has imposed a $2.50 security service fee per passenger segment
flown, not to exceed $5.00 for one-way travel or $10.00 for a round trip, on tickets
purchased on and after February 1, 2002. We believe that these fees have had downward
pressure on our average fare and in some cases we have been unable to pass these costs
along.
Passenger Revenues. Passenger revenues totaled $460,188,000 for the year ended
March 31, 2003 compared to $435,946,000 for the year ended March 31, 2002, or an
increase of 5.6%, on increased capacity of 1,420,963,000 ASMs or 30.9%. The number of
revenue passengers carried was 3,926,000 for the year ended March 31, 2003 compared to
3,069,000 for the year ended March 31, 2002 or an increase of 27.9%. We had an
average of 33.8 aircraft in our fleet during the year ended March 31, 2003 compared to
an average of 27.8 aircraft during the year ended March 31, 2002, an increase of
21.6%. RPMs for the year ended March 31, 2003 were 3,599,553,000 compared to
2,756,965,000 for the year ended March 31, 2002, an increase of 30.6%. Our load
factor decreased slightly to 59.9% for the year ended March 31, 2003, from 60.0% for
the prior year.
Cargo revenues, consisting of revenues from freight and mail service, totaled
$5,557,000 and $6,624,000 for the years ended March 31, 2003 and 2002, respectively,
representing 1.2% and 1.5% of total operating revenues, respectively, a decrease of
16.1%. We believe that our cargo revenues have been impacted by the slowing economy
as well as the agreement the United States Postal Service entered into with Federal
Express, Inc. which began in August 2001 that increased Federal Express's volume of
mail transportation. 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, comprised principally of interline handling fees, liquor sales
and excess baggage fees, totaled $4,191,000 and $2,505,000 or .9% and .6% of total
operating revenues for the years ended March 31, 2003 and 2002, respectively. 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 $500,560,000 and
$428,689,000, respectively, for the years ended March 31, 2003 and 2002, and
represented 106.5% and 96.4% of total revenue, respectively. Operating expenses
increased as a percentage of revenue during the year ended March 31, 2003 as a result
of the 17.4% decrease in the average fare.
Flight Operations. Flight operations expenses of $155,914,000 and $129,814,000
were 33.2% and 29.2% of total revenue for the years ended March 31, 2003 and 2002,
respectively. Flight operations expenses include all expenses related directly to the
operation of the aircraft excluding depreciation of owned aircraft and 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 year ended March 31, 2003
and 2002 are approximately $3,330,000 and $3,086,000, respectively, for Airbus
training and related travel expenses.
Aircraft lease expenses totaled $70,239,000 (14.9% of total revenue) and
$64,990,000 (14.6% of total revenue) for the years ended March 31, 2003 and 2002,
respectively, or an increase of 8.1%. The increase is largely due to an increase in
the average number of leased aircraft to 29.0 from 25.8, or 12.4%, during the year
ended March 31, 2003 compared to the same period in 2002.
Aircraft insurance expenses totaled $11,095,000 (2.4% of total revenue) for
the year ended March 31, 2003. Aircraft insurance expenses for the year ended March
31, 2002 were $5,324,000 (1.2% of total revenue). Aircraft insurance expenses were
..31(cent)and .19(cent)per RPM for the years ended March 31, 2003 and 2002, respectively.
Aircraft insurance expenses during the year ended March 31, 2002 were not 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 limited war
risk passenger liability coverage on 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 this
coverage to include war risk hull as well as passenger, crew and property liability
insurance. In February 2003, we cancelled our commercial hull and liability war risk
coverage after binding the FAA coverages. 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 original commercial coverage premium. While the Appropriations Act
authorized the government to offer both policies through August 31, 2004, the current
policies are in effect until August 12, 2003. 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 not be available from reputable underwriters.
Pilot and flight attendant salaries before payroll taxes and benefits totaled
$42,982,000 and $32,042,000 or 9.3% and 7.4% of passenger revenue for each of the
years ended March 31, 2003 and 2002, or an increase of 34.1%. Pilot and flight
attendant compensation increased as a result of an increase of 30.2% 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 FAPA members accepted this proposal, which was effective August 1,
2002. We pay pilot and flight attendant salaries for initial 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 year ended
March 31, 2002, 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 costs of $85,897,000 for 89,236,000 gallons used and $61,226,000 for
70,530,000 gallons used resulted in an average fuel cost of 96(cent)and 87(cent)per gallon
for the years ended March 31, 2003 and 2002, respectively. Fuel prices are subject to
change weekly, as we purchase a very small portion in advance for inventory.
We initiated a fuel hedging program in late November 2002, which allowed us to
reduce fuel expenses during the year ended March 31, 2003 by approximately $725,000.
Fuel consumption for the years ended March 31, 2003 and 2002 averaged 742 and 763
gallons per block hour, respectively. Fuel consumption per block hour decreased 2.8%
during the year ended March 31, 2003 from the prior comparable period because of the
more fuel-efficient Airbus aircraft added to our fleet, and a fuel conservation
program implemented in August 2001.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were
$86,448,000 and $70,202,000 (an increase of 23.1%) for the years ended March 31, 2003
and 2002, respectively, and represented 18.4% and 15.8% 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 reaccommodate passengers as well
as hotel, meal and other incidental expenses. Aircraft and traffic servicing expenses
increase with the addition of new cities and departures to our route system. As of
March 31, 2003, we served 38 cities compared to 30 during the year ended March 31,
2002, or an increase of 26.7%. During the year ended March 31, 2003, our departures
increased to 53,081 from 41,736 or 27.2%. Aircraft and traffic servicing expenses
were $1,629 per departure for the year ended March 31, 2003 as compared to $1,682 per
departure for the year ended March 31, 2002, or a decrease of $53 per departure.
Aircraft and traffic servicing expenses increased as a result of a general wage rate
increase and an increase in interrupted trip expenses as a result of the number of
flight cancellations related to the aircraft out of service for repair of hail
damage. The September 11 terrorist attacks caused us to reduce our flight schedule
and related capacity from October 2001 through February 2002, which caused our fixed
costs to be spread over fewer departures and increased our expenses per departure for
the year ended March 31, 2002.
Maintenance. Maintenance expenses for the years ended March 31, 2003 and 2002
of $75,559,000 and $68,560,000 (pro forma amount adjusting for the effect of the
accounting change), respectively, were 16.1% and 15.4% of total revenue, an increase
of 10.2%. These include all labor, parts and supplies expenses related to the
maintenance of the aircraft. Maintenance is charged to maintenance expense as
incurred. During the year ended March 31, 2002, we had previously accrued monthly for
major engine overhauls and heavy maintenance checks. Maintenance costs per block hour
for the years ended March 31, 2003 and 2002 were $628 and $742 per block hour,
respectively, a decrease of 18.2%. Maintenance cost per block hour decreased as a
result of the addition of new Airbus aircraft that are less costly to maintain than
our older Boeing aircraft. During the year ended March 31, 2003, we incurred
approximately $21,600, or less than $1 per block hour for Airbus maintenance training,
compared to $881,000 or $10 per block hour for the year ended March 31, 2002. Due to
the flight cancellations as a result of the September 11 terrorist attacks, 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 year ended
March 31, 2002.
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.
Promotion and Sales. Promotion and sales expenses totaled $53,032,000 and
$59,459,000 and were 11.3% and 13.4% of total revenue for the years ended March 31,
2003 and 2002, respectively. These include advertising expenses, telecommunications
expenses, wages and benefits for reservation agents and reservations supervision,
marketing management and sales personnel, credit card fees, travel agency commissions
and computer reservations costs. During the year ended March 31, 2003, promotion and
sales expenses per passenger decreased to $13.51 from $19.37 for the year ended March
31, 2002. Promotion and sales expenses per passenger decreased as a result of
variable expenses which are based on lower average fares, the overall elimination of
substantially all travel agency commissions effective on tickets sold after May
31, 2002 and a decrease in advertising expenses. We reduced advertising expenses from
the prior comparable period as efforts were put into identifying who our customers are
and developing our brand in preparation for a new advertising campaign. The campaign,
which was scheduled to begin in our fourth fiscal quarter, was postponed until fiscal
year 2004 as a result of the war in Iraq. During the year ended March 31, 2002, 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 years
ended March 31, 2003 and 2002 totaled $26,061,000 and $26,174,000, and were 5.5% and
5.9% of total revenue, respectively. During the year ended March 31, 2002 we accrued
for employee performance bonuses totaling $2,521,000, which was .6% of total revenue.
Bonuses are based on profitability. As a result of our pre-tax loss for the year
ended March 31, 2003, 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 (when profitable), 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 2,700 in March 2002 to approximately 3,160 in March 2003,
an increase of 17.0%. Because of the increase in personnel, our health insurance
benefit expenses, workers compensation, and accrued vacation expense increased
accordingly. During the year ended March 31, 2003, we brought revenue accounting
in-house. We previously had outsourced this function. We have realized a reduction
in expenses totaling approximately $1,000,000 associated with processing revenue
accounting transactions.
Depreciation and Amortization. Depreciation and amortization expenses of
$17,650,000 and $11,587,000, an increase of 52.3%, were approximately 3.8% and 2.6% of
total revenue for the years ended March 31, 2003 and 2002, respectively. 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 March 31, 2002 to nine at March 31, 2003.
Nonoperating Income (Expense). Net nonoperating expense totaled $8,885,000 for
the year ended March 31, 2003 compared to net nonoperating income of $8,447,000 for
the year ended March 31, 2002. During the year ended March 31, 2002, we recognized
$12,703,000 of compensation as a result of payments under 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 $4,835,000 represents amounts received in excess of estimated
allowable direct and incremental losses incurred from September 11, 2001 to December
31, 2001, which we repaid during the year ended March 31, 2003.
Interest income decreased to $1,883,000 during the year ended March 31, 2003
from $4,388,000 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 $8,041,000
for the year ended March 31, 2003 from $3,383,000 for the prior period as a result of
interest expense associated with the financing of additional purchased Airbus aircraft
and a $70,000,000 loan facility obtained to increase our liquidity.
During the year ended March 31, 2003, we completed a sale-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.
During the year ended March 31, 2002, we negotiated early lease terminations on
two of our Boeing 737-200 aircraft resulting in a pre-tax charge of $4,914,000
representing a negotiated settlement of future rent amounts due.
Income Tax Expense. We accrued an income tax benefit of $14,655,000 during the
year ended March 31, 2003 at a 37.1% effective tax rate, compared to an income tax
expense accrual of $8,282,000 for the year ended March 31, 2002, at a 38.7% effective
tax rate. The expected benefit for the year ended March 31, 2003 at a federal rate of
35% plus the blended state rate of 3.7% (net of federal tax benefit) is reduced by the
tax effect of permanent differences of 1%. 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 upon completion and filing of the income tax
returns in December 2001. During the year ended March 31, 2002, we recorded a credit
to income tax expense totaling $1,327,000 for this excess accrual. During the year
ended March 31, 2002, 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
amended state tax returns for 2000.
Results of Operations - Year Ended March 31, 2002 Compared to Year Ended March 31, 2001
General
During the year ended March 31, 2002, we expanded our fleet to 27 leased
aircraft and four purchased Airbus A319 aircraft, comprised of seven Boeing 737-200s,
17 Boeing 737-300s, and seven Airbus A319s
Beginning in May 2001, we began a fleet replacement plan to replace our Boeing
aircraft with new purchased and leased Airbus jet aircraft. 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.
During the fiscal year ended March 31, 2002 we added Houston, Texas on May 16,
2001, Reno/Lake Tahoe, Nevada and Austin, Texas, on October 1, 2001, New Orleans,
Louisiana on February 1, 2002, Sacramento, California, and Fort Lauderdale, Florida on
February 26, 2002.
Air Transportation Safety and Stabilization Act
As a result of the September 11, 2001 terrorist attacks on the United States, on
September 22, 2001 President Bush signed into law the Stabilization Act, which
provided, among other things, for compensation to U.S. passenger and cargo airlines
for direct and increment losses incurred from September 11, 2001 to December 31,
2002. We received compensation of $12,703,000 during the year ended March 31, 2002.
Results of Operations
We had net income of $16,550,000 or 56(cent)per diluted share for the year ended
March 31, 2002 as compared to net income of $54,868,000 or $1.90 per diluted share for
the year ended March 31, 2001, a decrease of $38,318,000 or 69.9%. On September 11,
2001, the FAA temporarily suspended all commercial airline flights as a result of the
terrorist attacks on the United States. As a result of this suspension, we cancelled
407 scheduled flights until we resumed operations on September 14, 2001. After we
resumed operations, we cancelled 303 additional scheduled flights through September
30, 2001 as a result of diminished consumer demand. During the year ended March 31,
2002, our daily average aircraft block hour utilization decreased to 9.1 from 9.4
during the prior comparable period ended March 31, 2001, as we reduced approximately
18.2% of departures originally scheduled during that period. Due to high fixed costs,
we continued to incur a significant portion of our normal operating expenses during
the period from September 11, 2001 through December 31, 2001 and incurred operating
losses.
As a result, we recognized $12,703,000 of the compensation we received under the
Act, which compensated for direct and incremental losses incurred by air carriers from
September 11, 2001 through December 31, 2001. Our fiscal year net income included an
after-tax gain of $7,749,000 from the Federal grant program; a $922,000 write-down,
net of taxes, for the carrying value of spare parts that support our Boeing 737-200A
aircraft and an unusual charge of $2,998,000, net of taxes, for the early return of
two Boeing 737-200 aircraft. Without these unusual items, we would have reported net
income of $12,721,000, or $0.43 per diluted common share.
During the year ended March 31, 2002, we took delivery of our first six Airbus
aircraft. Because this was a new aircraft type for us, we were required by the FAA to
demonstrate that our crews were proficient in flying Airbus 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 approval adversely affected our passenger revenues and our
cost per ASM during the year ended March 31, 2002.
Our CASM for the year ended March 31, 2002 was 9.33(cent)and for the year ended
March 31, 2001 was 9.20(cent), or an increase of .13(cent)or 1.4%. CASM excluding fuel
for the years ended March 31, 2002 and 2001 were 8.00(cent)and 7.54(cent), respectively,
or an increase of .46(cent)or 6.1%. Our CASM increased during the year ended March 31,
2002 over the prior comparable year principally because of the decreased aircraft
utilization and shorter stage lengths during that period. These expenses were impacted
by the terrorist attacks and the hail damage to five of our aircraft, or approximately
20% of our fleet, during the year ended March 31, 2002. During the year ended March 31,
2002, 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 .03(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 CASM associated with these unusual
weather conditions was .04(cent), or approximately $1,893,000, for the year ended March 31,
2002. During the year ended March 31, 2002, we incurred approximately $4,511,000 in
transition expenses associated with the induction of the Airbus aircraft, which had an
adverse effect on our CASM of approximately .10(cent)per ASM. These include crew
salaries; travel, training and induction team expenses; and depreciation expense. An
increase in pilots' salaries effective in May 2001 also contributed to the increase in
CASM during the year ended March 31, 2002. Additionally, due to the flight
cancellations as a result of the September 11 terrorist attacks and these weather
conditions, our ASMs were less than we had planned, which caused our fixed costs to be
spread over fewer ASMs and, we believe, distorted our CASM for the period.
For the year ended March 31, 2002, our break-even load factor was 57.6% compared
to our achieved passenger load factor of 60.0%. For the year ended March 31, 2001,
our break-even load factor was 52.7% compared to the passenger load factor achieved of
65.1%. Our break-even load factor increased for the year ended March 31, 2002 from
the prior comparable period largely as a result of a decrease in our average fare to
$132 during the year ended March 31, 2002 from $146 during the year ended March 31,
2001, compounded by an increase in our expense per ASM to 9.33(cent)for the year ended
March 31, 2002 from 9.20(cent)for the year ended March 31, 2001.
Revenues
Our average fare for the year ended March 31, 2002 was $132 and for the year
ended March 31, 2001 was $146. We believe that the decrease in the average fare during
the year ended March 31, 2002 from the prior comparable year was principally a result
of the slowing economy. During the year ended March 31, 2001, we experienced an
increase in the number of passengers that United Airlines directed to us because of
delays and cancellations that airline experienced. We estimate that the additional
passenger traffic received from that airline had the effect of increasing our load
factor and average fare for the year ended March 31, 2001 by approximately .6 load
factor points and .9%, respectively.
Passenger Revenues. Passenger revenues totaled $435,946,000 for the year ended
March 31, 2002 compared to $462,609,000 for the year ended March 31, 2001, or a
decrease of 5.8%, on increased capacity of 331,837,000 ASMs or 7.8%. The number of
revenue passengers carried was 3,069,000 for the year ended March 31, 2002 compared to
3,017,000 for the year ended March 31, 2001 or an increase of 1.7%. We had an average
of 27.8 aircraft in our fleet during the year ended March 31, 2002 compared to an
average of 24.5 aircraft during the year ended March 31, 2001, an increase of 13.5%.
RPMs for the year ended March 31, 2002 were 2,756,965,000 compared to 2,773,833,000
for the year ended March 31, 2001, a decrease of .6%. We believe that our cancelled
flights due to the terrorist attacks and weather had an adverse effect on our revenue
during the period.
Cargo revenues, consisting of revenues from freight and mail service, totaled
$6,624,000 and $7,517,000 for the years ended March 31, 2002 and 2001, respectively,
representing 1.5% and 1.6% of total operating revenues, respectively, a decrease of
11.9%. We believe that our cargo revenues were impacted by the slowing economy as
well as the flight cancellations as a result of the terrorist attacks, and the
resulting limitations placed on cargo service as a result of the terrorist attacks.
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, comprised principally of interline handling fees, liquor sales
and excess baggage fees, totaled $2,505,000 and $2,751,000 or .6% of total operating
revenues for each of the years ended March 31, 2002 and 2001, respectively.
Operating Expenses
Total operating expenses were $428,689,000 and $392,155,000, respectively, for
the years ended March 31, 2002 and 2001, and represented 96.4% and 82.9% of total
revenue, respectively. Operating expenses increased as a percentage of revenue during
the year ended March 31, 2002 as a result of the 5.8% decrease in passenger revenues,
associated with the slowing economy and the September 11 terrorist attacks.
Flight Operations. Flight operations expenses of $129,814,000 and $108,370,000
were 29.2% and 22.9% of total revenue for the years ended March 31, 2002 and 2001,
respectively. Included in flight operations expenses during the year ended March 31,
2002 is approximately $3,086,000 for Airbus training and related travel
expenses.
Aircraft lease expenses totaled $64,990,000 (14.6% of total revenue) and
$61,194,000 (13% of total revenue) for the years ended March 31, 2002 and 2001,
respectively, or an increase of 6.2%. The increase is largely due to an increase in
the average number of leased aircraft to 25.8 from 24.5, or 5.3%, during the year
ended March 31, 2002 compared to the same period in 2001.
Aircraft insurance expenses totaled $5,324,000 (1.2% of total revenue) for the
year ended March 31, 2002. Aircraft insurance expenses for the year ended March 31,
2001 were $3,241,000 (.7% of total revenue). Aircraft insurance expenses were .19(cent)
and .12(cent)per RPM for the years ended March 31, 2002 and 2001, respectively. Aircraft
insurance expenses during the year ended March 31, 2002 were not 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. 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. At the same time, the FAA provided us
supplemental third party war risk coverage from the $50 million limit to $1.6
billion. The premium for this supplemental coverage was $7.50 per flight departure.
Pilot and flight attendant salaries before payroll taxes and benefits totaled
$32,042,000 and $22,475,000 or 7.4% and 4.9% of passenger revenue for each of the
years ended March 31, 2002 and 2001, or an increase of 42.6%. The first bargaining
agreement for the pilots, which has a five-year term, was ratified and made effective
in May 2000. In May 2001, we agreed to reconsider the current rates of pay under our
collective bargaining agreement with our pilots in part because several pilot unions
at other air carriers received wage increases, which caused our pilot salaries to be
substantially below those paid by certain of our competitors. We submitted a revised
pilot pay proposal to FAPA, and its members accepted this proposal and was made
effective May 2001. Pilot and flight attendant compensation also increased as a
result of a 13.5% increase in the average number of aircraft in service, an increase
of 10.4% in block hours, a general wage increase in flight attendant salaries, and
additional crews required replacing those attending training on the Airbus equipment.
During the three months ended December 31, 2001, FAPA agreed to an 11% decrease in
salaries for all pilots in lieu of furloughs as a result of the September 11, 2001
terrorist attacks. The pilot salary levels were reinstated effective January 1, 2002.
Aircraft fuel expenses. Aircraft fuel costs of $61,226,000 for 70,530,000
gallons used and $71,083,000 for 66,724,000 gallons used resulted in an average fuel
cost of 87(cent)and $1.07 per gallon for the years ended March 31, 2002 and 2001,
respectively. Fuel consumption for the year ended March 31, 2002 and 2001 averaged
763 and 797 gallons per block hour, respectively. Fuel consumption decreased from the
prior comparable periods because of a decrease in our load factors, the more
fuel-efficient Airbus aircraft added to our fleet and a newly developed fuel
conservation program implemented in August 2001. Fuel consumption also decreased
during the year ended March 31, 2002 from the prior comparable period also as a result
of decreased use of the Boeing 737-200 aircraft, which have a higher fuel burn rate
than the Boeing 737-300 and Airbus A319 aircraft.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were
$70,202,000 and $60,408,000 (an increase of 16.3%) for the years ended March 31, 2002
and 2001, respectively, and represented 15.8% and 12.8% of total revenue. Aircraft
and traffic servicing expenses increase with the addition of new cities and departures
to our route system. During the year ended March 31, 2002, we served 30 cities
compared to 23 during the year ended March 31, 2001, or an increase of 30.4%. During
the year ended March 31, 2002, our departures increased to 41,736 from 38,556 or
8.2%. Aircraft and traffic servicing expenses were $1,682 per departure for the year
ended March 31, 2002 as compared to $1,567 per departure for the year ended March 31,
2001, or an increase of $115 per departure. Aircraft and traffic servicing expenses
increased as a result of expenses associated with deicing in April 2001 as a result of
an unusual spring blizzard, a general wage rate increase and an increase in
interrupted trip expenses as a result of the number of flight cancellations related to
the aircraft out of service for repair of hail damage. Additionally, our security
expenses increased during the year ended March 31, 2002, from $1,762,000 during the
year ended March 31, 2001 to $3,871,000 for the year ended March 31, 2002, or 119.7%,
as a result of the September 11, 2001 terrorist attacks. Additionally, due to the
number of flight cancellations as a result of weather conditions, as well as the
September 11 terrorist attacks, the number of departures were less than we had
planned, which caused our fixed costs to be spread over fewer departures thereby
increasing our expenses per departure for the year ended March 31, 2002.
Maintenance. Maintenance expenses for the years ended March 31, 2002 and 2001
of $70,227,000 and $65,529,000, respectively, were 15.8% and 13.9% of total revenue,
an increase of 7.2%. 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 checks expense were
accrued monthly. During the year ended March 31, 2003, we changed our method of
accounting for maintenance to the direct expense method for major engine overhauls and
heavy maintenance checks. Maintenance costs per block hour for the years ended March
31, 2002 and 2001 were $760 and $783 per block hour, respectively. Maintenance cost
per block hour decreased during the year ended March 31, 2002 from the prior
comparable year as a result of decreased utilization of our Boeing 737-200 aircraft
which are older and more costly to maintain than our other aircraft. Additionally, we
added six new Airbus aircraft that are less costly to maintain than our older Boeing
aircraft. These maintenance savings were offset or distorted by several factors.
During the year ended March 31, 2002, we incurred approximately $881,000 for Airbus
training or $10 per block hour. Also, during the year ended March 31, 2002, we
decreased the number of our departures as a result of decreased consumer demand for
air travel and reduced the utilization of our Boeing 737-200 aircraft, which are more
costly to maintain. We also incurred increased costs in personnel, training and
information technology expenses for implementation of new maintenance and engineering
software and in preparation for the Airbus transition. Additionally, due to the
flight cancellations as a result of the September 11 terrorist attacks and the adverse
spring 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 year ended March 31, 2002.
Promotion and Sales. Promotion and sales expenses totaled $59,459,000 and
$55,881,000 and were 13.4% and 11.8% of total revenue for the years ended March 31,
2002 and 2001, respectively. These include advertising expenses, telecommunications
expenses, wages and benefits for reservation agents and supervision, marketing
management and sales personnel, credit card fees, travel agency commissions and
computer reservations costs.
During the year ended March 31, 2002, promotion and sales expenses per passenger
increased to $19.37 from $18.52 for the year ended March 31, 2001. Promotion and
sales increased per passenger over the prior comparable year largely as a result of
increased advertising for additional fare sales offered during the year as well as
advertising in the new cities we entered this year. Travel agency commissions and
interline service charges and handling fees, as a percentage of passenger revenue,
before non-revenue passengers, administrative fees and breakage (revenue from expired
tickets), decreased to 3% for the year ended March 31, 2002, compared to 3.5% for the
year ended March 31, 2001 as a result of the cap we put on commissions effective
September 2001. With increased activity on our web site, our calls per passenger have
decreased. Because of the increase in web site activity, as well as a decrease in
long distance rates, we experienced a decrease in communications expense. In July
2000, we opened an additional reservations facility in Las Cruces, New Mexico and
simultaneously terminated an outsourcing agreement, which reduced our cost of
reservations.
General and Administrative. General and administrative expenses for the years
ended March 31, 2002 and 2001 totaled $26,174,000 and $25,429,000, and were 5.9% and
5.3% of total revenue, respectively. During the years, ended March 31, 2002 and 2001,
we accrued for employee performance bonuses totaling $2,521,000 and $7,009,000,
respectively, which were .6% and 1.5% of total revenue, a decrease of 64%. We
experienced increases in our human resources, training and information technology
expenses as a result of an increase in employees from approximately 2,360 in March
2001 to approximately 2,700 in March 2002, an increase of 14.4%. Also, the cost of
health insurance premiums increased to $4,239,000 during the year ended March 31, 2002
from $2,166,000 during the prior comparable period, an increase of 95.7%. Because of
the increase in personnel, our health insurance benefits expenses and accrued vacation
expense increased accordingly. During the year ended March 31, 2002, we also incurred
start-up costs associated with the implementation of our in-house revenue accounting
department which began processing effective with April 2002 sales and revenue.
Depreciation and Amortization. Depreciation and amortization expenses of
$11,587,000 and $5,455,000, an increase of 112.4%, were approximately 2.6% and 1.2% of
total revenue for the years ended March 31, 2002 and 2001, respectively. These
expenses include depreciation of aircraft and aircraft components, office equipment,
ground station equipment and other fixed assets. Depreciation expense increased over
the prior year as a result of depreciation expense associated with our first three
purchased aircraft, an increase in our spare parts inventory including spare engines
and parts for the Airbus fleet, ground handling equipment, and computers to support
new employees as well as replacement computers for those with outdated technology.
Nonoperating Income (Expense). Net nonoperating income totaled $8,447,000 for
the year ended March 31, 2002 compared to $7,611,000 for the year ended March 31,
2001. During the year ended March 31, 2002, we recognized $12,703,000 of compensation
as a result of payments under 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 $4,835,000
represents amounts received in excess of estimated allowable direct and incremental
losses incurred from September 11, 2001 to December 31, 2001 and is included as a
deferred liability on our balance sheet.
Interest income decreased to $4,388,000 from $7,897,000 during the year ended
March 31, 2002 from the prior year due to a decrease in cash balances as a result of
cash used for pre-delivery payments for future purchases of aircraft, spare parts
inventories largely for the new Airbus fleet and a decrease in interest rates.
Interest expense increased to $3,383,000 for the year ended March 31, 2002 from
$94,000 as a result of interest expense associated with the financing of the first
three purchased Airbus aircraft received in May, August and September 2001.
During the year ended March 31, 2002, we negotiated early lease terminations on
two of our Boeing 737-200 aircraft resulting in a pre-tax charge of $4,914,000
representing a negotiated settlement of future rent amounts due.
Income Tax Expense. We accrued income taxes of $8,282,000 and $33,465,000 at
38.7% of taxable income for each of the years ended March 31, 2002 and 2001,
respectively. During the year ended March 31, 2002, we recorded a credit to income
tax expense totaling $1,327,000. 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 upon completion and filing of the income tax returns in
December 2001. During the year ended March 31, 2002, 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 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, the fares we charge, our operating and capital expenditures, and our financing
activities. We depend on lease or mortgage financing to acquire all of our aircraft,
including six additional Airbus aircraft as of May 31, 2003 scheduled for delivery
through April 2004.
We had cash and cash equivalents and short-term investments of $104,880,000 and
$89,555,000 at March 31, 2003 and 2002, respectively. At March 31, 2003, total
current assets were $190,838,000 as compared to $130,047,000 of total current
liabilities, resulting in working capital of $60,791,000. At March 31, 2002, total
current assets were $193,393,000 as compared to $152,064,000 of total current
liabilities, resulting in working capital of $41,329,000. The increase in our cash
and working capital from March 31, 2002 is largely a result of the $70,000,000 loan
obtained in February 2003 as a result of participating in the government loan
guarantee program provided for under the Stabilization Act coupled with the
sale-leaseback of one of our purchased aircraft. This was offset by cash used for
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 year ended March 31, 2003 were applied as down
payments toward the purchase of these aircraft.
Cash provided by operating activities for the year ended March 31, 2003 was
$388,000. This is attributable to a $39,000,000 decrease in net income, a decrease in
receivables and prepaid expenses, an increase in accounts payable and deferred
liabilities, an increase in deferred expenses and inventories, decreases in air
traffic liability, and the repayment of excess Stabilization Act compensation
received. Included in cash provided by operating activities was a $10,000,000 advance
payment on the new affinity card program we launched in May 2003. Cash provided by
operating activities for the year ended March 31, 2002 was $40,294,000. This is
attributable to our net income for the period, increase in deferred tax expense, and
increases in air traffic liability, other accrued expenses, accrued maintenance
expenses, and deferred rent, offset by increases in restricted investments, security,
maintenance and other deposits, and inventories, and decreases in accounts payable.
Also, included in cash provided by operating activities for the year ended March 31,
2002 is $4,835,000 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. This amount is included as a liability on our balance sheet as of
March 31, 2002.
Cash used in investing activities for the year ended March 31, 2003 was
$194,849,000. We used $239,308,000 for the purchase of six additional Airbus
aircraft, rotable aircraft components, LiveTV for the Airbus aircraft, leasehold
improvements and other general equipment purchases. Net aircraft lease and purchase
deposits and restricted investments decreased by $12,892,000 and $1,177,000,
respectively, during this period. During the year ended March 31, 2003, we took
delivery of six purchased Airbus aircraft and applied their respective pre-delivery
payments to the purchase of those aircraft. Additionally, we completed a
sale-leaseback transaction on one of our purchased aircraft and assigned a purchase
commitment on another Airbus A319 to a lessor, generating cash proceeds of
approximately $12,306,000 from the sale of one aircraft and the return of the
pre-delivery payments relating to the purchase commitment assigned. We agreed to
lease both of these aircraft over a five-year term. Cash used by investing activities
for the year ended March 31, 2002 was $134,529,000. Net aircraft lease and purchase
deposits increased by $17,483,000. During the year ended March 31, 2002, 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. Additionally, we amended the purchase agreement to
add two additional Airbus A319 aircraft, for delivery in December 2002, which required
additional deposits in March 2002 of $3,602,000. We also used $118,183,000 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 years ended March 31, 2003 and
2002 were $209,787,000 and $72,538,000, respectively. In February 2003, we received
$70,000,000 from the Government Guaranteed Loan, of which $63,000,000 is guaranteed by
the federal government as a result of a loan program provided for under the
Stabilization Act. During the years ended March 31, 2003 and March 31, 2002, we
borrowed $171,000,000 and $72,000,000, respectively, to finance the purchases of
Airbus aircraft, of which $28,946,000 and $1,942,000 were repaid 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. During the years ended March 31, 2003 and 2002, we received $1,275,000 and
$3,184,000, respectively, from the exercise of common stock options.
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 hold.
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, the war with Iraq, and other uncertainties surrounding the airline
industry. Prior to applying for a government guaranteed loan under the Stabilization
Act, we 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 Government Guaranteed Loan has improved our liquidity, we may need to continue to
explore avenues to sustain our liquidity in the current economic and operating
environment. We intend to continue to examine the propriety of 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.
Emergency Wartime Supplemental Appropriations Act
The Emergency Wartime Supplemental Wartime Supplemental Appropriations Act (the
"Appropriations Act"), enacted on April 16, 2003, made available approximately $2.3
billion to U.S. flag air carriers for expenses and revenue foregone related to
aviation security. In order to have been eligible to receive a portion of this fund,
air carriers must have paid one or both of the TSA security fees, the September 11th
Security Fee and/or the Aviation Security Infrastructure Fee as of the date of
enactment of the Appropriations Act. According to the Appropriations Act, an air
carrier may use the amount received as the air carrier determines.
Additionally, the Appropriations Act provided for additional reimbursements to
be made to U.S. flag air carriers for costs incurred related to the FAA requirements
for enhanced flight deck door security measures that were mandated as a result of the
September 11 terrorist attacks. We are unable to determine how much of the costs
incurred will be reimbursed.
Contractual Obligations
The following table summarizes our contractual obligations as of March 31, 2003:
Less than 1-3 4-5 After
1 year years years 5 years Total
Long-term debt (1) $ 20,473,000 $ 39,003,000 $ 68,501,000 $ 154,235,000 $ 282,212,000
Capital lease obligations 66,000 66,000
Operating leases (2) 83,326,000 138,269,000 111,760,000 328,517,000 661,872,000
Unconditional purchase obligations(3) 107,870,000 37,749,000 145,619,000
Total contractual cash obligations $ 211,735,000 $ 215,021,000 $180,261,000 $ 482,752,000 $1,089,769,000
=============================================================================
(1) In February 2003, we obtained a $70,000,000 Government Guaranteed Loan of which
$69,300,000 was guaranteed by the Air Transportation Stabilization Board ("ATSB")
and two other parties. The loan has three tranches; Tranche A, Tranche B and
Tranche C, in amounts totaling $63,000,000, $6,300,000 and $700,000,
respectively. At March 31, 2003, the interest rates were 2.09%, 2.44%, and 3.89%,
respectively. The interest rates on each tranche of the loan adjust quarterly
based on LIBOR rates. The loan requires quarterly installments of approximately
$2,642,000 beginning in December 2003 with a final balloon payment of $33,000,000
due in June 2007. Upon receipt of our income tax receivable, which is pledged
under this loan agreement, we are required to make a pre-payment of $10,000,000,
which is applied against the next successive installments due. Interest is
payable quarterly, in arrears. Guarantee fees of 4.5% annually are payable
quarterly in advance to the guarantors of the Tranche A and Tranche B loans. The
loan facility is secured by substantially all of the assets of ours not previously
encumbered. In connection with this transaction, we issued warrants to purchase
of 3,833,946 shares of our common stock at $6.00 per share to the ATSB and to two
other guarantors. The warrants had an estimated fair value of $9,282,538 when
issued and expire seven years after issuance. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model. This
amount is being amortized to interest expense over the life of the loan. The
effective interest rate on the notes is approximately 10.26% including the value
of the warrants and other costs associated with obtaining the loan, assuming that
the variable interest rates payable on the notes at March 31, 2003. The notes
contain certain covenants including liquidity tests. We are not required to meet
certain liquidity tests until the quarter ending March 31, 2004. Unrestricted
cash balances cannot be less than $25,000,000 at any time through September 30,
2004 or $75,000,000 thereafter. We are in compliance with these requirements at
March 31, 2003.
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 year ended March 31, 2003, we
entered into a sale-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 require 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 loan.
During the year ended March 31, 2003, we entered into additional loans to finance
seven additional Airbus aircraft with interest rates based on LIBOR plus margins
that adjust quarterly or semi-annually. At March 31, 2003, interest rates for
these loans ranged from 2.56% to 3.01%, each loan has a term of 12 years and each
loan has balloon payments ranging from $4,800,000 to $7,770,000 at the end of the
term. The loans are secured by a aircraft.
(2) As of March 31, 2003, we lease eight Airbus 319 type aircraft and 19 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 March 31, 2003, we had made cash security deposits of $6,321,000 and
had arranged for letters of credit of $6,959,000 collateralized by restricted cash
balances. Additionally, we are required to make supplemental rent payments to
cover the cost of major scheduled maintenance overhauls of these aircraft. These
supplemental rent payments are based on the number of flight hours flown and/or
flight departures and are not included as an obligation in the table above.
During the year ended March 31, 2003, we returned five leased Boeing 737 aircraft
to the aircraft lessor.
As a complement to our Airbus purchase agreement, in April 2000 we signed an
agreement, as subsequently amended, to lease 15 new Airbus aircraft for a term of
12 years. As of March 31, 2003, we had made cash security deposits on the
remaining nine aircraft we agreed to lease and have made cash security deposits
and arranged for issuance of letters of credit totaling $2,471,000 and $1,853,000,
respectively, to secure these leases. Our restricted cash balance includes
$1,853,000 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 2003 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.
(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. 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. As of March 31, 2003, we had taken
delivery of 11 of these aircraft, one of which we sold in December 2002 and
assigned one purchase commitment to a lessor in February 2003. We agreed to lease
each of these aircraft over a five-year term. As of March 31, 2003, we have
remaining firm purchase commitments for six additional aircraft which are
scheduled to be delivered in calendar years 2003 through 2005. 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 March 31, 2003, we had made pre-delivery payments on future deliveries totaling
$30,532,000 to secure these aircraft and option aircraft.
In June 2003, we agreed to lease two additional Airbus 318 aircraft, scheduled for
delivery in May 2004 and March 2005, and one additional Airbus 319 aircraft,
scheduled for delivery in February 2005. We plan to operate a minimum of 35
purchased and leased Airbus aircraft by the fiscal year ended March 31, 2005.
We have recently signed a term sheet with a European financial institution to
provide debt financing for four of our five A318 aircraft scheduled for delivery
from Airbus in fiscal year 2004. The terms permit us to borrow up to $25,500,000
per aircraft over a period of either 120 or 144 months at floating interest rate
with either a $7,650,000 balloon payment due at maturity if we elect a 120 month
term or $3,060,000 if we elect a 144 month term. We are also in discussions with
a leasing company for a sale-leaseback of the A319 aircraft delivery scheduled in
fiscal year 2003. There are no other purchased aircraft due for delivery in
fiscal year 2003. The inability to close on the A318 financing could result in
delays in or our inability to take delivery of Airbus aircraft we have agreed to
purchase, which would have a material adverse effect on us.
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. We completed the installation of the LiveTV system on all Airbus
aircraft in our fleet in 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 11
units by providing written notice of cancellation at least 12 months in advance of
installation. The table above includes the purchase commitment amount for 35
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 and fees.
As of March 31, 2003, we had outstanding letters of credit, bonds, and cash security
deposits totaling $11,698,000, $4,146,000, and $7,500,000, respectively. In order to
meet these requirements, we have a credit agreement with a financial institution for
up to $1,500,000, which expires August 31, 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
March 31, 2003, we have drawn $11,698,000 under these credit agreements for standby
letters of credit that collateralize certain leases. In the event that these credit
agreements are not renewed beyond their present expiration dates, the certificates of
deposit would be redeemed and paid to the various lessors as cash security deposits in
lieu of standby letters of credit. As a result there would be no impact on our
liquidity if these agreements were not renewed. In the event that the surety
companies determined that issuing bonds on our behalf were a risk they were no longer
willing to underwrite, we would be required to collateralize certain of these lease
obligations with either cash security deposits or standby letters of credit, which
would decrease our liquidity.
We use Airlines Reporting Corporation 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 March 31, 2003, 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 June 20, 2003, the coverage would be increased to $9,122,000 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 restrict cash in an amount equal to 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 March 31, 2003, we had
established collateral for these transactions totaling $12,909,000. As of June 6,
2003, we are required to increase the collateral to $15,932,000. 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 limited war risk passenger liability coverage on 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 this coverage to include war risk hull as well as
passenger, crew and property liability insurance. In February 2003, we cancelled our
commercial hull and liability war risk coverage after binding the FAA coverage. 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 original commercial coverage premium.
While the Appropriations Act authorized the government to offer both policies through
August 31, 2004, the current policies are in effect until August 12, 2003. 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 November 2002, we initiated a fuel hedging program comprised of swap and
collar agreements. Under a swap agreement, we receive the difference between a fixed
swap price and a price based on an agreed upon published spot price for jet fuel. If
the index price is higher than the fixed price, we receive the difference between the
fixed price and the spot price. If the index price is lower, we pay the difference.
A collar agreement has a cap price, a primary floor price, and a secondary floor
price. When the U.S. Gulf Coast Pipeline Jet index price is above the cap, we receive
the difference between the index and the cap. When the index price is below the
primary floor but above the secondary floor, we pay the difference between the index
and the primary floor. However, when the price is below the secondary floor, we are
only obligated to pay the difference between the primary and secondary floor prices.
In November 2002, we entered into a swap agreement with a notional volume of
770,000 gallons per month of jet fuel for the period from December 1, 2002 to May 31,
2003. The fixed price under this agreement is 72.25 cents per gallon. The volumes
were estimated to represent 10% of our fuel purchases for that period. We entered
into a second contract a three-way collar in November 2002 with a notional volume of
385,000 gallons per month for the period December 1, 2002 to November 30, 2003. The
cap prices for this agreement is 82 cents per gallon, and the primary and secondary
floor prices are at 72 and 64.5 cents per gallon respectively. The volume of fuel
covered by this contract is estimated to represent 5% of our fuel purchases for that
period. In March 2003, we entered into a second swap agreement with a notional volume
of 1,260,000 gallons per month for the period from April 1, 2003 to June 30, 2003.
The fixed price of the swap is 79.25 cents per gallon and the agreement is estimated
to represent 15% of our fuel purchases for that period. In April 2003, we entered
into a third swap agreement with a notional volume of 1,260,000 gallons per month for
the period from July 1, 2003 to December 31, 2003. The fixed price of the swap is
71.53 cents per gallon and the agreement is estimated to represent 15% of our fuel
purchases for that period. The results of operations for the year ended March 31,
2003 include an unrealized derivative loss of $167,046 which is included in
nonoperating income (expense) and a realized gain of approximately $726,000 in cash
settlements from a counter-party recorded as a reduction of fuel expense. We were not
a party to any derivative contracts during the years ended March 31, 2002 or 2001.
In March 2003, we entered into an interest rate swap agreement with a notional
amount of $27,000,000 to a portion of the $70,000,000 Government Guaranteed Loan as
discussed above. Under the interest rate swap agreement, we are paying a fixed rate
of 2.45% and receive a variable rate based on the three month LIBOR. At March 31,
2003, our interest rate swap agreement had an estimated unrealized loss of $132,282
which was recorded as an unrealized loss and is included in non-operating expenses in
the statement of operations. We did not have any interest rate swap agreements
outstanding during the years ended March 31, 2002 or 2001.
Effective January 1, 2003, we entered into an engine maintenance agreement with
GE Engine Services, Inc. ("GE") for the servicing, repair, maintenance and functional
testing of our aircraft engines used on our Airbus aircraft. 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 multiplied by the number of flight hours flown on the aircraft during
that month. The amounts due based on useage are not included in table above.
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.
Critical accounting policies are defined as those that are both important to the
portrayal of our financial condition and results, and require management to exercise
significant judgments. Our most critical accounting policies are described briefly
below. For additional information about these and our other significant accounting
policies, see Note 1 of the Notes to the Financial Statements.
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. Revenues that have been
deferred are included in the accompanying balance sheet as air traffic liability.
Impairment of Long-Lived Assets
We record impairment losses on long-lived assets used in operations when indicators
of impairment are present and the undiscounted future cash flows estimated to be generated
by those assets are less than the carrying amount of the assets. If an impairment occurs,
the loss is measured by comparing the fair value of the asset to its carrying amount. During
the year ended March 31, 2002, we wrote down the carrying value of rotable parts that
support the Boeing 737-200 aircraft by $1,512,000, as a result of dimished demand for
that aircraft type. The write downs are charged to maintenance expenses. The amount
of the wirte down was based on prevailing market values at that time.
Aircraft Maintenance
We operate under an FAA-approved continuous inspection and maintenance program.
We account for maintenance activities on the direct expense method. Under this
method, major overhaul maintenance costs are recognized as expense as maintenance
services are performed, as flight hours are flown for nonrefundable maintenance
payments required by lease agreements, and as the obligation is incurred for payments
made under service agreements. Routine maintenance and repairs are charged to
operations as incurred. Prior to fiscal 2003 we accrued for major overhaul costs on a
per-flight-hour basis in advance of performing the maintenance services.
Effective January 1, 2003, we and GE executed a 12-year engine services
agreement (the "Services Agreement") covering the scheduled and unscheduled repair of
Airbus engines. Under the terms of the Services Agreement, we agreed to pay GE a
fixed rate per-engine-hour, payable monthly, and GE assumed the responsibility to
overhaul our engines on Airbus aircraft as required during the term of the Services
Agreement, subject to certain exclusions. We believe the fixed rate per-engine hour
approximates the periodic cost we would have incurred to service those engines.
Accordingly, these payments are expensed as the obligation is incurred.
Derivative Instruments
We have entered into derivative instruments which are intended to reduce our
exposure to changes in fuel prices and interest rates. We account for the derivative
instruments entered into as trading instruments under FASB Statement No. 133,
"Accounting for Derivative instruments and Hedging Activities" and record the fair
value of the derivatives as an asset or liability as of each balance sheet date. We
record any settlements received or paid as an adjustment to the cost of fuel or
interest expense.
Customer Loyalty Programs
In February 2001, we established EarlyReturns, a frequent flyer program to
encourage travel on its airline and customer loyalty. We account for the EarlyReturns
program under the incremental cost method whereby travel awards are valued at the
incremental cost of carrying one passenger based on expected redemptions. Those
incremental costs are based on expectations of expenses to be incurred on a per
passenger basis and include food and beverages, fuel, liability insurance, and
ticketing costs. The incremental costs do not include a contribution to overhead,
aircraft cost or profit. We do not record a liability for mileage earned by
participants who have not reached the level to become eligible for a free travel
award. We believe this is appropriate because the large majority of these
participants are not expected to earn a free flight award. We do not record a
liability for the expected redemption of miles for non-travel awards since the cost of
these awards to us is negligible.
As of March 31, 2003 and 2002, we estimated that approximately 14,615 and 4,600
round-trip flight awards, respectively, were eligible for redemption by EarlyReturns
members who have mileage credits exceeding the 15,000-mile free round-trip domestic
ticket award threshold. Of these earned awards, we expect that approximately 84%
would be redeemed. The difference between the round-trip awards outstanding and the
awards expected to be redeemed is the estimate of awards which will (1) never be
redeemed, or (2) be redeemed for something other than a free trip. As of March 31,
2003 and 2002, we had recorded a liability of approximately $283,000 and $65,000,
respectively, for these rewards.
New Accounting Standards
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 loss on early extinguishment of debt as a non-operating expense 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)." In May 2003, we ceased using one of our leased Boeing 737-200
aircraft prior to the lease expiration date and plan to cease using two additional
Boeing 737-200 aircraft in July 2003. We will record a liability and an expense equal
to the fair value of the remaining payments required under the leases in the quarters
ending June 30, 2003 and September 30, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to others, an interpretation of FASB Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No. 34." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial statement
about its obligations under guarantees issued. The Interpretation also clarifies that
a guarantor is required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. We have not currently
guaranteed any indebtedness of others, and therefore, the adoption of the
interpretation did not have an 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. We have not
adopted the fair value method of accounting for stock options, and therefore, the
adoption of SFAS No. 148 did not have an effect on our results of operation or
financial position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, and Interpretation of ARB No. 51." This Interpretation
addresses the consolidation by business enterprises of variable interest entities as
defined in the Interpretation. The Interpretation applies immediately to variable
interest in variable interest entities created after January 31, 2003. For nonpublic
enterprises, such as us, with a variable interest in a variable interest entity
created before February 1, 2003, the Interpretation is applied to the enterprise no
later than the end of the first annual reporting period beginning after June 15,
2003. The Interpretation requires certain disclosures in financial statements issued
after January 31, 2003 if it is reasonably possible that we will consolidate or
disclose information about variable interest entities when the Interpretation becomes
effective. The application of this Interpretation is not expected to have a material
effect on our financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for
Derivative instruments and Hedging Activities". This Statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The application of this Statement is not expected to
have a material effect on our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). This Statement is effective for financial instruments
entered into or modified after May 31, 2003 and for hedging relationships designated
after June 30, 2003. The application of this Statement is not expected to have a
material effect on our financial statements.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Aircraft fuel
Our earnings are affected by changes in the price and availability of aircraft
fuel. Market risk is estimated as a hypothetical 10 percent change in the average
cost per gallon of fuel for the year ended March 31, 2003. Based on fiscal year 2003
actual fuel usage, such a change would have the effect of increasing or decreasing our
aircraft fuel expense by approximately $8,590,000 in fiscal year 2003. Comparatively,
based on projected fiscal year 2004 fuel usage, such a change would have the effect of
increasing or decreasing our aircraft fuel expense by approximately $10,089,000 in
fiscal year 2004 excluding the effects of our fuel hedging arrangements. The increase
in exposure to fuel price fluctuations in fiscal year 2004 is due to the increase of
our average aircraft fleet size during the year ended March 31, 2003, projected
increases to our fleet during the year ended March 31, 2004 and related gallons
purchased.
As of March 31, 2003, we had hedged approximately 8.3% of our projected fiscal
2004 fuel requirements. In November 2002, we initiated a fuel hedging program
comprised of swap and collar agreements. Under a swap agreement, we receive the
difference between a fixed swap price and a price based on an agreed upon published
spot price for jet fuel. If the index price is higher than the fixed price, we
receive the difference between the fixed price and the spot price. If the index price
is lower, we pay the difference. A collar agreement has a cap price, a primary floor
price, and a secondary floor price. When the U.S. Gulf Coast Pipeline Jet index price
is above the cap, we receive the difference between the index and the cap. When the
index price is below the primary floor but above the secondary floor, we pay the
difference between the index and the primary floor. However, when the price is below
the secondary floor, we are only obligated to pay the difference between the primary
and secondary floor prices.
In November 2002, we entered into a swap agreement with a notional volume of
770,000 gallons per month of jet fuel for the period from December 1, 2002 to May 31,
2003. The fixed price under this agreement is 72.25 cents per gallon. The volumes
were estimated to represent 10% of our fuel purchases for that period. We entered
into a three-way collar in November 2002, with a notional volume of 385,000 gallons
per month for the period December 1, 2002 to November 30, 2003. The cap prices for
this agreement is 82 cents per gallon, and the primary and secondary floor prices are
72 and 64.5 cents per gallon, respectively. The volume of fuel covered by this
contract is estimated to represent 5% of our fuel purchases for that period. In March
2003, we entered into a second swap agreement with a notional volume of 1,260,000
gallons per month for the period from April 1, 2003 to June 30, 2003. The fixed price
of the swap is 79.25 cents per gallon and the agreement is estimated to represent 15%
of our fuel purchases for that period. In April 2003, we entered into a third swap
agreement with a notional volume of 1,260,000 gallons per month for the period from
July 1, 2003 to December 31, 2003. The fixed price of the swap is 71.53 cents per
gallon and the agreement is estimated to represent 15% of our fuel purchases for that
period. The results of operations for the year ended March 31, 2003 include an
unrealized derivative loss of $167,046 which is included in nonoperating income
(expense) and a realized gain of approximately $726,000 in cash settlements from a
counter-party recorded as a reduction of fuel expense. We were not a party to any
derivative contracts during the years ended March 31, 2002 or 2001.
Interest
We are susceptible to market risk associated with changes in interest rates on
long-term debt obligations we incurred to finance the purchases of our Airbus aircraft
and our Government Guaranteed Loan. 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. The interest rate on borrowings
under our credit agreement also is subject to adjustment based on changes in the
applicable LIBOR rates. A change in the base LIBOR rate of 100 basis points (1.0
percent) would have the effect of increasing or decreasing our annual interest expense
by $2,378,000 assuming the loans outstanding that are subject to interest rate
adjustments at March 31, 2003 totaling $237,778,000 are outstanding for the entire
period. As of March 31, 2003, we had hedged approximately 11.4% of our variable
interest rate loans.
In March 2003, we entered into an interest rate swap agreement with a notional
amount of $27,000,000 to a portion of the $70,000,000 Government Guaranteed Loan as
discussed above. Under the interest rate swap agreement, we are paying a fixed rate
of 2.45% and receive a variable rate based on the three month LIBOR over the term of
the swap which expires in March 2007.
Item 8: Financial Statements
Our financial statements are filed as a part of this report immediately
following the signature page.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10: Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated herein by reference to the
data under the heading "Election of Directors" in the Proxy Statement to be used in
connection with the solicitation of proxies for our annual meeting of shareholders to
be held on September 4, 2003. We will file the definitive Proxy Statement with the
Commission on or before July 29, 2003.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the
data under the heading "Executive Compensation" in the Proxy Statement to be used in
connection with the solicitation of proxies for our annual meeting of shareholders to
be held on September 4, 2003. We will file the definitive Proxy Statement with the
Commission on or before July 29, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated herein by reference to the
data under the heading "Voting Securities and Principal Holders Thereof" in the Proxy
Statement to be used in connection with the solicitation of proxies for our annual
meeting of shareholders to be held on September 4, 2003. We will file the definitive
Proxy Statement with the Commission on or before July 29, 2003.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference to the
data under the heading "Related Transactions" in the Proxy Statement to be used in
connection with the solicitation of proxies for our annual meeting of shareholders to
be held on September 4, 2003. We will file the definitive Proxy Statement with the
Commission on or before July 29, 2003.
Item 14. 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.
Item 15. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference to the
data under the heading "Principal Accountant Fees and Services" in the Proxy Statement
to be used in connection with the solicitation of proxies for our annual meeting of
shareholders to be held on September 4, 2003. We will file the definitive Proxy
Statement with the Commission on or before July 29, 2003.
PART IV
Item 16(a): Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Exhibit
Numbers Description of Exhibits
Exhibit 3 - Articles of Incorporation and Bylaws:
3.1 Restated Articles of Incorporation of the Company. (Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
3.2 Amended and Restated Bylaws of the Company. (Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
Exhibit 4 - Instruments defining the rights of security holders:
4.1 Specimen common stock certificate of the Company. (Exhibit 4.1 to
the Company's Registration Statement on Form SB-2, declared effective
May 20, 1994)
4.2 Rights Agreement, dated as of February 20, 1997, between Frontier
Airlines, Inc. and American Securities Transfer & Trust, Inc,
including the form of Rights Certificate and the Summary of Rights
attached thereto as Exhibits A and B, respectively (Exhibit 3.1 to
the Company's Registration Statement on Form 8-A filed March 12, 1997)
4.2(a) Amendment to Rights Agreement dated June 30, 1997. (Exhibit 4.4(a)
to the Company's Annual Report on Form 10-KSB for the year ended
March 31, 1997; Commission File No. 0-24126)
4.2(b) Amendment to Rights Agreement dated December 5, 1997. (Exhibit
4.4(b) to the Company's Annual Report on Form 10-K for the year ended
March 31, 1999)
4.2(c) Third Amendment to Rights Agreement dated September 9, 1999.
(Exhibit 4.4 to the Company's Registration Statement on Form 8-A/A
filed October 14, 1999)
4.2(d) Fourth Amendment to Rights Agreement dated May 30, 2001. (Exhibit
4.4(d) to the Company's Annual Report on Form 10-K for the year ended
March 31, 2001)
4.3 Frontier Airlines Inc. Warrant to Purchase Common Stock, No. 1 - Air
Stabilization Board. Two Warrants, dated as of February 14, 2003,
substantially identical in all material respect to this Exhibit, have
been entered into with each of the Supplemental Guarantors granting
each Supplemental Guarantor a warrant to purchase 191,697 shares
under the same terms and conditions described in this Exhibit.
Portions of this Exhibit have been omitted and filed separately with
the Securities and Exchange Commission in a confidential treatment
request under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended. (Exhibit 4.5 to the Company's Current Report on Form 8-K
dated March 25, 2003)
4.4 Registration Rights Agreement dated as of February 14, 2003 by and
Frontier Airlines, Inc. as the Issuer, and the Holders to Herein of
Warrants to Purchase Common Stock, No Par Value. Portions of this
Exhibit have been omitted and filed separately with the Securities
and Exchange Commission in a confidential treatment request under
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(Exhibit 4.6 to the Company's Current Report on Form 8-K dated March
25, 2003)
Exhibit 10 - Material Contracts:
10.1 1994 Stock Option Plan. (Exhibit 10.3 to the Company's Registration
Statement on Form SB-2, declared effective May 20, 1994)
10.1(a) Amendment No. 1 to 1994 Stock Option Plan. (Exhibit 10.4 to the
Company's Annual Report on Form 10-KSB for the year ended March 31,
1995; Commission File No. 0-4877)
10.1(b) Amendment No. 2 to 1994 Stock Option Plan. (Exhibit 10.2 to the
Company's Annual Report on Form 10-KSB for the year ended March 31,
1997; Commission File No. 0-24126)
10.2 Airport Use and Facilities Agreement, Denver International Airport
(Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the
year ended March 31, 1995; Commission File No. 0-4877)
10.3 Space and Use Agreement between Continental Airlines, Inc. and the
Company. (Exhibit 10.43 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1999)
10.3(a) Second Amendment to Space and Use Agreement between Continental
Airlines, Inc. and the Company. Portions of this Exhibit have been
omitted and filed separately with the Securities and Exchange
Commission in a confidential treatment request under Rule 24b-2 of
the Securities Exchange Act of 1934, as amended. (filed herewith)
10.4 Airbus A318/A319 Purchase Agreement dated as of March 10, 2000
between AVSA, S.A.R.L., Seller, and Frontier Airlines, Inc., Buyer.
Portions of this exhibit have been excluded from the publicly
available document and an order granting confidential treatment of
the excluded material has been received. (Exhibit 10.51 to the
Company's Annual Report on Form 10-K for the year ended March 31,
2000)
10.5 Aircraft Lease Common Terms Agreement dated as of April 20, 2000
between General Electric Capital Corporation and Frontier Airlines,
Inc. Portions of this exhibit have been excluded from the publicly
available document and an order granting confidential treatment of
the excluded material has been received. (Exhibit 10.52 to the
Company's Annual Report on Form 10-K for the year ended March 31,
2000)
10.6 Aircraft Lease Agreement dated as of April 20, 2000 between Aviation
Financial Services, Inc., Lessor, and Frontier Airlines, Inc.,
Lessee, in respect of 15 Airbus A319 Aircraft. After 3 aircraft were
leased under this Exhibit with Aviation Financial Services, Inc. as
Lessor, related entities of Aviation Financial Services, Inc.
replaced it as the Lessor, but each lease with these related entities
is substantially identical in all material respects to this Exhibit.
Portions of this exhibit have been excluded from the publicly
available document and an order granting confidential treatment of
the excluded material has been received. (Exhibit 10.53 to the
Company's Annual Report on Form 10-K for the year ended March 31,
2000)
10.7 Lease dated as of May 5, 2000 for Frontier Center One, LLC, as
landlord, and Frontier Airlines, Inc., as tenant. Portions of this
exhibit have been excluded from the publicly available document and
an order granting confidential treatment of the excluded material has
been received. (Exhibit 10.55 to the Company's Annual Report on Form
10-K for the year ended March 31, 2000)
10.8 Operating Agreement of Frontier Center One, LLC, dated as of May 10,
2000 between Shea Frontier Center, LLC, and 7001 Tower, LLC, and
Frontier Airlines, Inc. Portions of this exhibit have been excluded
from the publicly available document and an order granting
confidential treatment of the excluded material has been received.
(Exhibit 10.56 to the Company's Annual Report on Form 10-K for the
year ended March 31, 2000)
10.9 Standard Industrial Lease dated April 27, 2000, between Mesilla
Valley Business Park, LLC, landlord, and Frontier Airlines, Inc.,
tenant. Portions of this exhibit have been excluded from the
publicly available document and an order granting confidential
treatment of the excluded material has been received. (Exhibit 10.57
to the Company's Annual Report on Form 10-K for the year ended March
31, 2000)
10.10 General Terms Agreement No. 6-13616 between CFM International and
Frontier Airlines, Inc. Portions of this exhibit have been excluded
from the publicly available document and an order granting
confidential treatment of the excluded material has been received.
(Exhibit 10.60 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000)
10.11 Lease Agreement dated as of December 15, 2000 between Gateway Office
Four, LLC, Lessor, and Frontier Airlines, Inc., Lessee. (Exhibit
10.61 to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2000)
10.12 Code Share Agreement dated as of May 3, 2001 between Frontier
Airlines, Inc. and Great Lakes Aviation, Ltd. Portions of this
exhibit have been excluded from the publicly available document and
an order granting confidential treatment of the excluded material has
been received. (Exhibit 10.62 to the Company's Annual Report on Form
10-K for the year ended March 31, 2001)
10.12(a) Amendment No. 1 to the Codeshare Agreement dated as of May 3, 2001
between Frontier Airlines, Inc. and Great Lakes Aviation, Ltd.
Portions of the exhibit have been excluded from the publicly
available document andan order granting confidential treatment of the
excluded material has been received. (Exhibit 10.62(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 2001)
10.13 Codeshare Agreement between Mesa Airlines, Inc. and Frontier
Airlines, Inc. (Exhibit 10.61 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001)
10.14(a) Amendment No. 1 to the Codeshare Agreement dated as of September 4,
2001 between Mesa Airlines, Inc. and Frontier Airlines, Inc.
Portions of this exhibit have been excluded from the publicly
available document and an order granting confidential treatment of
the excluded material has been received. (Exhibit 10.65(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 2001)
10.14(b) Amendment No. 2 to Codeshare Agreement dated as of August 1, 2002
between Mesa Airlines, Inc. and Frontier Airlines, Inc. Portions of
this Exhibit have been omitted and filed separately with the
Securities and Exchange Commission in a confidential treatment
request under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended. (filed herewith)
10.14(c) Letter Agreement No. 1 to the Codeshare Agreement dated February 1,
2003 between Mesa Airlines, Inc. and Frontier Airlines, Inc.
Portions of this Exhibit have been omitted and filed separately with
the Securities and Exchange Commission in a confidential treatment
request under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended. (filed herewith)
10.15 Employee Stock Ownership Plan of Frontier Airlines, Inc. as amended
and restated, effective January 1, 1997 and executed February 5,
2002. (Exhibit 10.66 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2001)
10.15(a) Amendment of the Employee Stock Ownership Plan of Frontier Airlines,
Inc. as amended and restated, effective January 1, 1997 and executed
February 5, 2002 for EGTRRA. (Exhibit 10.66(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
2001)
10.16 Director Compensation Agreement between Frontier Airlines, Inc. and
Samuel D. Addoms dated effective April 1, 2002. This agreement was
modified on April 1, 2003, to expressly describe the second
installment exercise period as on or after December 31, 2003, and the
third installment exercise period as on or after April 1, 2004.
(Exhibit 10.67 to the Company's Annual Report on Form 10-K for the
year ended March 31, 2002)
10.17 Secured Credit Agreement dated as of October 10, 2002 between
Frontier Airlines, Inc. and Credit Agricole Indosuez in respect to 3
Airbus 319 aircraft. Portions of this exhibit have been excluded form
the publicly available document and an order granting confidential
treatment of the excluded material has been received. (Exhibit 10.75
to the Company's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 2002)
10.18 Aircraft Mortgage and Security Agreement dated as of October 10, 2002
between Frontier Airlines, Inc. and Credit Agricole Indosuez in
respect to 3 Airbus 319 aircraft. Portions of this exhibit have been
excluded form the publicly available document and an order granting
confidential treatment of the excluded material has been received.
(Exhibit 10.76 to the Company's Quarterly Report on Form 10-Q/A for
the quarter ended September 30, 2002)
10.19 $70,000,000 Loan Agreement dated as of February 14, 2003 among
Frontier Airlines, Inc. as Borrower, West LB AG, as Tranche A Lender
and Tranche C Lender, Wells Fargo Bank, N.A., as Tranche B-1 Lender,
Tranche B-2 Lender, and a Tranche C Lender, Bearingpoint, Inc. as
Loan Administrator, Wells Fargo Bank Northwest, N.A. as Collateral
Agent, LB AG, as Agent, and Air Transportation Stabilization Board.
Portions of this Exhibit have been omitted and filed separately with
the Securities and Exchange Commission in a confidential treatment
request under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended. (Exhibit 10.77 to the Company's Current Report on Form 8-K
dated March 25, 2003)
10.20 Mortgage and Security Agreement dated as of February 14, 2003 made by
Frontier Airlines, Inc. in favor of Wells Fargo Bank Northwest, N.A.
the Collateral Agent. Portions of this Exhibit have been omitted and
filed separately with the Securities and Exchange Commission in a
confidential treatment request under Rule 24b-2 of the Securities
Exchange Act of 1934, as amended. (Exhibit 10.78 to the Company's
Current Report on Form 8-K dated March 25, 2003)
Exhibit 18- Letter re Change in Accounting Principles
18.1 Letter from KPMG LLP re Change in Accounting Principle (filed
herewith)
Exhibit 23 - Consents of Experts:
23.1 Consent of KPMG LLP (filed herewith)
Exhibit 99 - Additional Exhibits:
99.1 Section 906 Certification of President and Chief Executive Officer,
Jeff S. Potter. (filed herewith)
99.2 Section 906 Certification of Chief Financial Officer, Paul H. Tate.
(filed herewith)
99.3 Section 302 Certification of President and Chief Executive Officer,
Jeff S. Potter. (filed herewith)
99.4 Section 302 Certification of Chief Financial Officer, Paul H. Tate.
(filed herewith)
Item 16(b): Reports on Form 8-K.
During the quarter ended March 31, 2003, the Company filed the following reports
on Form 8-K.
Financial Statements
Date of Reports Item Numbers Required to be Filed
February 19, 2003 5 None
March 26, 2003 5 and 7 None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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: June 26, 2003 By: /s/ Paul H. Tate
Paul H. Tate, Vice President and
Chief Financial Officer
Date: June 26, 2003 By: /s/ Elissa A. Potucek
Elissa A.Potucek, Vice President,Controller,
Treasurer and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: June 26, 2003 By: /s/ Jeffery S. Potter
Jeffery S. Potter, Director
Date: June 26, 2003 By: /s/ Samuel D. Addoms
Samuel D. Addoms, Director
Date: June 26, 2003 By: /s/ William B. McNamara
William B. McNamara, Director
Date: June 26, 2003 By: /s/ Paul Stephen Dempsey
Paul Stephen Dempsey, Director
Date: June 26, 2003 By:
B. LaRae Orullian, Director
Date: June 26, 2003 By: /s/ D. Dale Browning
D. Dale Browning, Director
Date: June 26, 2003 By:
James B. Upchurch, Director
Date: June 26, 2003 By: /s/ Hank Brown
Hank Brown, Director
Certification
I, Jeff S. Potter, certify that:
1. I have reviewed this annual report on Form 10-K of Frontier Airlines, Inc.;
2. Based on my knowledge, this annual 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 financial information included in this
annual 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: June 26, 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 annual report on Form 10-K 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 financial 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: June 26, 2003
By: /s/ Paul H. Tate
Paul H. Tate
Chief Financial Officer
Independent Auditors' Report
The Board of Directors and Stockholders
Frontier Airlines, Inc.:
We have audited the accompanying balance sheets of Frontier Airlines, Inc. as of March
31, 2003 and 2002, and the related statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended March 31, 2003. These financial
statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Frontier Airlines, Inc. as of March 31, 2003 and 2002,
and the results of its operations and its cash flows for each of the years in the three-year
period ended March 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in note 1 to the financial statements, the Company changed its method of
accounting for aircraft maintenance checks from the accrual method of accounting to the
direct expense method in 2003.
KPMG LLP
Denver, Colorado
May 22, 2003
FRONTIER AIRLINES, INC.
Balance Sheets
March 31, 2003 and 2002
2003 2002
Assets
Current assets:
Cash and cash equivalents $ 102,880,404 $ 87,555,189
Short-term investments 2,000,000 2,000,000
Restricted investments 14,765,000 12,074,000
Receivables, net of allowance for doubtful accounts
of $237,000 and $155,000 at March 31, 2003 and 2002,
respectively 25,856,692 28,536,313
Income taxes receivable (note 9) 24,625,616 6,855,544
Security, maintenance and other deposits (note 7) 912,399 36,891,297
Prepaid expenses 9,032,084 11,013,602
Inventories, net of allowance of $2,478,000 at March
31, 2003 5,958,836 6,604,378
Deferred tax asset (note 9) 4,788,831 1,788,078
Other current assets 18,587 74,952
Total current assets 190,838,449 193,393,353
Property and equipment, net (note 4) 334,492,983 142,861,771
Security, maintenance and other deposits (note 7) 6,588,023 20,087,569
Aircraft pre-delivery payments 30,531,894 44,658,899
Restricted investments 9,324,066 12,160,210
Deferred loan fees and other assets 16,068,361 523,134
$ 587,843,776 $ 413,684,936
==============================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 26,388,621 $ 23,185,266
Air traffic liability 58,875,623 61,090,705
Other accrued expenses (note 6) 22,913,659 22,060,082
Accrued maintenance expense (note 1) - 37,527,906
Refundable stabilization act compensation (note 2) - 4,835,381
Current portion of long-term debt (note 8) 20,473,446 3,225,651
Deferred revenue and other liabilities (note 5) 1,396,143 138,604
Total current liabilities 130,047,492 152,063,595
Long-term debt (note 8) 261,738,503 66,832,018
Accrued maintenance expense (note 1) - 15,796,330
Deferred tax liability (note 9) 20,017,787 6,716,815
Deferred revenue and other liabilities (note 5) 17,072,868 3,142,885
Total liabilities 428,876,650 244,551,643
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; 29,674,050 and
29,421,331 issued and outstanding at March 31, 2003
and March 31, 2002, respectively 29,674 29,422
Additional paid-in capital 96,424,525 85,867,486
Unearned ESOP shares (note 12) - (2,119,670)
Retained earnings 62,512,927 85,356,055
Total stockholders' equity 158,967,126 169,133,293
Commitments and contingencies (notes 3, 7, 12 and 15)
587,843,776 413,684,936
==============================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statement of Operations
Years Ended March 31, 2003, 2002 and 2001
2003 2002 2001
Revenues:
$
Passenger $ 460,187,753 $ 435,945,581 $ 462,608,847
Cargo 5,557,153 6,623,665 7,516,867
Other 4,191,009 2,505,479 2,750,713
Total revenues 469,935,915 445,074,725 472,876,427
Operating expenses:
Flight operations 155,913,606 129,814,429 108,370,148
Aircraft fuel expense 85,896,535 61,226,385 71,083,152
Aircraft and traffic servicing 86,447,925 70,201,825 60,408,236
Maintenance 75,559,243 70,227,020 65,529,428
Promotion and sales 53,031,888 59,458,779 55,880,717
General and administrative 26,060,812 26,173,864 25,428,753
Depreciation and amortization 17,649,815 11,586,703 5,454,673
Total operating expenses 500,559,824 428,689,005 392,155,107
Operating income (loss) (30,623,909) 16,385,720 80,721,320
Nonoperating income (expense):
Interest income 1,882,691 4,388,249 7,897,282
Interest expense (8,041,412) (3,382,695) (94,393)
Stabilization act compensation - 12,703,007 -
Loss on early extinquishment of debt (1,774,311) - -
Aircraft lease termination - (4,913,650) -
Unrealized derivative loss (299,328) - -
Other, net (652,897) (348,329) (191,771)
Total nonoperating income(expense), net (8,885,257) 8,446,582 7,611,118
Income (loss) before income tax expense (benefit)
and cumulative effect of change in method of
accounting for maintenance (39,509,166) 24,832,302 88,332,438
Income tax expense (benefit) (14,655,366) 8,282,312 33,464,665
Income (loss) before cumulative effect of
change in method of accounting for maintenance (24,853,800) 16,549,990 54,867,773
Cumulative effect of change in method of accounting
for maintenance, net of tax (note 1) 2,010,672 - -
Net income (loss) $ (22,843,128) $ 16,549,990 $ 54,867,773
===================================================================
(continued)
FRONTIER AIRLINES, INC.
Statement of Operations, continued
Years Ended March 31, 2003, 2002 and 2001
2003 2002 2001
Earnings (loss) per share:
Basic:
Income (loss) before cumulative effect of a
change in accounting principle ($0.84) $0.58 $2.02
Cumulative effect of change in method
of accounting for maintenance 0.07 - -
Net income (loss) ($0.77) $0.58 $2.02
===================================================================
Diluted:
Income (loss) before cumulative effect of a
change in accounting principle ($0.84) $0.56 $1.90
Cumulative effect of change in method of
accounting for maintenance 0.07 - -
Net income (loss) ($0.77) $0.56 $1.90
===================================================================
Pro forma amounts assuming the new
method of accounting for maintenance
is applied retroactively:
Net income 17,661,307 $ 55,119,366
Earnings per share:
Basic $0.62 $2.03
Diluted $0.60 $1.91
Weighted average shares of
common stock outstanding
Basic 29,619,742 28,603,861 27,152,099
===================================================================
Diluted 29,619,742 29,515,150 28,842,783
===================================================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Stockholders' Equity
Years Ended March 31, 2003, 2002 and 2001
Common Stock Additional Unearned Total
Stated paid-in ESOP Retained stockholders'
Shares value capital shares earnings equity
Balances, March 31, 2000 26,598,410 26,599 67,937,363 (857,713) $13,938,292 81,044,541
Exercise of common stock
warrants (note 10) 583,030 583 1,450,570 - - 1,451,153
Exercise of common stock
options (note 11) 879,025 879 1,884,366 - - 1,885,245
Tax benefit from exercises of
common stock options and
warrants - - 4,129,336 - - 4,129,336
Contribution of common stock to
employees stock ownership plan
(note 12) 135,000 135 2,216,115 (2,216,250) - -
Amortization of employee stock
compensation (note 12) - - - 1,411,876 - 1,411,876
Adjustment for fractional shares
from stock dividend (863) (1) (10,832) - - (10,833)
Net income - - - - 54,867,773 54,867,773
Balances, March 31, 2001 28,194,602 28,195 77,606,918 (1,662,087) 68,806,065 144,779,091
Exercise of common stock
warrants (note 10) 525,000 525 1,311,975 - - 1,312,500
Exercise of common stock options
(note 11) 528,711 529 1,870,516 - - 1,871,045
Tax benefit from exercises of
common stock options and
warrants - - 2,252,023 - - 2,252,023
Contribution of common stock to
employees stock ownership plan
(note 12) 173,018 173 2,826,054 (2,826,227) - -
Amortization of employee stock
compensation (note 12) - - - 2,368,644 - 2,368,644
Net income - - - - 16,549,990 16,549,990
Balances, March 31, 2002 29,421,331 29,422 85,867,486 (2,119,670) 85,356,055 169,133,293
Exercise of common stock options
(note 11) 252,719 252 616,695 - - 616,947
Warrants issued in conjunction
with debt agreement (note 10) - - 9,282,538 - - 9,282,538
Tax benefit from exercises of
common stock options and warrants - - 657,806 - - 657,806
Contribution of common stock to
employees stock ownership plan
(note 12) - - - - - -
Amortization of employee stock
compensation (note 12) - - - 2,119,670 - 2,119,670
Net loss - - - - (22,843,128) (22,843,128)
Balances, March 31, 2003 $29,674,050 $29,674 $96,424,525 $ - $62,512,927 $158,967,126
=====================================================================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Cash Flows
Years ended March 31, 2003, 2002, and 2001
2003 2002 2001
Cash flows from operating activities:
Net income (loss) $ (22,843,128) $ 16,549,990 $ 54,867,773
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Employee stock ownership plan
compensation expense 2,641,624 2,368,644 1,411,876
Depreciation and amortization 18,297,444 11,670,818 5,618,200
Impairment recorded on inventories 2,478,196 1,511,642 -
Loss on disposal of equipment 573,075 323,000 56,800
Unrealized derivative loss 299,328 - -
Deferred tax expense 10,300,219 4,435,402 1,146,015
Changes in operating assets
and libilities:
Restricted investments (1,031,556) (4,588,250) (5,639,400)
Receivables 2,679,621 (758,891) (6,060,773)
Income taxes receivable (17,770,072) - -
Security, maintenance and other deposits (341,365) (7,885,865) (16,207,351)
Prepaid expenses 1,981,518 (164,522) (3,462,229)
Inventories (1,832,654) (2,532,043) (1,837,152)
Deferred loan fees and other assets (3,339,467) - -
Accounts payable 3,203,355 (1,470,179) 7,215,154
Air traffic liability (2,215,082) 1,459,846 18,144,400
Other accrued expenses 32,295 3,823,603 694,460
Refundable stabilization act compensation (4,835,381) 4,835,381 -
Accrued maintenance expense (2,269,046) 7,638,480 16,578,273
Deferred revenue and other liabilities 14,378,900 3,077,326 -
Net cash provided by operating
activities 387,843 40,294,382 72,526,046
Cash flows from investing activities:
Decrease in short-term investments, net - - 13,760,000
Decrease (increase) in aircraft
lease and purchase deposits, net 12,891,605 (17,483,332) (22,810,967)
Decrease (increase) in restricted investments 1,176,000 1,137,700 (3,330,500)
Proceeds from the sale of aircraft 29,750,000 - -
Capital expenditures (238,667,511) (118,182,990) (21,957,336)
Net cash used in investing
activities (194,849,206) (134,528,622) (34,338,803)
Cash flows from financing activities:
Net proceeds from issuance of
common stock and warrants 1,274,753 3,183,545 3,325,566
Proceeds from long-term borrowings 241,100,000 72,000,000 -
Payment of financing fees (3,504,435) (577,959) -
Principal payments on long-term borrowings (28,945,720) (1,942,331) -
Principal payments on obligations under
captial leases (138,020) (125,252) (112,316)
Net cash provided by financing
activities 209,786,578 72,538,003 3,213,250
Net increase (decrease) in cash
and cash equivalents 15,325,215 (21,696,237) 41,400,493
Cash and cash equivalents, beginning of period 87,555,189 109,251,426 67,850,933
Cash and cash equivalents, end of period $ 102,880,404 $ 87,555,189 $ 109,251,426
================= ================== =================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Financial Statements
March 31, 2003
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Frontier Airlines, Inc. ("Frontier" or the "Company") provides air transportation for passengers
and freight. Frontier was incorporated in the State of Colorado on February 8, 1994 and commenced
operations on July 5, 1994. Denver-based Frontier in conjunction with its regional jet partner
Frontier JetExpress currently serves 38 cities coast to coast with a fleet of 19 Boeing 737 and 17
Airbus A319 jets, from its base in Denver, and employs approximately 3,200 aviation professionals
as of March 31, 2003.
Airline operations have high fixed costs relative to revenues and are highly sensitive to various
factors including the actions of competing airlines and general economic factors. Small
fluctuations in yield per revenue passenger mile or expense per available seat mile can
significantly affect operating results.
Preparation of Financial Statements and Use of Estimates
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.
Cash and Cash Equivalents
For financial statement purposes, the Company considers cash and short-term investments with an
original maturity of three months or less to be cash equivalents. These investments are stated at
cost, which approximates fair value. Cash includes $25,000,000 required to be available and on
hand based on loan covenants with our loan guaranteed principally by the Air Transportation
Stabilization Board ("ATSB") loan (see note 7).
Short-term Investments
Short-term investments consist of certificates of deposit with maturities between three months and
one year. These investments are classified as held-to-maturity and are carried at amortized cost
which approximates fair value. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the security until maturity. Interest income is
recognized when earned.
FRONTIER AIRLINES, INC.
Notes to Financial Statements, continued
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Year for:
2003 2002 2001
Interest $ 6,490,758 $ 3,081,370 $ 94,393
Taxes $ - $ 8,838,909 $ 21,926,000
Supplemental disclosure of non-cash activities:
In connection with the commercial loan facility the Company obtained during the year ended March 31,
2003, the Company issued warrants to the ATSB and to two other guarantors for the purchase of
3,833,946 of our common stock at $6.00 per share. The warrants had an estimated fair value of
$9,282,538 which increased deferred loan fees and other assets and increased additional paid-in
captial. See Note 7.
Restricted Investments
Restricted investments include certificates of deposit which secure certain letters of credit
issued primarily to companies which process credit card sale transactions, certain airport
authorities and aircraft lessors. Restricted investments are carried at cost, which management
believes approximates fair value. Maturities are for one year or less and the Company intends to
hold restricted investments until maturity.
Valuation and Qualifying Accounts
The allowance for doubtful accounts was approximately $237,000 and $155,000 at March 31, 2003 and
2002, respectively. Provisions for bad debts net of recoveries totaled $477,000, $450,000, and
$1,179,000 for the years ended March 31, 2003, 2002 and 2001, respectively. Write-offs from the
allowance for doubtful accounts totaled $395,000, $663,000, and $982,000 for the years ended March
31, 2003, 2002, and 2001, respectively.
At March 31, 2003 and 2002, we had reserves for our aircraft rotable parts totaling $1,323,000 and
$1,512,000, respectively. Write-offs from the reserve totaled $189,000 for the year ended March 31,
2003. Additionally, at March 31, 2003 inventories include a reserve for our aircraft expendable parts
totaling $2,478,000 and none at March 31, 2002. The Company recorded a reserve against Boeing spare
parts inventory totaling $2,478,000 during the year ended March 31, 2003.
Accrued maintenance expense was zero and $53,324,000 at March 31, 2003 and 2002, respecitvely.
See "aircraft maintenance" below. Effective April 1, 2002, the Company changed its method of accounting
for maintenance checks from the accrue-in-advance method to the direct expensing method. Provisions
for accrued maintenance expenses totaled $22,168,000 and $24,970,000 for the years ended March 31,
2002 and 2001, respectively. Deductions from accrued maintenance expense totaled $14,530,000 and
$8,391,000 for the years ended March 31, 2002 and 2001, respectively.
Inventories
Inventories consist of expendable aircraft spare parts, supplies and aircraft fuel and are stated
at the lower of cost or market. Inventories are accounted for on a first-in, first-out basis and
are charged to expense as they are used. An allowance was provided in the year ended March 31,
2003 in the amount of $2,478,000 for Boeing spare parts that was based on the fair market value of
the parts and the estimated useage of those parts throughout the remaining lease terms of the
Boeing aircraft. The Company will continue to monitor this reserve throughout the duration of our
fleet replacement plan.
Property and Equipment
Property and equipment are carried at cost. Major additions, betterments and renewals are
capitalized. Depreciation and amortization is provided for on a straight-line basis to estimated
residual values over estimated depreciable lives as follows:
Aircraft 25 years
Capitalized software 3 years
Flight equipment 5-10 years
Improvements to leased aircraft Life of improvements or term of lease,
whichever is less
Ground property, equipment, and
leasehold improvements 3-5 years or term of lease
Residual values for aircraft are at 25% of the aircraft cost, residual values for engines range in
amounts up to 48% of the engine's cost and residual values for major rotable parts are generally
10% of the cost of the asset, except when a guaranteed residual value or other agreements exist to
better estimate the residual value. Assets utilized under capital leases are amortized over the
lesser of the lease term or the estimated useful life of the asset using the straight-line method.
Amortization of capital leases is included in depreciation expense.
Deferred Loan Fees
Deferred loan fees, including the estimated fair value of warrants issued to the lenders, are
deferred and amortized over the term of the related debt obligation using the effective interest
method.
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted future cash flows estimated to be generated by those
assets are less than the carrying amount of the assets. If an impairment occurs, the loss is
measured by comparing the fair value of the asset to its carrying amount. During the year ended
March 31, 2002, the Company wrote down the carrying value of rotable parts that support the Boeing
737-200 aircraft by $1,512,000, as a result of diminished demand for that aircraft type. The write
down was charged to maintenance expenses. The amount of the write down was based on prevailing
market values at that time.
Manufacturers' Credits
The Company receives credits in connection with its purchase of aircraft, engines, auxiliary power
units and other rotable parts. These credits are deferred until the aircraft, engines, auxiliary
power units and other rotable parts are delivered and then applied as a reduction of the cost of
the related equipment.
Aircraft Maintenance
The Company operates under an FAA-approved continuous inspection and maintenance program. The
Company accounts for maintenance activities on the direct expense method. Under this method, major
overhaul maintenance costs are recognized as expense as maintenance services are performed, as
flight hours are flown for nonrefundable maintenance payments required by lease agreements, and as
the obligation is incurred for payments made under service agreements. Routine maintenance and
repairs are charged to operations as incurred. Prior to fiscal 2003 the Company accrued for major
overhaul costs on a per-flight-hour basis in advance of performing the maintenance services.
Effective January 1, 2003, the Company and GE Engine Services, Inc. (GE) executed a twelve-year
engine services agreement (the "Services Agreement") covering the scheduled and unscheduled repair
of Airbus engines. Under the terms of the Services Agreement, the Company agreed to pay GE a fixed
rate per-engine-hour, payable monthly, and GE assumed the responsibility to overhaul the Company's
engines on Airbus aircraft as required during the term of the Services Agreement, subject to
certain exclusions. The Company believes the fixed rate per-engine hour approximates the periodic
cost the Company would have incurred to service those engines. Accordingly, these payments are
expensed as the obligation is incurred.
Effective April 1, 2002, the Company changed its method of accounting for certain aircraft
maintenance costs from the accrual method of accounting to the direct expense method. Under the new
accounting method, maintenance costs are recognized as expense as maintenance services are
performed and as flight hours are flown for nonrefundable maintenance payments required by lease
agreements. The Company believes the direct-expense method is preferable in the circumstances
because the maintenance liability is not recorded until there is an obligating event (when the
maintenance event is actually being performed or flight hours are actually flown), the direct
expense method eliminates significant estimates and judgments inherent under the accrual method,
and it is the predominant method used in the airline industry. Accordingly, effective April 1,
2002, the Company reversed its major overhaul accrual against the corresponding maintenance
deposits and recorded a cumulative effect of a change in accounting principle of $3,196,617
($2,010,672, net of income taxes).
Advertising Costs
The Company expenses the costs of advertising as promotion and sales in the year incurred.
Advertising expense was $5,717,438, $9,086,752, and $6,076,501 for the years ended March 31, 2003,
2002, and 2001, respectively.
Development Costs
Development costs related to the preparation of operations for new routes are expensed as incurred.
Revenue Recognition
Passenger, cargo, and other revenues are recognized when the transportation is provided or after
the tickets expire, and are net of excise taxes. Unearned revenues have been deferred and included
in the accompanying balance sheet as air traffic liability.
Passenger Traffic Commissions and Related Expenses
Passenger traffic commissions and related expenses are expensed when the transportation is provided
and the related revenue is recognized. Passenger traffic commissions and related expenses not yet
recognized are included as a prepaid expense.
Customer Loyalty Programs
In February 2001, the Company established EarlyReturns, a frequent flyer program to encourage
travel on its airline and customer loyalty.
The Company accounts for the EarlyReturns program under the incremental cost method whereby travel
awards are valued at the incremental cost of carrying one passenger based on expected redemptions.
Those incremental costs are based on expectations of expenses to be incurred on a per passenger
basis and include food and beverages, fuel, liability insurance, and ticketing costs. The
incremental costs do not include a contribution to overhead, aircraft cost or profit. The Company
does not record a liability for mileage earned by participants who have not reached the level to
become eligible for a free travel award. The Company believes this is appropriate because the
large majority of these participants are not expected to earn a free flight award. The Company
does not record a liability for the expected redemption of miles for non-travel awards since the
cost of these awards to the Company is negligible.
As of March 31, 2003 and 2002, the Company estimated that approximately 14,615 and 4,600 round-trip
flight awards, respectively, were eligible for redemption by EarlyReturns members who have mileage
credits exceeding the 15,000-mile free round-trip domestic ticket award threshold. Of these earned
awards, the Company expected that approximately 84% would be redeemed. The difference between the
round-trip awards outstanding and the awards expected to be redeemed is the estimate of awards
which will (1) never be redeemed, or (2) be redeemed for something other than a free trip. As of
March 31, 2003 and 2002, the Company had recorded a liability of approximately $283,000 and
$65,000, respectively, for these rewards.
In March 2003 we entered into an agreement with a financial institution, a full-service credit card
issuer, to exclusively offer Frontier MasterCard products to consumers, customers and Frontier's
EarlyReturns frequent flyer members. The credit card was launched in May 2003. During the year
ended March 31, 2003, we received a $10,000,000 advance on expected future earnings associated with
the program which is included in deferred revenues and other liabilities at March 31, 2003.
Deferred Revenue
Deferred revenue represents advances received under an agreement with a financial institution which
is offering the Company a co-branded MasterCard product to our customers and other consumers. See
"Customer Loyalty Programs" above. As EarlyReturns miles accrue in the members' accounts, we earn
the revenue associated with this agreement and amounts are applied against the advance. The
revenue earned from the sale of frequent flyer miles will be further deferred and amortized
straight-line over 20 months.
Earnings (Loss) Per Common Share
Basic earnings per common share excludes the effect of potentially dilutive securities and is
computed by dividing income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per common share reflects the potential dilution of all securities that
could share in earnings.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under that method,
deferred income taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and tax bases of existing assets and liabilities. A valuation
allowance for net deferred tax assets is provided unless realizability is judged by management to
be more likely than not. The effect on deferred taxes from a change in tax rates is recognized in
income in the period that includes the enactment date.
Fair Value of Financial Instruments
The Company estimates the fair value of its monetary assets and liabilities based upon existing
interest rates related to such assets and liabilities compared to current rates of interest for
instruments with a similar nature and degree of risk. The Company estimates that the carrying
value of all of its monetary assets and liabilities approximates fair value as of March 31, 2003
and 2002 with exception of its fixed rate loans at March 31, 2003. The Company estimates the fair
value of its fixed rate loans to be approximately $49,619,955 as compared to the book value of
$44,434,308 at March 31, 2003.
Derivative Instruments
The Company has entered into derivative instruments which are intended to reduce the Company's
exposure to changes in fuel prices and interest rates. The Company accounts for the derivative
instruments entered into as trading instruments under Statement No. 133 of Financial Accounting
Standards, "Accounting for Derivative instruments and Hedging Activities" and records the fair value
of the derivatives as an asset or liability as of each balance sheet date with a corresponding gain
or loss recorded in non-operating income (expense). The Company records any settlements received
or paid as an adjustment to the cost of fuel or interest expense, as appropriate.
Stock Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations in accounting for its employee stock options and
follows the disclosure provisions of Statement of Financial Accounting Standards No. 123 (SFAS
123). The Company applies APB 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost is recognized for options granted at a price equal to the fair
market value of the Common Stock. Pro forma information regarding net income and earnings per
share is required by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average assumptions for 2003, 2002
and 2001, respectively: risk-free interest rates of 4.14%, 4.47% and 6.02%, dividend yields of 0%,
0% and 0%; volatility factors of the expected market price of the Company's common stock of 82.06%,
83.75% and 56.78%, and a weighted-average expected life of the options of 2.5 years, 2.6 years, and
2.7 years. Had compensation cost for the Company's stock-based compensation plan been determined
using the fair value of the options at the grant date, the Company's pro forma net income and
earnings per share would be as follows:
2003 2002 2001
Net Income (loss):
As Reported $ (22,843,128) $ 16,549,990 $ 54,867,773
Pro Forma $ (26,290,907) $ 14,424,422 $ 53,527,821
Earnings (loss) per share, basic:
As Reported $ (0.77) $ 0.58 $ 2.02
Pro Forma $ (0.89) $ 0.50 $ 1.97
Earnings (loss) per share, diluted:
As Reported $ (0.77) $ 0.56 $ 1.90
Pro Forma $ (0.89) $ 0.49 $ 1.86
New Accounting Standards
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 our loss on early extinguishment of debt as a non-operating expense 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)." In May 2003, the Company ceased using one of its leased Boeing 737-200
aircraft prior to the lease expiration date and plans to cease using two additional Boeing 737-200
aircraft in July 2003. The Company will record a liability and an expense equal to the fair value
of the remaining payments required under the leases in the quarters ending June 30, 2003 and
September 30, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No.
34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statement about its obligations under guarantees issued. The Interpretation also
clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken. The initial recognition and measurement provisions of
the Interpretation are applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company has not currently guaranteed any indebtedness of others, and
therefore, the adoption of the interpretation did not have an impact on the Company's 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. The Company has not
adopted the fair value method of accounting for stock options, and therefore, the adoption of SFAS
No. 148 did not have an effect on our results of operation or financial position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities, and Interpretation of ARB No. 51." This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interest in variable interest entities created after
January 31, 2003. For nonpublic enterprises, such as the Company, with a variable interest in a
variable interest entity created before February 1, 2003, the Interpretation is applied to the
enterprise no later than the end of the first annual reporting period beginning after June 15,
2003. The Interpretation requires certain disclosures in financial statements issued after January
31, 2003 if it is reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective. The application of
this Interpretation is not expected to have a material effect on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities". This Statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative instruments and Hedging Activities". This Statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging relationship designated
after June 30, 2003. The application of this Statement is not expected to have a material effect on
the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). This Statement is effective for
financial instruments entered into or modified after May 31, 2003 and for hedging relationship
designated after June 30, 2003. The application of this Statement will not have any impact on the
Company's financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
(2) Government Assistance
Air Transportation Safety and System Stabilization Act
As a result of the September 11, 2001 terrorist attacks on the United States, on September 22, 2001
President Bush signed into law the Air Transportation Safety and System Stabilization Act (the
"Act"). The Act which provided, among other things, for compensation to U.S. passenger and cargo
airlines for direct and increment losses incurred from September 11, 2001 to December 31, 2001 as a
result of the September 11 terrorist attacks. The Company was eligible to receive up to
approximately $20,200,000 from the $5 billion in cash compensation provided for in the Act, of
which $17,538,388 was received as of March 2002. The Company recognized $12,703,007 of the grant
during the year ended March 31, 2002 which is included in non-operating income and expense. The
remaining $4,835,381 represents amounts received in excess of estimated allowable direct and
incremental losses incurred from September 11, 2001 through December 31, 2001 and was repaid
during the year ended March 31, 2003.
Emergency Wartime Supplemental Wartime Supplement Appropriations Act
The Emergency Wartime Supplemental Wartime Supplemental Appropriations Act (the Appropriations Act)
enacted on April 16, 2003, which made available approximately $2.3 billion to U.S. flag air
carriers for expenses and revenue foregone related to aviation security. In order to have been
eligible to receive a portion of this fund, air carriers must have paid one or both of the TSA
security fees, the September 11th Security Fee and/or the Aviation Security Infrastructure Fee as
of the date of enactment of the Appropriations Act. According to the Appropriations Act, an air
carrier may use the amount received as the air carrier determines. The Appropriations Act requires
air carriers who accept these funds to limit the compensation paid during the 12 month period
beginning April 1, 2003 to each executive officer to an amount equal to no more than the annual
salary paid to that officer with respect to the air carrier's fiscal year 2002. Pursuant to the
Appropriations Act, the Company received $15,573,000 in May 2003.
Additionally, the Appropriations Act provided for additional reimbursements to be made to U.S. flag
air carriers for costs incurred related to the FAA requirements for enhanced flight deck door
security measures that were mandated as a result of the September 11 terrorist attacks. The
Company is unable to determine how much of the costs incurred will be reimbursed.
(3) Derivative Instruments
Fuel Hedging
In November 2002, the Company initiated a fuel hedging program comprised of swap and collar
agreements. Under a swap agreement, the Company receives the difference between a fixed swap price
and a price based on an agreed upon published spot price for jet fuel. If the index price is
higher than the fixed price, the Company receives the difference between the fixed price and the
spot price. If the index price is lower, the Company pays the difference. A collar agreement has
a cap price, a primary floor price, and a secondary floor price. 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 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 only obligated to pay the difference between the primary and
secondary floor prices.
In November 2002, the Company entered into a swap agreement with a notional volume of 770,000
gallons per month of jet fuel for the period from December 1, 2002 to May 31, 2003. The fixed
price under this agreement is 72.25 cents per gallon. The volumes were estimated to represent 10%
of fuel purchases for that period. The Company entered into a second contract in November 2002, a
three-way collar, with a notional volume of 385,000 gallons per month for the period December 1,
2002 to November 30, 2003. The cap prices for this agreement is 82 cents per gallon, and the
primary and secondary floor prices are at 72 and 64.5 cents per gallon respectively. The volume of
fuel covered by this contract is estimated to represent 5% of fuel purchases for that period. In
March 2003, the Company entered into a second swap agreement with a notional volume of 1,260,000
gallons per month for the period from April 1, 2003 to June 30, 2003. The fixed price of the swap
is 79.25 cents per gallon and the agreement is estimated to represent 15% of fuel purchases for
that period. In April 2003, we entered into a third swap agreement with a notional volume of
1,260,000 gallons per month for the period from July 1, 2003 to December 31, 2003. The fixed price
of the swap is 71.53 cents per gallon and the agreement is estimated to represent 15% of fuel
purchases for that period. The results of operations for the year ended March 31, 2003 include an
unrealized derivative loss of $167,046 which is included in nonoperating income (expense) and a
realized gain of approximately $726,000 in cash settlements from a counter-party recorded as a
reduction of fuel expense. The Company was not a party to any derivative contracts during the
years ended March 31, 2002 or 2001.
Interest Rate Hedging Program
In March 2003, the Company entered into an interest rate swap agreement with a notional amount of
$27,000,000 to a portion of the $70,000,000 commercial loan facility as discussed in note 7.
Under the interest rate swap agreement, the Company is paying a fixed rate of 2.45% and receive a
variable rate based on the three month LIBOR. At March 31, 2003, our interest rate swap agreement
had an estimated unrealized loss of $132,282 which was recorded as an unrealized loss and is
included in non-operating expenses in the statement of operations. The Company did not have any
interest rate swap agreements outstanding during the years ended March 31, 2002 or 2001.
(4) Property and Equipment, Net
As of March 31, 2003 and 2002 property and equipment consisted of the following:
2003 2002
Aircraft, spare aircraft parts, and
improvements to leased aircraft $ 345,804,415 $ 142,590,544
Ground property, equipment and leasehold
improvements 24,460,880 20,989,272
Construction in progress 1,293,135 1,829,400
371,558,430 165,409,216
Less accumulated depreciation and amortization
(37,065,447) (22,547,445)
Property and equipment, net $ 334,492,983 $ 142,861,771
================== =================
Property and equipment includes certain office equipment and software under capital leases. At
March 31, 2003 and 2002, office equipment and software recorded under capital leases were $602,149
in both years and accumulated amortization was $493,754 and $400,843, respectively. At March 31,
2002, construction in progress includes capitalized software totaling approximately $642,000.
Airbus flight equipment not yet placed in service totalled approximately $1,219,000 and $1,187,000,
at March 31, 2003 and 2002, respectively.
During the year ended March 31, 2003, we completed a sale-leaseback transaction on one of our
purchased aircraft and assigned a purchase commitment on another Airbus A319, generating cash
proceeds of approximately $42,056,000, of which $22,863,368 was used to repay the loan secured by
one of these aircraft and $1,774,311 associated with the early extinguishment of the debt. We
agreed to lease both of these aircraft over a five-year term. The fees paid were recorded as a
loss on early extinguishment of debt and is included in non-operating income (expense). The
Company recognized a gain of approximately $1,169,000 on the sale which has been deferred and is
being amortized as a reduction of lease expense over the five-year term of the leases.
(5) Deferred Revenue and Other Liabilities
At March 31, 2003 and 2002 deferred revenue and other liabilities is comprised of the following:
2003 2002
Advance received for co-branded credit card
revenue (note 1) 10,000,000 -
Deferred rent 8,122,500 3,077,326
Other 346,511 204,163
Total deferred revenue and other liabilities 18,469,011 3,281,489
Less current portion (1,396,143) (138,604)
$ 17,072,868 $ 3,142,885
=================== ===================
(6) Other Accrued Expenses
The March 31, 2003 and 2002 other accrued expenses is comprised of the following:
2003 2002
Accrued salaries and benefits $14,103,101 $11,857,466
Federal excise taxes payable 3,899,329 6,383,350
Other 4,911,229 3,819,266
$22,913,659 $22,060,082
=================== ===================
(7) Lease Commitments
Aircraft Leases
At March 31, 2003 and 2002, the Company operated 27 leased aircraft, which are accounted for under
operating lease agreements with initial terms ranging from 3 years to 12 years. Certain leases
allow for renewal options. Security deposits related to leased aircraft and future leased aircraft
deliveries at March 31, 2003 and 2002 totaled $6,320,933 and $5,293,189, respectively, and are
included in security, maintenance and other deposits. Letters of credit issued to certain aircraft
lessors in lieu of cash deposits and related restricted investments to secure these letters of
credit at March 31, 2003 and 2002 totaled $7,959,100 and $9,282,700, respectively.
During the year ended March 31, 2002, the Company negotiated early lease terminations on two of its
Boeing 737-200 aircraft resulting in a charge of $4,913,650, representing the payment amounts due
to terminate the lease early.
In addition to scheduled future minimum lease payments, the Company is required to make
supplemental rent payments to cover the cost of major scheduled maintenance overhauls of these
aircraft. These supplemental rentals are based on the number of flight hours flown and/or flight
departures. The lease agreements require the Company to pay taxes, maintenance, insurance, and
other operating expenses applicable to the leased property. Effective April 1, 2002, we changed
our method of accounting for maintenance costs. This change in accounting method resulted in a decrease
in maintenance deposits and related maintenance accruals totaling $51,055,190 and $59,055,258,
respectively.
Other Leases
The Company leases an office, hangar space, spare engines and office equipment for its
headquarters, airport facilities, and certain other equipment. The Company also leases certain
airport gate facilities on a month-to-month basis.
At March 31, 2003, commitments under noncancelable operating leases (excluding aircraft
supplemental rent requirements) with terms in excess of one year were as follows:
Operating
Leases
Year ended March 31:
2004 $ 83,325,975
2005 76,790,940
2006 61,477,754
2007 56,339,841
2008 55,419,581
Thereafter 328,517,593
Total minimum lease payments $661,871,684
=================
Rental expense under operating leases, including month-to-month leases, for the years ended March
31, 2003, 2002 and 2001 was $92,337,439, $86,603,234 and $80,781,897, respectively.
(8) Long-term Debt
Long-term debt at March 31 consisted of the following:
Commercial loan facility payable through 2007,
6.60% weighted average interest rate at
March 31, 2003, including guarantee fees,
variable interest rates based on LIBOR plus
margins ranging from .07% to 2.5% $ 70,000,000 $ -
Aircraft notes payable, 6.62% weighted average
interest rate 44,434,308 70,057,669
Aircraft notes payable, variable interest rates
based on LIBOR plus margins ranging from
1.25% to 1.70%, 2.85% weighted average interest
rates at March 31, 2003 167,777,641 -
Total debt 282,211,949 70,057,669
Less current maturities 20,473,446 3,225,651
$261,738,503 $ 66,832,018
==================== =================
In February 2003, the Company obtained a $70,000,000 commercial loan facility of which $69,300,000
was guaranteed by the ATSB and two other parties. The loan has three tranches; Tranche A, Tranche
B and Tranche C, in amounts totaling $63,000,000, $6,300,000 and $700,000, respectively. At March
31, 2003 the interest rates were 2.09%, 2.44%, and 3.89%, respectively. The interest rates on each
tranche of the loan adjust quarterly based on LIBOR rates. The loan requires quarterly
installments of approximately $2,642,000 beginning in December 2003 with a final balloon payment of
$33,000,000 due in June 2007. Upon receipt of the Company's income tax receivable, which is
pledged under this loan agreement, the Company is required to make a pre-payment of $10,000,000,
which is applied against the next successive installments due. Interest is payable quarterly, in
arrears. Guarantee fees of 4.5% annually are payable quarterly in advance to the guarantors of the
Tranche A and Tranche B loans. The loan facility is secured by certain assets of the Company as
described in the loan agreement, consisting primarily of Boeing rotable fixed assts, all expendable
inventory and 50% of other property and equipment. In connection with this transaction, the Company
issued warrants to purchase of 3,833,946 shares of our common stock at $6.00 per share to the ATSB and to
two other guarantors. The warrants had an estimated fair value of $9,282,538 when issued and expire
seven years after issuance. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model. This amount is being amortized to interest expense over
the life of the loan. The effective interest rate on the notes is approximately 10.26% including
the value of the warrants and other costs associated with obtaining the loan, assuming that the
variable interest rates payable on the notes at March 31, 2003. The notes contain certain
covenants which requires the Company to maintain certain ratios with respect to indebtedness to
EBITDAR and EBITDAR to fixed charges beginning January 1, 2004.. The Company is not required to
meet certain liquidity tests until the quarter ending March 31, 2004. Unrestricted cash balances
cannot be less than $25,000,000 at any time through September 30, 2004 or $75,000,000 thereafter.
The company is in compliance with these requirements at March 31, 2003.
During the year ended March 31, 2002, the Company entered into a credit agreement to borrow up to
$72,000,000 for the purchase of three Airbus aircraft with a maximum borrowing of $24,000,000 per
aircraft. During the year ended March 31, 2003, the Company entered into a sale-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 require 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 loan.
During the year ended March 31, 2003, the Company entered into additional loans to finance seven
additional Airbus aircraft with interest rates based on LIBOR plus margins that adjust quarterly or
semi-annually. At March 31, 2003 interest rates for these loans ranged from 2.56% to 3.01%, each
loan has a term of 12 years and each loan has balloon payments ranging from $4,800,000 to
$7,770,000 at the end of the term. The loans are secured by a aircraft.
Maturities of long-term debt are as follows:
2004 $ 20,473,446
2005 16,863,741
2006 22,139,219
2007 22,724,668
2008 45,776,232
Thereafter 154,234,644
$ 282,211,949
===================
(9) Income Taxes
Income tax expense (benefit) for the years ended March 31, 2003, 2002, and 2001 including amounts
recorded as the cumulative effect of a change in accounting principle, was as follows:
Current Deferred Total
Year ended March 31, 2003:
U.S. Federal $ (24,433,153) $12,515,808 $ (11,917,345)
State and local - (1,467,730 (1,467,730)
$ (24,433,153) $11,048,078 $ (13,385,075)
=================== ==================== ===============
Year ended March 31, 2002:
U.S. Federal $ 4,714,262 $ 3,971,593 $ 8,685,855
State and local (867,353) 463,809 (403,544)
$ 3,846,909 $ 4,435,402 $ 8,282,311
=================== ==================== ===============
Year ended March 31, 2001:
U.S. Federal $ 28,441,039 $ 1,008,515 $ 29,449,554
State and local 3,877,611 137,500 4,015,111
$ 32,318,650 $ 1,146,015 $ 33,464,665
=================== ==================== ===============
The differences between the Company's effective rate for income taxes and the federal statutory rate
are shown in the following table:
2003 2002 2001
Income tax (benefit) expense
at the statutory rate (35%) 35% 35%
State and local income tax,
net of federal income tax
benefit (3%) (3%) 3%
Nondeductible expenses 1% 1%
(37%) 33% 38%
================= ================= ===============
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets (liabilities) at March 31, 2003 and 2002 are presented below:
2003 2002
Deferred tax assets:
Accrued vacation and health insurance
liability not deductible for tax purposes $ 2,383,676 $ 1,719,555
Accrued workers compensation liability
not deductible for tax purposes 939,777 483,879
Deferred rent not deductible for tax
purposes 3,025,846 1,157,725
Impairment recorded on inventory
and fixed assets not deductible
for tax purposes 1,420,127 564,317
State tax loss carryforward - 1,815,034
Deferred revenue currently taxable - 3,760,000
Other 1,314,577 207,479
Total gross deferred tax assets $ 14,659,037 $ 4,132,955
================== ===================
Deferred tax liabilities:
Equipment depreciation and amortization $(29,107,695) $ (8,438,857)
Accrued maintenance expense deductible
for tax purposes - (724,659)
Prepaid commissions (55,639) (622,835)
Total gross deferred tax liabilities $(29,887,993) $ (9,061,692)
================== ===================
Net deferred tax liabilities $(15,228,956) $ (4,928,737)
The net deferred tax assets (liabilities) are reflected in the accompanying balance sheet as
follows:
2003 2002
Current deferred tax assets $ 4,788,831 $ 1,788,078
Non-current deferred tax liabilities (20,017,787) (6,716,815)
Net deferred tax liabilities $(15,228,956) $ (4,928,737)
==================== ====================
During the year ended March 31, 2001, the Company accrued income tax expense at a rate of 38.7%
which was greater than the actual effective tax rate of 37.6% determined upon completion and filing
of the income tax returns in December 2001. As a result, during the year ended March 31, 2002, the
Company recorded a credit to income tax expense totaling $1,327,000 for this excess accrual.
During the year ended March 31, 2002, the Company 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 the
amended state tax returns for 2000.
(10) Warrants and Stock Purchase Rights
In April 1998, in connection with a private placement of shares of its Common Stock, the Company
issued a warrant to an institutional investor to purchase 1,075,393 shares of its Common Stock at a
purchase price of $2.50 per share. During the years ended March 31, 2002 and 2001, the
institutional investor exercised 525,000 and 550,394 warrants, respectively, with net proceeds to
the Company totaling $1,312,500 and $1,375,984.
In February 2003, the Company issued warrants to purchase 3,833,946 shares of common stock at $6.00
per share to the ATSB and to two other guarantors, as discuss in note 7. The warrants had an
estimated fair value of $9,282,538 when issued and expire seven years after issuance. The fair
value for these options was estimated at the date of grant using a Black-Scholes option pricing
model.
In February 1997, the Board of Directors declared a dividend of one Common Stock purchase right for
each share of the Company's Common Stock outstanding on March 15, 1997. Each right entitles a
shareholder to purchase one share of the Company's Common Stock at a purchase price of $65.00 per
full common share, subject to adjustment. There are currently 0.67 rights associated with each
outstanding share of Common Stock. The rights are not currently exercisable, but would become
exercisable if certain events occurred relating to a person or group acquiring or attempting to
acquire 20 percent or more of the outstanding shares of the Company's Common Stock. The rights
expire on February 20, 2007, unless redeemed by the Company earlier. Once the rights become
exercisable, each holder of a right will have the right to receive, upon exercise, Common Stock
(or, in certain circumstances, cash, property or other securities of the Company) having a value
equal to two times the exercise price of the right.
(11) Stock Option Plan
The Company has a stock option plan whereby the Board of Directors or its Compensation Committee
may grant options to purchase shares of the Company's Common Stock to employees, officers, and
directors of the Company.
Under the plan, the Company has reserved an aggregate of 6,375,000 shares of Common Stock for
issuance pursuant to the exercise of options. With certain exceptions, options issued through
March 31, 2003 generally vest over a five-year period from the date of grant and expire from
March 9, 2004 to March 27, 2013. At March 31, 2003, 475,075 options are available for grant under
the plan.
A summary of the stock option activity and related information for the years ended March 31, 2003,
2002 and 2001 is as follows:
2003 2002 2001
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding-beginning of year 2,070,033 $8.78 2,203,444 $6.07 2,629,469 $3.61
Granted 667,500 $12.07 579,300 $14.95 517,500 $11.56
Exercised (252,719) $2.44 (528,711) $3.45 (879,025) $2.18
Surrendered (53,999) $12.72 (184,000) $11.27 (64,500) $5.95
Outstanding-end of year 2,430,815 $10.28 2,070,033 $8.78 2,203,444 $2.23
=========================================================================
Exercisable at the end of year 1,168,815 $10.01 831,834 $6.65 911,945 $3.16
Exercise prices for options outstanding under the plan as of March 31, 2003 ranged from $.667 to
$24.168 per share. The weighted-average remaining contractual life of those options is 7.3 years.
A summary of the outstanding and exercisable options at March 31, 2003, segregated by exercise
price ranges, is as follows:
Weighted-
Average
Weighted- Remaining Weighted-
Exercise Price Options Average Contractual Exercisable Average
Range Outstanding Exercise Price Life (in years) Options Exercise Price
$ 0.667 - $ 4.98 357,515 $2.61 5.4 191,515 $1.7615
$ 5.150 - $ 8.834 883,000 6.59 7.1 431,500 6.18000
$10.001 - $ 14.85 541,000 12.35 7.5 201,500 11.8000
$15.140 - $19.461 533,000 16.89 8.8 253,000 17.0800
$21.200 - $24.168 116,300 21.95 8.7 91,300 21.8200
2,430,815 $10.28 7.4 1,168,815 $10.01
====================================================================================
(12) Retirement Plans
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (ESOP) which inures to the benefit of
each employee of the Company, except those employees covered by a collective bargaining agreement
that does not provide for participation in the ESOP. Company contributions to the ESOP are
discretionary and may vary from year to year. In order for an employee to receive an allocation of
Company Common Stock from the ESOP, the employee must be employed on the last day of the ESOP's
plan year, with certain exceptions. The Company's annual contribution to the ESOP, if any, will be
allocated among the eligible employees of the Company as of the end of each plan year in proportion
to the relative compensation (as defined in the ESOP) earned that plan year by each of the eligible
employees. The ESOP does not provide for contributions by participating employees. Employees will
vest in contributions made to the ESOP based upon their years of service with the Company. A year
of service is an ESOP plan year during which an employee has at least 1,000 hours of service.
Vesting generally occurs at the rate of 20% per year, beginning after the first year of service, so
that a participating employee will be fully vested after five years of service. Distributions from
the ESOP will not be made to employees during employment. However, upon termination of employment
with the Company, each employee will be entitled to receive the vested portion of his or her
account balance.
During the years ended March 31, 2002 and 2001, the Company contributed 173,018 and 135,000 shares,
respectively to the plan. Total Company contributions to the ESOP from inception through March 31,
2003 totaled 1,194,831 shares. In May 2003, the Company contributed 347,968 shares to the plan for
the plan year ending December 31, 2003. The Company accrued $521,954 of the expense associated
with this for the three months ended March 31, 2003 as an accrued liability at March 31, 2003. The
Company recognized compensation expense during the years ended March 31, 2003, 2002 and 2001 of
$2,642,545, $2,368,644 and $1,411,876, respectively, related to its contributions to the ESOP.
Retirement Savings Plan
The Company has established a Retirement Savings Plan (401(k)). Participants may contribute from
1% to 15% of their pre-tax annual compensation. Annual individual pre-tax participant
contributions are limited to $12,000 if under the age of 50, and $14,000 if over the age of 50 for
calendar year 2003, $11,000 for calendar year 2002 and $10,500 for calendar year 2001, under the
Internal Revenue Code. Participants are immediately vested in their voluntary contributions.
The Company's Board of Directors have elected to match 50% of participant contributions up to 10%
of salaries from May 2000 through December 2003. During the years ended March 31, 2003, 2002, and
2001, the Company recognized compensation expense associated with the matching contributions
totaling $2,536,363, $2,087,984 and $1,286,611, respectively. Future matching contributions, if
any, will be determined annually by the Board of Directors. In order to receive the matching
contribution, participants must be employed on the last day of the plan year. Participants will
vest in contributions made to the 401(k) based upon their years of service with the Company. A
year of service is a 401(k) plan year during which a participant has at least 1,000 hours of
service. Vesting generally occurs at the rate of 20% per year, beginning after the first year of
service, so that a participant will be fully vested after five years of service. Upon termination
of employment with the Company, each participant will be entitled to receive the vested portion of
his or her account balance.
Retirement Health Plan
In conjunction with the Company's collective bargaining agreement with its pilots, retired pilots
and their dependents may retain medical benefits under the terms and conditions of the Health and
Welfare Plan for Employees of Frontier Airlines, Inc. ("the Plan") until age 65. The cost of
retiree medical benefits are continued under the same contribution schedule as active employees.
The following table provides a reconciliation of the changes in the benefit obligations under the
Plan for the years ended March 31, 2003 and 2002.
Reconciliation of benefit obligation:
2003 2002
Obligation at beginning of period $ 758,162 $ 344,348
Service cost 423,009 402,866
Interest cost 55,445 25,288
Benefits paid (22,450) (4,627)
Net actuarial loss (gain) 1,072,584 (9,713)
Obligation at end of period $ 2,286,750 $ 758,162
==============================
A 1% change in the healthcare cost trend rate used in measuring the accumulated postretirement
benefit obligation (APDO) at March 31, 2003, would have the following effects:
1% increase 1% decrease
Increase (decrease) in total service and interest cost 42,185 (40,466)
Increase (decrease) in the APBO 241,040 (210,594)
The following is a statement of the funded status as of March 31:
2003 2002
Funded status $(2,286,750) $ (758,162)
Unrecognized net acturial loss (gain) 1,055,873 (16,711)
Accrued benefit liability $(1,230,877) $ (774,873)
=============================
The Company used the following actuarial assumptions to account for this postretirement benefit plan:
2003 2002 2001
Weighted average discount rate 6.50% 7.50% 7.50%
Assumed healthcare cost trend rate (1) 9.75% 6.50% 6.50%
(1) Trend rates were assumed to reduce until 2011 when an ultimate rate of 4.25% is reached.
(13) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
2003 2002 2001
Numerator:
Income (loss) before cumulative effect of
change in method of accounting for
maintenance $ (24,853,800) $16,549,990 $54,867,773
Cumulative effect of change in method
of accounting for naintenance 2,010,672 - -
Net income (loss) $ (22,843,128) $16,549,990 $54,867,773
======================================================
Denominator:
Weighted average shares outstanding,
basic 29,619,742 28,603,861 27,152,099
Dilutive effect of employee stock options - 911,289 1,260,094
Dilutive effect of warrants - - 430,590
Adjusted weighted-average shares
outstanding, diluted 29,619,742 29,515,150 28,842,783
======================================================
Basic earnings (loss) per share:
Income (loss) before cumulative
effect of change in method of
accounting for maintenance $ (0.84) $ 0.58 $ 2.02
Cumulative effect of change in
method of accounting for
maintenance 0.07 - -
Basic earnings (loss) per share $ (0.77) $ 0.58 $ 2.02
======================================================
Diluted earnings (loss) per share:
Income (loss) before cumulative
effect of change in method of
accounting for maintenance $ (0.84) $ 0.56 $ 1.90
Cumulative effect of change in method
of accounting for maintenance 0.07 - -
Diluted earnings (loss) per share $ (0.77) $ 0.56 $ 1.90
======================================================
For the years ending March 31, 2002 and 2001, the Company has excluded from its calculations of
diluted earnings per share, 326,800 and 97,500 options and warrants, with exercise prices ranging
from $15.14 to $24.17, and $15.19 to $24.17, respectively, because the exercise price of the
options and warrants was less than the average market price of the common shares for the respective
year. All outstanding options and warrants were excluded from the calculation of earnings per
share for the year ended March 31, 2003 since the effect was anti-dilutive.
(14) Concentration of Credit Risk
The Company does not believe it is subject to any significant concentration of credit risk relating
to receivables. At March 31, 2003 and 2002, 68.4% and 64.9% of the Company's receivables relate to
tickets sold to individual passengers through the use of major credit cards, travel agencies
approved by the Airlines Reporting Corporation, tickets sold by other airlines and used by
passengers on Company flights, the United States Postal Service, and the Internal Revenue Service.
Receivables related to tickets sold are short-term, generally being settled shortly after sale or
in the month following ticket usage.
(15) Commitments and Contingencies
From time to time, we are engaged in routine litigation incidental to our business. The Company
believes there are no legal proceedings pending in which the Company is a party or of which any of
our property may be subject to that are not adequately covered by insurance maintained by us, or
which, if adversely decided, would have a material adverse affect upon our business or financial
condition.
In March 2000, the Company entered into an agreement with AVSA, S.A.R.L., as subsequently amended,
to purchase up to 31 new Airbus aircraft. During the years ended March 31, 2003 and 2002, the
Company took delivery of nine and three of these aircraft, respectively. As of March 31, 2003, the
Company has remaining firm purchase commitments for six additional aircraft which are scheduled to
be delivered in calendar years 2003 through 2005. Under the terms of the purchase agreement, the
Company is required to make scheduled pre-delivery payments. These payments are non-refundable with
certain exceptions. As of March 31, 2003, the Company has made pre-delivery payments totaling
$30,531,894 to secure these aircraft and option aircraft. Pre-delivery payments due in fiscal year
2004 approximate $8,724,175. The balance of the total purchase price must be paid upon delivery of
each aircraft. In order to complete the purchase of these aircraft, it will be necessary for the
Company to secure financing. The amount of financing required will depend on the number of
aircraft purchase options exercised and the amount of cash generated by operations prior to
delivery of the aircraft. As of March 31, 2003, the Company has arranged financing for four of
these 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. We completed the
installation of the LiveTV system on all Airbus aircraft in our fleet in 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 aggregate additional amounts due under this purchase commitment and estimated amounts for
buyer-furnished equipment, spare parts for both the purchased and leased aircraft and to equip the
aircraft with LiveTV was approximately $145,619,000 at March 31, 2003.
(16) Selected Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter (1) Quarter (1) Quarter (1) Quarter
2003
Revenues $ 111,812,407 $ 119,354,524 $ 120,253,288 $ 118,515,696
=============== ================ ================ ================
Operating $ 114,910,166 $ 122,557,105 $ 126,608,444 $ 136,484,109
Expenses =============== ================ ================ ================
Loss before cumulative effect of
change in accounting principle $ (2,472,421) $ (3,054,494) $ (6,367,833 $ (12,959,052)
Cumulative effect of change in
method of accounting for
maintenance 2,010,672 - - -
Net loss $ 461,749 $ (3,054,494) $ (6,367,833) $ (12,959,052) $ (461,749)
=============== ================ ================ ================
Basic loss per share:
Loss before cumulative
effect of change in
accounting principle $ (0.08) $ (0.10) $ (0.21) $ (0.44)
Cumulative effect of change in
method of accounting for
maintenance 0.07 - - -
Basic loss per share $ (0.01) $ (0.10) $ ( .21) $ (0.44)
=============== ================ ================ ================
Diluted loss per share:
Loss before cumulative
effect of change in
accounting principle $ (0.08) (0.10) ( .21) (0.44)
Cumulative effect of change in
method of accounting for
maintenance 0.07 - - -
Diluted loss per share $ (0.01) (0.10) ( .21) (0.44)
=============== ================ ================ ================
2002
Revenues $ 123,316,357 $ 116,006,211 $ 92,556,856 $ 113,195,301
=============== ================ ================ ================
Operating Expenses $ 112,010,797 $ 114,035,857 $ 95,849,342 $ 106,793,009
=============== ================ ================ ================
Net income $ 7,739,597 $ 7,278,583 $ 908,623 $ 623,187
=============== ================ ================ ================
Earnings per share:
Basic $ 0.27 0.26 0.03 0.02
=============== ================ ================ ================
Diluted $ 0.26 0.24 0.03 0.02
=============== ================ ================ ================
(1) Income before the cumulative effect of the change in the method of accounting for maintenance
for the first, second, and third quarters of the year ended March 31, 2003 differs from the amount
previously reported on Form 10-Q by $463,151, $933,182, and ($202,221), respectively, because
the change in method of accounting for maintenance was applied retroactively to April 1, 2002
(Note 1).