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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended December 31, 2003.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 1-12805
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction of incorporated or organization) (I.R.S. Employer Identification No.)
7001 Tower Road, Denver, CO 80249
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (720) 374-4200
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes X No
The number of shares of the Company's common stock outstanding as of February 9, 2004 was
35,527,942.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Information
Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited)
December 31, March 31,
2003 2003
Assets
Current assets:
Cash and cash equivalents $ 184,323,539 $ 102,880,404
Short-term investments 2,000,000 2,000,000
Restricted investments 23,415,901 14,765,000
Receivables, net of allowance for doubtful accounts
of $298,000 and $237,000 at December 31, 2003 and
March 31, 2003, respectively 26,998,522 25,856,692
Income taxes receivable 389,192 24,625,616
Security and other deposits 515,000 912,399
Prepaid expenses and other assets 11,271,500 9,050,671
Inventories, net of allowance of $2,428,000 and
$2,478,000 at December 31, 2003 and March 31,
2003, respectively 6,206,370 5,958,836
Deferred tax asset 7,669,732 4,788,831
Total current assets 262,789,756 190,838,449
Property and equipment, net 444,366,268 334,492,983
Security and other deposits 14,998,851 6,588,023
Aircraft pre-delivery payments 24,276,079 30,531,894
Restricted investments 8,161,000 9,324,066
Deferred loan fees and other assets, net 5,494,202 16,068,361
$ 760,086,156 $ 587,843,776
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 27,649,190 $ 26,388,621
Air traffic liability 72,991,948 58,875,623
Other accrued expenses (note 4) 40,866,829 22,913,659
Current portion of long-term debt (note 6) 16,042,842 10,473,446
Deferred revenue and other liabilities 1,330,000 1,396,143
Total current liabilities 158,880,809 130,047,492
Long-term debt (note 6) 284,994,343 261,738,503
Deferred tax liability 32,221,473 20,017,787
Deferred revenue and other liabilities 21,261,354 17,072,868
Total liabilities 497,357,979 428,876,650
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;
35,229,768 and 29,674,050 shares issued and
outstanding at December 31, 2003 and March
31, 2003, respectively 35,230 29,674
Additional paid-in capital 181,833,352 96,424,525
Other comprehensive loss (40,609) -
Retained earnings 80,900,204 62,512,927
262,728,177 158,967,126
760,086,156 587,843,776
================= =================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
Revenues:
Passenger $ 159,174,576 $ 117,752,421 $ 458,130,130 $ 343,753,943
Cargo 2,036,132 1,353,403 6,094,379 4,299,590
Other 2,349,767 1,147,464 7,322,528 3,366,686
Total revenues 163,560,475 120,253,288 471,547,037 351,420,219
Operating expenses:
Flight operations 26,097,278 22,100,419 75,417,872 62,819,816
Aircraft fuel expense 27,486,807 21,709,633 75,988,127 60,437,755
Aircraft lease expense 17,246,551 17,868,787 52,359,272 52,469,573
Aircraft and traffic servicing 29,626,177 22,440,145 79,701,143 63,063,269
Maintenance 17,324,224 19,343,863 52,322,200 53,286,854
Promotion and sales 17,322,739 11,664,781 48,312,687 39,889,202
General and administrative 9,560,740 6,684,541 28,280,752 19,381,332
Depreciation and amortization 6,295,489 4,558,342 17,352,987 12,489,981
Total operating expenses 150,960,005 126,370,511 429,735,040 363,837,782
Operating income (loss) 12,600,470 (6,117,223) 41,811,997 (12,417,563)
Nonoperating income (expense):
Interest income 590,206 328,303 1,528,037 1,523,063
Interest expense (3,195,924) (1,993,971) (11,064,704) (5,148,950)
Emergency Wartime Supplemental
Appropriations Act compensation - - 15,024,188 -
Early extinguishment of debt (1,073,028) (1,774,311) (9,815,517) (1,774,311)
Aircraft lease and facility
exit costs (26,446) - (5,371,799) -
Loss on sale-leaseback of aircraft (85,376) - (1,323,094) -
Other, net (39,802) (240,000) (892,113) (678,322)
Total nonoperating expense,
net (3,830,370) (3,679,979) (11,915,002) (6,078,520)
Income (loss) before income tax
expense (benefit) and cumulative
effect of change in method of
accounting for maintenance 8,770,100 (9,797,202) 29,896,995 (18,496,083)
Income tax expense (benefit) 3,314,236 (3,429,369) 11,509,718 (6,601,335)
Income (loss) before cumulative
effect of change in method of
accounting for maintenance 5,455,864 (6,367,833) 18,387,277 (11,894,748)
Cumulative effect of change in
method of accounting for
maintenance, net of tax - - - 2,010,672
Net income (loss) $ 5,455,864 $ (6,367,833) $ 18,387,277 $ (9,884,076)
============= ============== ============= =============
(continued)
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
Earnings (loss) per share:
Basic:
Income (loss) before cumulative
effect of change in accounting
principle $0.15 ($0.21) $0.58 ($0.40)
Cumulative effect of change in
method of accounting for
maintenance checks - - - 0.07
Net income (loss) $0.15 ($0.21) $0.58 ($0.33)
============= ============== ============= =============
Diluted:
Income (loss) before cumulative
effect of change in accounting
principle $0.14 ($0.21) $0.53 ($0.40)
Cumulative effect of change in
method of accounting for
maintenance checks - - - 0.07
Net income (loss) $0.14 ($0.21) $0.53 ($0.33)
============= ============== ============= =============
Weighted average shares of
common stock outstanding:
Basic 35,203,458 29,648,077 31,829,010 29,605,350
============= ============== ============= =============
Diluted 38,509,350 29,648,077 34,554,105 29,605,350
============= ============== ============= =============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Stockholders' Equity and Other Comprehensive Loss
For the Year Ended March 31, 2003 and the Nine Months Ended December 31, 2003
Accumulated
Additional Unearned other Total
Common paid-in ESOP comprehensive Retained stockholders'
stock capital shares loss earnings equity
Balances, March 31, 2002 $ 29,422 85,867,486 (2,119,670) - 85,356,055 169,133,293
Net loss - - - - (22,843,128) (22,843,128)
Exercise of common
stock options 252 616,695 - - - 616,947
Warrants issued in
conjunction with
debt agreement - 9,282,538 - - - 9,282,538
Tax benefit from exercises
of common stock options - 657,806 - - - 657,806
Amortization of employee
stock compensation - - 2,119,670 - - 2,119,670
Balances, March 31, 2003 29,674 96,424,525 - - 62,512,927 158,967,126
Net income - - - - 18,387,277 18,387,277
Other comprehensive loss -
Unrealized loss on
derivative instruments - - - (40,609) - (40,609)
Total comprehensive income 18,346,668
Sale of common stock, net of
offering costs of $257,000 5,050 81,072,096 - - - 81,077,146
Exercise of common
stock options 158 939,620 - - - 939,778
Tax benefit from exercises
of common stock options - 987,650 - - - 987,650
Equity adjustment for the
repricing of warrants
issued in conjunction
with a debt agreement - 116,701 - - - 116,701
Contribution of common stock
to employees stock
ownership plan 348 2,292,760 (2,293,108) - - -
Amortization of employee
stock compensation - - 2,293,108 - - 2,293,108
Balances, December 31, 2003 $35,230 $181,833,352 $ - $ (40,609 $80,900,204 $62,728,177
=========================================================================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Cash Flows
For the Nine Months Ended December 31, 2003 and 2002
(Unaudited)
2003 2002
Cash flows from operating activities:
Net income (loss) $ 18,387,277 $ (9,884,076)
Adjustments to reconcile net income to net cash and cash
equivalents provided (used) by operating
activities:
Employee stock option plan compensation expense 1,771,156 2,119,670
Depreciation and amortization 17,352,987 12,489,981
Loss on disposal of equipment 1,631,405 234,797
Accelerated amortization of deferred loan costs 9,815,517 177,924
Unrealized derivative gain, net (580,005) (237,933)
Deferred tax expense 9,322,785 6,683,479
Changes in operating assets and liabilities:
Restricted investments (9,931,335) (3,809,834)
Receivables (1,141,830) 2,416,697
Income taxes receivable 24,236,424 (6,495,325)
Security and other deposits (2,556,741) (3,924,364)
Prepaid expenses and other assets (2,220,829) 2,816,232
Inventories (247,534) (1,385,935)
Deferred loan and other assets 2,486,574 (174,209)
Accounts payable 1,260,569 (1,570,274)
Air traffic liability 14,116,325 (10,238,143)
Accrued maintenance expense - (3,196,618)
Other accrued expenses 18,525,475 (484,470)
Deferred stabilization act compensation - (4,835,381)
Deferred revenue and other liabilities 4,122,343 4,408,747
Net cash and cash equivalents provided
(used) by operating activities 106,350,563 (14,889,035)
Cash flows from investing activities:
Decrease in aircraft lease and purchase deposits, net 799,127 4,792,059
Decrease in restricted investments 2,443,500 617,700
Proceeds from the sale of aircraft - 29,750,000
Capital expenditures (128,857,677) (197,880,599)
Net cash and cash equivalents used by
investing activities (125,615,050) (162,720,840)
Cash flows from financing activities:
Net proceeds from issuance of common stock 83,121,275 1,184,019
Proceeds from long-term borrowings 98,500,000 147,100,000
Payment of financing fees (1,238,889) (1,786,064)
Principal payments on long-term borrowings (79,674,764) (26,941,612)
Net cash and cash equivalents provided
by financing activities 100,707,622 119,556,343
Net increase (decrease) in cash and
cash equivalents 81,443,135 (58,053,532)
Cash and cash equivalents, beginning of period 102,880,404 87,555,189
Cash and cash equivalents, end of period $184,323,539 $ 29,501,657
============= =============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Financial Statements
December 31, 2003
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim
financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements
and should be read in conjunction with the Company's Annual Report on Form 10-K for the
year ended March 31, 2003. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for the three and nine months ended
December 31, 2003 are not necessarily indicative of the results that will be realized
for the full year.
(2) Summary of Significant Accounting Policies
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 on the date of grant.
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. 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 (loss) and earnings (loss)
per share would be as follows:
Three Months Ended Three Months Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
Net income (loss):
As Reported $ 5,455,864 $ (6,367,833) $ 18,387,277 $ (9,884,076)
Pro Forma $ 4,970,766 $ (6,825,508) $ 16,830,293 $ (12,898,885)
Earnings (loss) per share, basic:
As Reported $ 0.15 $ (0.21) $ 0.58 $ (0.33)
Pro Forma $ 0.14 $ (0.23) $ 0.53 $ (0.44)
Earnings (loss) per share, diluted:
As Reported $ 0.14 $ (0.21) $ 0.53 $ (0.33)
Pro Forma $ 0.13 $ (0.23) $ 0.49 $ (0.44)
FRONTIER AIRLINES, INC.
Notes to Financial Statements
December 31, 2003
Interest Rate Hedging Program
During the nine months ending December 31, 2003, the Company designated certain interest rate
swaps as qualifying cash flow hedges. Under these hedging arrangements, the Company is hedging
the interest payments associated with a portion of its LIBOR-based borrowings. Under the swap
agreements, the Company pays a fixed rate of interest on the notional amount of the contracts
of $27,000,000, and it receives a variable rate of interest based on the three month LIBOR rate,
which is reset quarterly. Interest expense for the three and nine months ended December 31, 2003
includes $90,000 and $263,000 of settlement amounts payable to the counter party for the period.
Changes in the fair value of interest rate swaps designated as hedging instruments are reported
in accumulated other comprehensive income. These amounts are subsequently reclassified into
interest expense as a yield adjustment in the same period in which the related interest payments
on the LIBOR-based borrowings affects earnings. Approximately $41,000 of unrealized losses
are included in accumulated other comprehensive loss for the nine months ended December 31,
2003 and are expected to be reclassified into interest expense as a yield adjustment of the hedged
interest payments over the next 12 months.
(3) Government Assistance
The Emergency Wartime Supplemental Appropriations Act (the "Appropriations Act"), enacted in
April 2003, made available approximately $2.3 billion to U.S. flag air carriers for expenses
and revenue foregone related to aviation security. The payment received by each carrier was
for the reimbursement of the TSA security fees, the September 11th Security Fee and/or the
Aviation Security Infrastructure Fee paid by the carrier 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 carrier determines. Pursuant to the Appropriations Act, the Company received
$15,573,000 in May 2003, of which $549,000 was paid to Mesa Air Group for the revenue passengers
Mesa carried as Frontier JetExpress.
The Appropriations Act provides 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.
Pursuant to the Appropriations Act, the Company received $889,000 in September 2003 for expenses
related to the installation of enhanced flight deck doors on its aircraft, $275,000 of which
was recorded as a reduction to property and equipment, net, and $614,000 was recorded as a
reduction to maintenance expense.
(4) Other Accrued Expenses
The December 31, 2003 and March 31, 2003 other accrued expenses are comprised of the following:
December 31, March 31,
2003 2003
Accrued salaries and benefits $22,313,946 $14,103,103
Federal excise and other passenger taxes payable 9,463,071 6,651,108
Other 9,089,812 2,159,448
$40,866,829 $22,913,659
================== ==================
FRONTIER AIRLINES, INC.
Notes to Financial Statements
December 31, 2003
(5) Stockholders' Equity
Common Stock
The Company completed a secondary public offering of 5,050,000 shares of common stock
in September 2003. The Company received $81,077,000, net of offering expenses, from the
sale of these shares. See note 6 for a discussion of the required prepayment of the
Company's government guaranteed loan as a result of this issuance of common stock.
Additionally, the government guaranteed loan includes certain anti-dilution adjustments
in the event of any sale of the Company's common stock. As a result, the exercise price
of the warrants issued in connection with the loan was adjusted from $6.00 per share to
$5.92 per share. The Company recorded $117,000 as additional debt issuance costs in
conjunction with this repricing. There are 3,833,945 warrants to purchase common stock
outstanding at December 31, 2003, which were issued in connection with the loan.
(6) Long-Term Debt
Government Guaranteed Loan
In July 2003, the Company received a federal income tax refund totaling $26,574,000
from the Internal Revenue Service. The Company prepaid $10,000,000 on its government
guaranteed loan upon receipt of this refund, as required by the terms of the loan agreement.
The government guaranteed loan also required a prepayment equal to 60% of the net
proceeds from any sales of common stock. As a result of the sale of common stock in
September 2003 (see note 5), the Company prepaid approximately $48,418,000 on the loan.
In December 2003, the Company repaid the remaining loan balance of $11,582,000.
Other Long-Term Debt
During the nine months ended December 31, 2003, the Company borrowed $98,500,000 for
the purchase of four Airbus A318 aircraft. Each aircraft loan has a term of 12 years and
is payable in monthly installments, including interest, payable in arrears, with a
floating interest rate adjusted quarterly based on LIBOR plus a margin of 2.25% for
three of the loans, and LIBOR plus a margin of 1.95% for the fourth. At the end of
the term, there is a balloon payment of $3,060,000 each for three of the aircraft
loans and $2,640,000 for the fourth. The loans are secured by the aircraft.
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 that describe the business and prospects of Frontier Airlines,
Inc. 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; the inability to obtain sufficient gates at Denver International Airport to
accommodate the expansion of our operations; 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 competitors 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 that we have ordered or lease aircraft we anticipate adding to our fleet
through lease financing; 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 available seat mile ("RASM") or cost per available
seat mile ("CASM") can significantly affect operating results. See "Risk Factors" in our Form
10-K for the year ended March 31, 2003 and our Form 8-K filed September 19, 2003, which updates our
risk factors.
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 February 9, 2004, we, in
conjunction with Frontier JetExpress operated by Horizon Air Industries, Inc. ("Horizon"),
operate routes linking our Denver hub to 37 cities in 22 states spanning the nation from coast
to coast and to five cities in Mexico. We are a low cost, affordable fare airline operating
primarily in a hub and spoke fashion connecting points coast to coast through our hub at DIA.
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 in service to 39 jets (26 of which we
lease and 13 of which we own), consisting of 12 Boeing 737-300s, 23 Airbus A319s, and 4 Airbus A318s.
In May 2001, we began a fleet replacement plan to replace our Boeing aircraft with new purchased
and leased Airbus jet aircraft, a transition we expect to complete by approximately the end
of calendar year 2005. As of November 1, 2003, we no longer operate Boeing 737-200 aircraft.
During the three and nine months ended December 31, 2003, we increased capacity by 19.1% and
17.0% over the prior comparable periods, respectively. In the three and nine months ended
December 31, 2003, we increased passenger traffic by 45.3% and 39.8% over the prior comparable
periods, respectively, outpacing our increase in capacity during the periods.
We currently operate on 14 gates on Concourse A at DIA on a preferential basis. Together
with our regional jet codeshare partner, Frontier Jet Express, we use these 14 gates and
share use of up to seven common use regional jet parking positions to operate approximately
188 daily system flight departures and arrivals and 22 Frontier JetExpress daily system flight
departures and arrivals.
We began service to Orange County, California and Milwaukee, Wisconsin on August 31,
2003 with two and three daily round-trips, respectively, and we added a third round-trip to
Orange County, California on October 1, 2003. Additionally, on November 1, 2003 we began
service to St. Louis, Missouri with two daily round-trip flights, resumed our seasonal service
to Mazatlan, Mexico with one weekly round-trip frequency, that we increased to three weekly
round-trip frequencies to Mazatlan, Mexico on November 22, 2003 and began service to Cabo
San Lucas with one weekly round-trip frequency that we increased to three weekly round-trip
frequencies on November 22, 2003. On November 22, 2003, we began service to Puerto Vallarta,
Mexico with three weekly round-trip flights. We began service to Ixtapa/Zihuatanejo, Mexico, on
January 31, 2004 with two weekly round-trip frequencies. On February 8, we replaced our
service between DIA and El Paso, Texas via Albuquerque, New Mexico, with two direct daily
round-trip frequencies. We intend to begin service to Washington Dulles International Airport
on April 11, 2004 with two daily round-trip frequencies from DIA and seasonal service to Anchorage,
Alaska on May 9, 2004 with one daily round-trip frequency from DIA. We received authority to
add a third frequency at New York's LaGuardia Airport, which we intend to begin on March 2, 2004.
Beginning April 11, 2004, we intend to begin our first significant point-to-point routes
outside of our DIA hub. We will begin service from Los Angeles International Airport with two
daily round-trip frequencies to Minneapolis/St. Paul, Minnesota, Kansas City, Missouri and
St. Louis, Missouri.
In June 2003, we entered into an agreement with Kinetics, Inc., a provider of enterprise
and self-service technology to the U.S. airline industry, to deploy its new automated check-in
system. The launch of "FlexCheck," our suite of airport and web-based automated check-in services,
utilizes Kinetics' TouchPort self-service terminals and associated Kinetics software solutions
for airport and Internet check-in. FlexCheck became available via the Internet in early August
2003 with deployment of self-service kiosks at our hub at DIA in September 2003. The system
allows our customers to check in for their flights using a standard credit card for identification
purposes only, their EarlyReturns frequent flyer number, E-ticket number or confirmation number.
On September 18, 2003, we signed a 12 year agreement with Horizon Air Industries, Inc.
("Horizon"), under which Horizon will operate up to nine 70-seat CRJ 700 aircraft under our Frontier
JetExpress brand. The service began on January 1, 2004 with three aircraft. A fourth aircraft
was put into the schedule effective January 31, 2004 and a fifth aircraft began service on February
8, 2004. The remaining aircraft will be added to service periodically through May 2004. We
control the scheduling of this service. We reimburse Horizon for its expenses related to the operation
plus a margin. The agreement provides for financial incentives, penalties and changes to the
margin based on performance of Horizon and our financial performance. As of February 9, 2004,
Frontier JetExpress provides service to Ontario, California, Boise, Idaho, Tucson, Arizona,
Oklahoma City, Oklahoma and supplements our mainline service to San Jose, California, Albuquerque,
New Mexico, Minneapolis/St. Paul, Minnesota and El Paso and Austin, Texas. This service replaced
our codeshare arrangement with Mesa Airlines, which terminated on December 31, 2003.
In March 2003, we entered into an agreement with Juniper Bank (www.juniperbank.com),
a full-service credit card issuer, to offer exclusively Frontier MasterCard products to consumers,
customers and Frontier's EarlyReturns frequent flyer members. We launched the co-branded credit card
in May 2003. As of February 9, 2004, Juniper Bank has issued approximately 35,000 of these credit
cards. We believe that the Frontier/Juniper Bank co-branded MasterCard offers one of the most
aggressive affinity card programs because free travel can be earned for as little as 15,000 miles.
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 A319 aircraft. We are moving
forward with the installation of the LiveTV systems in our Airbus A318 aircraft and anticipate
these systems will become operational by April 2004. We have implemented a $5 per segment usage
charge for access to the system to offset the costs for the system equipment, programming and
services. We are also in discussions with film distributors to offer current-run pay-per-view movies
on four additional channels to be added to our basic LiveTV service. We cannot anticipate with
any certainty whether or when this service will become available. We believe the DIRECTV(TM)product
represents a significant value to our customers and offers a competitive advantage for our company.
Effective July 9, 2001, we began a codeshare agreement with Great Lakes Aviation Ltd. ("Great
Lakes"). We added two additional markets under the codeshare agreement: Rapid City, South Dakota
on July 30, 2003 and to Grand Junction, Colorado on August 1, 2003. Additionally, Great Lakes
replaced Frontier JetExpress service to Wichita, Kansas on November 1, 2003. Including these new
cities, Great Lakes provides service to 35 regional markets located in Arizona, Colorado, Kansas, New
Mexico, Nebraska, North Dakota, South Dakota, Texas, and Wyoming under this codeshare agreement.
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 typically available within two days 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.
Results of Operations
We had net income of $5,456,000 or 14(cent)per diluted share for the three months ended
December 31, 2003 as compared to a net loss of $6,368,000, or 21(cent)per share for the three months
ended December 31, 2002. Included in our net income for the three months ended December 31, 2003
on a pre-tax and profit sharing basis was a special item for the write-off of deferred loan costs
of $1,073,000 associated with the prepayment of the remaining principal of the government guaranteed
loan. This item, net of income taxes and profit sharing, reduced net income by 2(cent)per diluted share.
We had net income of $18,387,000 or 53(cent)per diluted share for the nine months ended
December 31, 2003 as compared to a net loss of $11,895,000, before cumulative effect of change in
accounting for maintenance checks, or 40(cent)per share for the nine months ended December 31,
2002. Included in our net income for the nine months ended December 31, 2003 were the following
special items on a pre-tax and profit sharing basis: $15,024,000 of compensation received under the
Appropriations Act; an unrealized derivative gain of $539,000 offset by the write-off of deferred
loan costs of $9,816,000 associated with the prepayment of all of the government guaranteed loan;
a charge for Boeing aircraft and facility lease exit costs of $5,372,000; and a loss of $1,806,000
on the sale of one Airbus aircraft in a sale-leaseback transaction and from the sale of a spare engine.
These items, net of income taxes and profit sharing, reduced net income by 3(cent)per diluted share.
During the three and nine months ended December 31, 2002, we completed a sale-leaseback transaction
of one of our purchased aircraft and paid off the loan that was collateralized by this aircraft.
We incurred $1,774,000 in costs associated with the early extinguishment of this debt. This item,
net of income taxes, reduced net income by 4(cent)per share.
The following table provides certain of our financial and operating data for the three
month and nine month periods ended December 31, 2003 and 2002.
Three Months Ended Dec. 31, Nine Months Ended Dec. 31,
2003 2002 2003 2002
Selected Operating Data:
Passenger revenue (000s) (1) $ 159,175 $ 117,752 $ 458,130 $ 343,754
Revenue passengers carried (000s) 1,444 999 4,127 2,915
Revenue passenger miles (RPMs)
(000s) (2) 1,317,227 906,801 3,760,480 2,689,222
Available seat miles (ASMs)
(000s) (3) 1,815,751 1,524,638 5,212,198 4,453,916
Passenger load factor (4) 72.5% 59.5% 72.1% 60.4%
Break-even load factor (5) 68.5% 64.4% 67.4% 63.6%
Block hours (6) 36,304 30,472 103,339 89,026
Departures 15,726 13,522 45,414 39,289
Average aircraft stage length 877 852 864 860
Average passenger length of haul 912 908 911 923
Average daily fleet block hour
utilization (7) 10.3 9.5 10.2 9.8
Yield per RPM (cents) (8) (9) 12.01 12.93 12.12 12.74
Yield per ASM (cents) (9) (10) 8.71 7.69 8.75 7.69
Total yield per ASM (cents) (11) 9.01 7.89 9.05 7.89
Cost per ASM (cents) 8.31 8.29 8.24 8.17
Fuel cost per ASM (cents) 1.51 1.42 1.46 1.36
Cost per ASM excluding fuel (cents)
(12) 6.80 6.86 6.79 6.81
Average fare (13) $ 104 $ 111 $ 104 $ 109
Average aircraft in fleet 38.2 34.8 36.9 33.1
Aircraft in fleet at end of period 39.0 37.0 39.0 37.0
Average age of aircraft at end of
period 4.2 7.9 4.2 7.9
(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. The
break-even load factor for the three months ended December 31, 2003 includes the write-off of
deferred loan costs net of profit-sharing of $1,053,000 associated with the prepayment of the
remaining principal of the government guaranteed loan. The break-even load factor for the nine
months ended December 31, 2003 includes the following special items net of profit-sharing:
$13,842,000 of compensation received under the Appropriations Act; an unrealized derivative gain
of $497,000 offset by the write-off of deferred loan costs of $9,677,000 associated with the
prepayment of all of the government guaranteed loan; a charge for Boeing aircraft and facility
lease exit costs of $4,949,000; and a loss of $1,664,000 on the sale of one Airbus aircraft in a
sale-leaseback transaction and from the sale of a spare engine. The break-even load factor for
the three and nine months ended December 31, 2002 includes a special item of $1,774,000 associated
with the early extinguishment of debt which we incurred when we paid off the loan that was
collateralized by one our aircraft for which we had completed a sale-leaseback transaction during
the period.
(6) "Block hours" represent the time between aircraft gate departure and aircraft gate arrival.
(7) "Average daily block hour utilization" represents the total block hours divided by the 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 operational spare
aircraft, and excludes aircraft removed permanently from revenue service or new aircraft not yet
placed in revenue service.
(8) "Yield per RPM" is determined by dividing passenger revenues (excluding charter revenue) by
revenue passenger miles.
(9) For purposes of these yield calculations, charter revenue is excluded from passenger revenue.
These figures may be deemed non-GAAP financial measures under regulations issued by the Securities
and Exchange Commission. We believe that presentation of yield excluding charter revenue is useful
to investors because charter flights are not included in RPMs or ASMs. Furthermore, in preparing
operating plans and forecasts, we rely on an analysis of yield exclusive of charter revenue. Our
presentation of non-GAAP financial measures should not be viewed as a substitute for our financial or
statistical results based on GAAP. The calculation of passenger revenue excluding charter revenue
is as follows:
Three Months Ended Nine Months Ended
Dec 31, Dec. 31,
2003 2002 2003 2002
Passenger revenues, as
reported $ 159,175 $ 117,752 $ 458,130 $ 343,754
Charter revenue 1,023 471 2,217 1,249
Passenger revenues,
excluding charter
revenue 158,152 117,281 455,913 342,505
=======================================================
(10) "Yield per ASM" is determined by dividing passenger revenues (excluding charter revenue)
by available seat miles.
(11) "Total yield per ASM" is determined by dividing passenger revenues by available seat miles.
(12) This may be deemed a non-GAAP financial measure under regulations issued by the Securities and
Exchange Commission. We believe the presentation of financial information excluding fuel
expense is useful to investors because we believe that fuel expense tends to fluctuate more
than other operating expenses, it facilitates comparison of results of operations between
current and past periods and enables investors to better forecast future trends in our operations.
Furthermore, in preparing operating plans and forecasts, we rely, in part, on trends in our
historical results of operations excluding fuel expense. However, our presentation of non-GAAP
financial measures should not be viewed as a substitute for our financial results determined
in accordance with GAAP.
(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.
The following table provides our operating revenues and expenses expressed as cents per total
ASMs and as a percentage of total operating revenues, for the three and nine month periods ended
December 31, 2003 and 2002.
Three Months Ended December 31, Nine Months Ended December 31,
2003 2002 2003 2002
Per % Per % Per % Per %
Total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
Passenger 8.77 97.3% 7.72 97.9% 8.79 97.2% 7.72 97.8%
Cargo 0.11 1.3% 0.09 1.1% 0.12 1.3% 0.10 1.2%
Other 0.13 1.4% 0.08 1.0% 0.14 1.6% 0.07 1.0%
Total revenues 9.01 100.0% 7.89 100.0% 9.05 100.0% 7.89 100.0%
===================================== =====================================
Operating expenses:
Flight operations 1.44 16.0% 1.45 18.4% 1.45 16.0% 1.41 17.9%
Aircraft fuel expense 1.51 16.8% 1.42 18.0% 1.46 16.1% 1.36 17.2%
Aircraft lease expense 0.95 10.5% 1.17 14.9% 1.00 11.1% 1.18 14.9%
Aircraft and
traffic servicing 1.63 18.1% 1.47 18.7% 1.53 16.9% 1.42 17.9%
Maintenance 0.95 10.6% 1.27 16.1% 1.00 11.1% 1.20 15.2%
Promotion and sales 0.95 10.6% 0.77 9.7% 0.93 10.2% 0.89 11.3%
General and
administrative 0.53 5.8% 0.44 5.5% 0.54 6.0% 0.43 5.5%
Depreciation and
amortization 0.35 3.9% 0.30 3.8% 0.33 3.7% 0.28 3.6%
Total operating 8.31 92.3% 8.29 105.1% 8.24 91.1% 8.17 103.5%
===================================== =====================================
Our passenger yield per RPM was 12.01(cent)and 12.93(cent)for the three months ended
December 31, 2003 and 2002, respectively, or a decrease of 7.1%. Our length of haul was 912 and 908
miles for the three months ended December 31, 2003 and 2002, respectively, or an increase of .4%.
Our average fare was $104 for the three months ended December 31, 2003 as compared to $111 for the
three months ended December 31, 2002, a decrease of 6.3%. Our passenger yield per RPM was 12.12(cent)
and 12.74(cent)for the nine months ended December 31, 2003 and 2002, respectively, or a decrease of 4.9%.
Our length of haul was 911 and 923 miles for the nine months ended December 31, 2003 and 2002,
respectively, or a decrease of 1.3%. Our average fare was $104 for the nine months ended December
31, 2003 as compared to $109 for the nine months ended December 31, 2002, a decrease of 4.6%. As part
of our new fare structure, which we implemented in February 2003, our highest-level business fares
were initially reduced by 25 to 45 percent, and our lowest available walk-up fares were reduced by 38 to
77 percent. The February 2003 fare structure was comprised of six fare categories and capped all
fares to and from Denver at $399 or $499 one-way, excluding passenger facility, security or segment fees,
depending on length of haul. In January 2004, we capped all fares to and from Denver at $309 one-way,
excluding passenger facility, security or segment fees, with the exception of flights to Mexico
and Anchorage, Alaska. The $309 fare is a base fare of $299 plus a $10 fuel surcharge, which is
temporarily in place. The new fare cap is a 25 to 50 percent reduction from the February 2003 caps
of $399 and $499. Unlike some 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 reinstated some of the advance purchase requirements of
past pricing structures. Although this has created downward pressure on our passenger yield per
RPM and average fare, we believe the effect on our revenues was offset by an increase in passenger
traffic. We also believe that the January 2004 fare structure adjustments will tend to slightly increase
our average fare. Our revenue per available seat mile ("RASM") for the three months ended December 31,
2003 and 2002 was 8.71(cent)and 7.69(cent), an increase of 13.3%. Our RASM for the nine months ended
December 31, 2003 and 2002 was 8.75(cent)and 7.69(cent), an increase of 13.8%. Additionally,
we believe that our average fare during the three and nine months ended December 31, 2003 was negatively
impacted as a result of intense competition from United Airlines, a carrier operating under
Chapter 11 bankruptcy protection, which is our principal competitor at DIA.
Our cost per available seat mile ("CASM") for the three months ended December 31, 2003 and
2002 was 8.31(cent)and 8.29(cent), respectively, an increase of .02(cent)or .2%. CASM excluding
fuel for the three months ended December 31, 2003 and 2002 was 6.80(cent)and 6.86(cent), respectively,
a decrease of .06(cent)or .9%. Our CASM increased during the three months ended December 31, 2003 as a
result of an increase in the average price of fuel per gallon from .96(cent)to $1.03 or an increase of
..09(cent)per ASM; an increase in aircraft and traffic servicing expenses combined with sales and
promotions expenses of .35(cent)as a result of the increase in the number of passengers we serve and
general increases in DIA facility charges as well as related increases in sales and promotion expenses
for booking fees associated with the increase in passengers, the ongoing costs of LiveTV service
of .05(cent); and an increase in general and administrative expenses of .09(cent)as a result of the
bonus accrual associated with our return to profitability and an increase in health insurance costs.
These increases were partially offset by a decrease of .32(cent)in maintenance expense primarily
as a result of the reduction in the number of aircraft in our Boeing fleet that were replaced with
new Airbus A319 and A318 aircraft. Our CASM for the nine months ended December 31, 2003 and 2002
was 8.24(cent)and 8.17(cent), respectively, an increase of .07(cent)or .9%. CASM excluding fuel
for the nine months ended December 31, 2003 and 2002 was 6.79(cent)and 6.81(cent), respectively, a
decrease of .02(cent)or .3%.
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. For
the three months ended December 31, 2003, our break-even load factor was 68.5% compared to our
achieved passenger load factor of 72.5%. The break-even load factor for the three months ended
December 31, 2003 includes a special item net of profit-sharing for the write-off of deferred loan
costs of $1,053,000 associated with the prepayment of the remaining principal of the government
guaranteed loan. These items, net of profit sharing, accounted for .5 load factor points of the
break-even load factor amount. For the nine months ended December 31, 2003, our break-even
load factor was 67.4% compared to our achieved passenger load factor of 72.1%. The break-even
load factor for the nine months ended December 31, 2003, net of profit-sharing, was negatively
affected by $13,842,000 of compensation received under the Appropriations Act; write-off of
deferred loan costs of $9,677,000 associated with the prepayment of all of our government guaranteed
loan; a charge for Boeing aircraft and facility lease exit costs of $4,949,000; loss of $1,664,000
on the sale of one Airbus aircraft in a sale-leaseback transaction and from the sale of a spare
engine, and positively affected by an unrealized derivative gain of $497,000. These items, net of
profit sharing, accounted for .2 load factor points of the break-even load factor amount.
Small fluctuations in our RASM or in our CASM 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.
Our operations during the three and nine months ended December 31, 2003, are not necessarily
indicative of future operating results or comparable to the prior periods ended December 31, 2002.
Revenues
Our revenues are highly sensitive to changes in fare levels. Competitive fare pricing policies
have a significant impact on our revenues. Because of the elasticity of passenger demand, we
believe that increases in fares may at certain levels result in a decrease in passenger demand in
many markets. We cannot predict future fare levels, which depend to a substantial degree on
competitive factors 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 some markets.
We believe that our new fare structure that was implemented in February 2003 has had a downward
effect on the average fare and passenger yield offset by an increase in passenger traffic. Our
load factor increased to 72.5% for the three months ended December 31, 2003 from 59.5% for the
prior comparable period, an increase of 13.0 points, or 21.8%. This represents a record load
factor for us as compared to prior comparable quarters. We cannot predict whether or for how long
these higher load factors will continue. In addition, we recently further modified our fare
structure in January 2004 to reduce the cap on the highest fares charged, as discussed above. Our
new fare structure also reinstated some of the advance purchase requirements of past pricing structures.
We also believe that the January 2004 fare structure adjustments will tend to slightly increase our
average fare. At this time it is to early to determine whether our fare reduction has had the desired
effect on increased passenger traffic, and there is no certainty that short-term gains in passenger
traffic, if any, will continue into the future.
Passenger Revenues. Passenger revenues totaled $159,175,000 for the three months ended
December 31, 2003 compared to $117,752,000 for the three months ended December 31, 2002, or an
increase of 35.2%, on increased ASMs of 291,113,000 or 19.1%. Passenger revenues totaled $458,130,000
for the nine months ended December 31, 2003 compared to $343,754,000 for the nine months ended December
31, 2002, or an increase of 33.3%, on increased ASMs of 758,282,000 or 17.0%. Passenger revenues
include revenues for reduced rate standby passengers, administrative fees, and revenue recognized
for tickets that are not used within one year from their issue dates. We carried 1,444,000 revenue
passengers during the three months ended December 31, 2003 compared to 999,000 revenue passengers
during the three months ended December 31, 2002, an increase of 44.5%. We had an average of 38.2
aircraft in our fleet during the three months ended December 31, 2003 compared to an average of 34.8
aircraft during the three months ended December 31, 2002, an increase of 9.8%. RPMs for the three
months ended December 31, 2003 were 1,317,227,000 compared to 906,801,000 for the three months
ended December 31, 2002, an increase of 45.3%. Our load factor increased to 72.5% for the three
months ended December 31, 2003 from 59.5% for the prior comparable period, an increase of 13.0
points, or 21.8%. We carried 4,127,000 revenue passengers during the nine months ended December 31,
2003 compared to 2,915,000 during the nine months ended December 31, 2002, an increase of
41.6%. We had an average of 36.9 aircraft in our fleet during the nine months ended December 31,
2003 compared to an average of 33.1 aircraft during the nine months ended December 31, 2002, an
increase of 11.5%. RPMs for the nine months ended December 31, 2003 were 3,760,480,000 compared to
2,689,222,000 for the nine months ended December 31, 2002, an increase of 39.8%. Our load factor
increased to 72.1% for the nine months ended December 31, 2003 from 60.4% for the prior comparable
period, an increase of 11.7 points, or 19.4%.
Cargo revenues, consisting of revenues from freight and mail service, totaled $2,036,000
and $1,353,000 for the three months ended December 31, 2003 and 2002, respectively, representing
1.3% and 1.1%, respectively, of total revenues, an increase of 50.5%. Cargo revenues totaled
$6,094,000 and $4,300,000 for the nine months ended December 31, 2003 and 2002, respectively,
representing 1.3% and 1.2%, respectively, of total revenues, an increase of 41.7%. Cargo revenues
increased over the prior comparable periods as a result of our new contract to carry mail under
the United States Postal Service Commercial Air 2003 Air System (CAIR-03) program. IN APRIL
2003, WE WERE SELECTED AS ONE OF ONLY 18 AIRLINES IN THE UNITED STATES AND THE CARIBBEAN TO BE
OFFERED A 3-YEAR CONTRACT TO CARRY PRODUCTS FOR THE UNITED STATES POSTAL SERVICE (USPS) UNDER THE
CAIR-03 PROGRAM. THIS PROGRAM ALLOWED THE USPS TO REQUEST BIDS FROM AIR CARRIERS THAT WOULD BE
ACCEPTED AND THEN LOCKED IN FOR THE 3-YEAR TERM. IN RETURN FOR PROVIDING COMPETITIVE BIDS, THE USPS
IS REQUIRED TO USE ONLY THOSE CARRIERS SELECTED FOR THE 3-YEAR TERM. THE NEW PROGRAM BEGAN ON
JUNE 28, 2003. AS A LOW COST CARRIER, WE WERE ABLE TO AGGRESSIVELY BID ON THE CONTRACT, WHICH
ALLOWS US TO USE EXCESS CARGO SPACE ON OUR AIRCRAFT. 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, LiveTV sales,
co-branded credit card revenue, and excess baggage fees totaled $2,350,000 and $1,147,000, or 1.4%
and 1.0% of total revenues for the three months ended December 31, 2003 and 2002, respectively, an
increase of 104.9%. Other revenues totaled $7,323,000 and $3,367,000 or 1.6% and 1.0% of total
operating revenues for the nine months ended December 31, 2003 and 2002, respectively, an increase
of 117.5%. Other revenues increased over the prior comparable period primarily due to the Mesa
codeshare agreement and LiveTV sales. The three and nine months ended December 31, 2002 did not
include these revenues from LiveTV, which commenced in the fourth fiscal quarter for the year
ended March 31, 2003.
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 for the three months ended December 31, 2003 and 2002
were $150,960,000 and $126,371,000, an increase of 20.2%, and represented 92.3% and 105.1%
of revenue, respectively. Total operating expenses were $429,735,000 and $363,838,000 for the
nine months ended December 31, 2003 and 2002, an increase of 18.1%, and represented 91.1%
and 103.5% of revenue, respectively. Operating expenses decreased as a percentage of revenue
during the three and nine months ended December 31, 2003 as a result of an increase in total
revenues as compared to the nine months ended December 31, 2002.
Salaries, Wages and Benefits. We record salaries, wages and benefits within the specific
expense category identified in our statements of operations to which they pertain. Salaries, wages
and benefits totaled $41,168,000 and $32,248,000 and were 25.2% and 26.8% of total revenues
for the three months ended December 31, 2003 and 2002, respectively, an increase of 27.7%.
Salaries, wages and benefits totaled $117,822,000 and $93,062,000 and were 25.0% and 26.5% of total
revenues for the nine months ended December 31, 2003 and 2002, respectively, an increase of 26.6%.
Salaries, wages and benefits increased over the prior comparable periods largely as a result of
our bonus accrual due to our return to profitability, overall wage increases, and an increase in
the number of employees to support our ASM growth of 17.0% during the nine months ended December
31, 2003 as well as the ASM growth that we expect for 2004. Our employees increased from approximately
3,000 in December 2002 to approximately 3,800 in December 31, 2003, an increase of 26.7%.
Flight Operations. Flight operations expenses of $26,097,000 and $22,100,000 were 16.0%
and 18.4% of total revenue for the three months ended December 31, 2003 and 2002, respectively, an
increase of 18.1%. Flight operations expenses of $75,418,000 and $62,820,000 were 16.0% and 17.9%
of total revenue for the nine months ended December 31, 2003 and 2002, respectively, an increase
of 20.0%. Flight operations expenses include all expenses related directly to the operation of
the aircraft including lease and insurance expenses, pilot and flight attendant compensation,
in-flight catering, crew overnight expenses, flight dispatch and flight operations administrative
expenses.
Aircraft insurance expenses totaled $2,429,000 (1.5% of total revenue) for the three
months ended December 31, 2003. Aircraft insurance expenses for the three months ended December
31, 2002 were $3,161,000 (2.6% of total revenue). Aircraft insurance expenses were .18(cent)and
..35(cent)per RPM for the three months ended December 31, 2003 and 2002, respectively. Aircraft
insurance expenses totaled $7,433,000 (1.6% of total revenue) for the nine months ended December
31, 2003. Aircraft insurance expenses for the nine months ended December 31, 2002 were $8,327,000
(2.4% of total revenue). Aircraft insurance expenses were .20(cent)and .31(cent)per RPM for the
nine months ended December 31, 2003 and 2002, respectively. Aircraft insurance expenses decreased
per RPM as a result of less expensive war risk coverage that is presently provided by the FAA compared
to the coverage that was previously provided by commercial underwriters combined with a 30% decrease
in our basic hull and liability insurance rates effective June 7, 2003. The current FAA war risk
policy is in effect until August 31, 2004. We do not know whether the government will extend the
coverage beyond August 2004, 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 $13,596,000 and
$11,108,000 or 8.5% and 9.4% of passenger revenue for the three months ended December 31, 2003 and
2002, an increase of 22.4%. Pilot and flight attendant salaries before payroll taxes and benefits
totaled $38,760,000 and $31,542,000 or 8.5% and 9.2% of passenger revenue for the nine months ended
December 31, 2003 and 2002, an increase of 22.9%. Pilot and flight attendant compensation for the
three and nine months ended December 31, 2003 also increased as a result of a 9.8% and 11.5% increase
in the average number of aircraft in service, respectively, an increase of 19.1% and 16.1% in block
hours, respectively, a general wage increase in flight attendant and pilot salaries and additional
crew required to replace those who were attending training on the Airbus equipment. We pay pilot and
flight attendant salaries for training, consisting of approximately six and three weeks, respectively,
prior to scheduled increases in service, which can cause the compensation expense during such periods
to appear high relative to the average number of aircraft in service. We expect these additional
costs to continue as we place additional aircraft into service and continue to retire Boeing equipment.
Aircraft Fuel Expenses. Aircraft fuel expenses include both the direct cost of fuel, including
taxes, as well as the cost of delivering fuel into the aircraft. Aircraft fuel expenses of
$27,487,000 for 26,790,000 gallons used and $21,710,000 for 22,577,000 gallons used resulted in an
average fuel expense $1.03 and 96.2(cent)per gallon for the three months ended December 31, 2003 and 2002,
respectively. Aircraft fuel expenses represented 16.8% and 18.0% of total revenue for the three months ended
December 31, 2003 and 2002, respectively. Aircraft fuel expenses of $75,988,000 for 76,745,000 gallons used
and $60,438,000 for 66,606,000 gallons used resulted in an average fuel cost of 99.0(cent)and 90.7(cent)per
gallon for the nine months ended December 31, 2003 and 2002, respectively. Aircraft fuel expenses represented
16.1% and 17.2% of total revenue for the nine months ended December 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 decreased fuel expense by $552,000 for
the three months ended December 31, 2003 and decreased fuel expense $1,055,000 for the nine months ended
December 31, 2003. Fuel consumption for the three months ended December 31, 2003 and 2002 averaged 738 and
741 gallons per block hour, respectively, or a decrease of .4%. Fuel consumption for the nine months ended
December 31, 2003 and 2002 averaged 743 and 748 gallons per block hour, respectively, or a decrease of
..7%. Fuel consumption per block hour decreased during the three and nine months ended December 31, 2003
from the prior comparable periods because of the more fuel-efficient Airbus aircraft added to our fleet
coupled with the reduction in our Boeing fleet, which had higher fuel burn rates, offset by the increase
in our load factors.
Aircraft Lease Expenses. Aircraft lease expenses totaled $17,247,000 (10.5% of total revenue) and
$17,869,000 (14.9% of total revenue) for the three months ended December 31, 2003 and 2002, respectively,
a decrease of 3.5%. Aircraft lease expenses totaled $52,359,000 (11.1% of total revenue) and $52,470,000
(14.9% of total revenue) for the nine months ended December 31, 2003 and 2002, respectively, a decrease of
..2%. The average number of leased aircraft decreased 16.5% from 29.6 to 25.4 during the three months
ended December 31, 2003. The average number of leased aircraft decreased 7.4% from 28.3 to 26.2 during
the nine months ended December 31, 2003. The marginal decrease in lease expenses is due to the
replacement of leased Boeing 737 aircraft that had unfavorable lease rates with Airbus A319 leased
aircraft with more favorable lease rates.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $29,626,000 and
$22,440,000, an increase of 32.0%, for the three months ended December 31, 2003 and 2002, respectively,
and represented 18.1% and 18.7% of total revenue. Aircraft and traffic servicing expenses were $79,701,000
and $63,063,000, an increase of 26.4%, for the nine months ended December 31, 2003 and 2002, respectively,
and represented 16.9% and 17.9% of total revenue. Aircraft and traffic servicing expenses include all
expenses incurred at airports including landing fees, facilities rental, station labor, ground handling
expenses (passenger and cargo) 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 will increase with the addition
of new cities to our route system. During the three months ended December 31, 2003, our departures increased
to 15,726 from 13,522 for the three months ended December 31, 2002, or 16.3%. Aircraft and traffic servicing
expenses were $1,884 per departure for the three months ended December 31, 2003 as compared to $1,660 per
departure for the three months ended December 31, 2002, or an increase of $224 per departure. During
the nine months ended December 31, 2003, our departures increased to 45,414 from 39,289 for the nine
months ended December 31, 2002, or 15.6%. Aircraft and traffic servicing expenses were $1,755 per departure
for the nine months ended December 31, 2003 as compared to $1,605 per departure for the nine months ended
December 31, 2002, or an increase of $150 per departure. Aircraft and traffic servicing expenses increased
per departure as a result of general increases in airport rents and landing fees and a 44.5% and a 41.6%
increase in passengers for the three and nine months ended December 31, 2003, respectively, as compared to
the prior periods. Certain airport facility rent charges are calculated using the numbers of originating
and departing passengers, as well as additional personnel required to handle the increased number of
passengers. Additionally, cargo (including mail) revenue increased 50.4% and 41.7% for the three and nine
months ended December 31, 2003, respectively, as compared to prior periods. Aircraft and traffic servicing
expenses increase with increases in passengers and cargo handling. We also experienced higher landing
fees associated with the Airbus aircraft, which have higher landing weights than the Boeing aircraft.
Maintenance. Maintenance expenses of $17,324,000 and $19,344,000 were 10.6% and 16.1% of total
revenue for the three months ended December 31, 2003 and 2002, respectively, a decrease of 10.4%.
Maintenance expenses of $52,322,000 and $53,287,000 were 11.1% and 15.2% of total revenue for the nine
months ended December 31, 2003 and 2002, respectively, a decrease of 1.8%. These expenses include
all labor, parts and supplies expenses related to the maintenance of the aircraft. Maintenance cost
per block hour for the three months ended December 31, 2003 and 2002 were $477 and $635, respectively.
Maintenance cost per block hour for the nine months ended December 31, 2003 and 2002 were $506 and $599,
respectively. Maintenance cost per block hour decreased as a result of a decrease in our Boeing fleet
coupled with the additional new Airbus aircraft that are less costly to maintain than our older Boeing
aircraft.
Promotion and Sales. Promotion and sales expenses totaled $17,323,000 and $11,665,000, an increase
of 48.5%, and were 10.6% and 9.7% of total revenue for the three months ended December 31, 2003 and 2002,
respectively. Promotion and sales expenses totaled $48,313,000 and $39,889,000, an increase of 21.1%, and
were 10.2% and 11.3% of total revenue for the nine months ended December 31, 2003 and 2002, respectively.
These include advertising expenses, telecommunications expenses, wages and benefits for reservationists as
well as marketing management and sales personnel, credit card fees, travel agency commissions and computer
reservations costs. During the three months ended December 31, 2003, promotion and sales expenses per
passenger increased to $12.00 compared to $11.68 for the three months ended December 31, 2002. During the
three months ended December 31, 2002, we reduced advertising expenditures in order to apply those funds toward
our new branding campaign that was scheduled to begin in March 2003. Due to the commencement of the
hostilities in Iraq, we postponed the roll out of our branding campaign until May 2003. Additionally,
during the three months ended December 31, 2003, we became heavily involved in sports team sponsorships as
part of our branding awareness initiative. During the nine months ended December 31, 2003, promotion and sales
expenses per passenger decreased to $11.71 compared to $13.68 for the nine months ended December 31, 2002.
Promotion and sales expenses per passenger decreased as a result of variable expenses that are based on lower
average fares, the elimination of substantially all travel agency commissions effective on tickets sold after
May 31, 2002, and economies of scale associated with our growth.
General and Administrative. General and administrative expenses for the three months ended December
31, 2003 and 2002 totaled $9,561,000 and $6,685,000, an increase of 43.0%, and were 5.8% and 5.5% of total
revenue, respectively. General and administrative expenses for the nine months ended December 31, 2003
and 2002 totaled $28,281,000 and $19,381,000, an increase of 45.9%, and were 6.0% and 5.5% of total
revenue for each of the nine months ended December 31, 2003 and 2002, respectively. During the three months
ended December 31, 2003, we accrued $819,000 for employee performance bonuses, or .5%of total revenue.
During the nine months ended December 31, 2003, we accrued $3,242,000 for employee performance bonuses,
or .7% of total revenue. Bonuses are based on profitability. As a result of our pre-tax loss for the three
and nine months ended December 31, 2002, we did not accrue bonuses. General and administrative expenses
include the wages and benefits for several of our executive officers and various other administrative
personnel including legal, accounting, information technology, aircraft procurement, corporate communications,
training and human resources and other expenses associated with these departments. Employee health benefits,
accrued vacation and bonus expenses, general insurance expenses including worker's compensation and
write-offs associated with credit card and check fraud are also included in general and administrative
expenses. Our employees increased from approximately 3,000 in December 2002 to approximately 3,800 in
December 2003, or 26.7%. Accordingly, we experienced increases in our human resources, training, information
technology, and health insurance benefit expenses. General and administrative expenses also increased
with a general increase in the cost of providing health insurance.
Depreciation and Amortization. Depreciation and amortization expenses of $6,295,000 and $4,558,000
were approximately 3.9% and 3.8% of total revenue the three months ended December 31, 2003 and 2002,
respectively, an increase of 38.1%. Depreciation and amortization expenses of $17,353,000 and $12,490,000 were
approximately 3.7% and 3.6% of total revenue for the nine months ended December 31, 2003 and 2002,
respectively, an increase of 38.9%. 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 largely as a result of an increase in the average number of Airbus A318 and A319
aircraft owned from an average of 7.2 during the December 2002 quarter to an average of 12.8 during
the December 2003 quarter, an increase of 77.8%.
Nonoperating Income (Expense). Net nonoperating expense totaled $11,915,000 for the nine months
ended December 31, 2003 compared to net nonoperating expense totaling $6,079,000 for the nine months ended
December 31, 2002.
Interest income increased slightly to $1,528,000 from $1,523,000 during the nine months ended
December 31, 2003 from the prior period due to an increase in cash offset by a decrease in interest
rates. Interest expense increased to $11,065,000 for the nine months ended December 31, 2003 from
$5,149,000 as a result of interest expense associated with the financing of additional aircraft purchased
since December 31, 2002 and the government guaranteed loan we obtained in February 2003.
During the nine months ended December 31, 2003, we ceased using three of our Boeing 737-200 leased
aircraft, two of which had lease terminations in October 2003 and one with a lease termination date in
October 2005. In August 2003, we closed our maintenance facility in El Paso Texas, which had a lease
termination date in August 2007. As a result of these transactions we recorded a pre-tax charge of
$5,372,000. This amount includes the estimated fair value of the remaining lease payments and the write
off of the unamortized leasehold improvements on the aircraft and the facility.
We completed a public offering of 5,050,000 shares of common stock in September 2003. Under
the terms of our government guaranteed loan, we were required to make a prepayment of the loan equal to
60% of the net proceeds from the offering. As a result, we prepaid approximately $48,418,000 on the
loan. In December 2003, we repaid the remaining loan balance due of $11,582,000. As a result of paying
off the government guaranteed loan, we wrote off approximately $9,816,000 of deferred loan costs associated
with the prepayment amount. Of this amount, approximately $8,053,000 represented the unamortized
portion of the value assigned to the warrants issued to the ATSB and to two other guarantors in connection
with the loan transaction.
During the nine months ended December 31, 2003, we incurred a loss totaling $1,323,000 on the
sale-leaseback of an Airbus A319 aircraft and a loss totaling $483,000 on the sale of an aircraft engine.
Offsetting these nonoperating expenses during the nine months ended December 31, 2003 is pre-tax
compensation of $15,024,000 as a result of payments under the Appropriations Act for expenses and
foregone revenue related to aviation security. We received a total of $15,573,000 in May 2003, of
which we paid $549,000 to Mesa Airlines for the revenue passengers Mesa carried as Frontier JetExpress.
Income Tax Expense. Income tax expense totaled $11,510,000 during the nine months ended December
31, 2003 at a 38.5% rate, compared to an income tax benefit of $6,601,000 for the nine months ended
December 31, 2002, at a 35.7% rate. The expected benefit for the nine months ended December 31, 2002
at a federal rate of 35.7% plus the blended state rate of 2.6% (net of federal tax benefit) is reduced by
the tax effect of permanent differences of 2.0%.
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-style financing to acquire all of our aircraft, including 37 firm additional Airbus
aircraft as of December 31, 2003 scheduled for delivery through 2008. We may seek to obtain additional
aircraft in connection with our fleet expansion.
We had cash and cash equivalents and short-term investments of $186,324,000 at December 31,
2003 and $104,880,000 at March 31, 2003, respectively. At December 31, 2003, total current assets
were $262,790,000 as compared to $158,881,000 of total current liabilities, resulting in working
capital of $103,909,000. 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. The increase
in our cash and working capital from March 31, 2003 is largely a result of cash provided by our net
income for the nine months ended December 31, 2003 adjusted for reconciling items to net cash and cash
equivalents totaling $47,886,000: the common stock offering in September 2003, which netted $81,077,000
after offering expenses; an income tax refund from the Internal Revenue Service totaling $26,574,000,
and the net proceeds from a sale-leaseback transaction of one of our aircraft purchase commitments.
These were offset by required prepayments of principal on our government guaranteed loan totaling
$58,418,000 as a result of the income tax refund and a portion of the proceeds from the stock offering,
our decision to pay the remaining balance due of $11,582,000 on the government guaranteed loan after
the required prepayments, and an increase in restricted investments totaling $9,931,000, which was
largely a result of the increase in our collateral requirements to our bankcard processor associated
with the increase in our air traffic liability
Cash provided by operating activities for the nine months ended December 31, 2003 was
$106,351,000. This is attributable to our net income adjusted for reconciling items to net cash and
cash equivalents. Our air traffic liability increased as a result in the growth of our business
associated with the increase in the number of aircraft in our fleet coupled with the increase
in the number of passengers we carried in excess of our increased capacity. Our accrued liabilities
increased as a result of increases in employee benefits associated with the increase in the number of
employees and increases in health care expenses, the bonus accrual for our employees as a result of
our profitability and increases in passenger related taxes associated with our increase in revenue
and passengers carried. Cash used by operating activities for the nine months ended December 31,
2002 was $14,889,000. This is attributable to a decrease in our air traffic liability largely a
result of the decrease in the average fare during the period and seasonality, and a $4,835,000 repayment
of excess amounts received under the Stabilization Act.
Cash used in investing activities for the nine months ended December 31, 2003 was $125,615,000.
Net aircraft lease and purchase deposits decreased by $799,000 during this period. We used
$128,858,000 for the purchase of four additional Airbus aircraft, aircraft leasehold improvements,
ground equipment to support increased below-wing operations, and computer equipment, including
scanning equipment for our new mail transportation requirements. During the nine months ended December
31, 2003, we took delivery of four purchased Airbus A318 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 that was delivered to us in September 2003, generating
cash proceeds of approximately $4,374,000 from the sale and the return of the pre-delivery payments
relating to the purchase commitment. We agreed to lease the aircraft over a 12 year term. Cash used
by investing activities for the nine months ended December 31, 2002 was $162,721,000. We used
$197,881,000 for the purchase of six Airbus aircraft and to purchase rotable aircraft components,
leasehold improvements and other general equipment purchases. Net aircraft lease and purchase
deposits and restricted deposits decreased by $4,792,000 during this period.
Cash provided by financing activities for the nine months ended December 31, 2003 and 2002 was
$100,708,000 and $119,556,000, respectively. During the nine months ended December 31, 2003, we
completed a public offering of 5,050,000 shares of our common stock. We received $81,077,000, net
of offering expenses, from the sale of these shares. During the nine months ended December 31, 2003
and 2002, we received $940,000 and $578,000, respectively, from the exercise of common stock options.
During the nine months ended December 31, 2003 and 2002, we borrowed $98,500,000 and $147,100,000,
respectively, to finance the purchase of Airbus aircraft. Principal repayments were $79,675,000
and $26,942,000 during the respective periods. In July 2003, we received an income tax refund from
the Internal Revenue Service totaling $26,574,000 and prepaid $10,000,000 on our government
guaranteed loan upon receipt of this refund. In September 2003, we used $48,418,000 of the
proceeds from the stock offering to prepay a portion of the government guaranteed loan. Both prepayments
were required by the loan agreement. In December 2003, we repaid the remaining loan balance due
of $11,582,000. In December 2002, we entered into a sale-leaseback transaction for one of our
purchased aircraft. We received net proceeds of approximately $5,300,000 from the sale of this
aircraft, net of repayment of debt that collateralized this aircraft totaling $22,772,000 and payment
of fees associated with the early extinguishments of the debt.
We have been working closely with DIA, our primary hub for operations, and the offices of
the Mayor of the City and County of Denver, in which DIA is located, to develop plans for expanding
Concourse A where our aircraft gates are located and also improving efficient use of existing gates,
in order to accommodate our anticipated growth over the next several years. At this time, DIA has
commenced construction of two additional gates to Concourse A for our preferential use. We expect
that these gates will become available in late spring of 2004. We are examining other expansion
options that could add up to an additional six gates and five regional jet parking positions to
the west side of Concourse A. As new gates are constructed, we would enter into long-term lease
arrangements to use those gates on a preferential basis. On November 9, 2003, the City and County of
Denver and United Airlines announced that they had reached agreement with respect to the restructuring
of United's lease of gates and other facilities at DIA. The agreement will permit United to proceed
with the assumption of the restructured lease as part of its bankruptcy reorganization process. As
part of that settlement, United has agreed to relinquish to DIA one gate on Concourse A for immediate
lease to us on a permanent basis. In addition, United would make available two additional gates
for use by us until the earlier of the construction of the two additional gates for us on the west
end of Concourse A or October 31, 2005. Plans for our expansion of Concourse A are still in development
and the final scope of the project, if any, and a firm estimate of the project costs is yet to be
determined. It is impossible at this time to estimate with any certainty the increased rates and
charges that we would incur as the result of the construction and leasing of newly constructed gates
on Concourse A.
As part of the lease restructure between the City and County of Denver and United Airlines, we
believe that United has been provided certain concessions and reductions in the rents, rates
and charges arising from their lease of facilities at DIA. We have been advised by the City and
County of Denver that they will seek to prevent the reduced rates and charges being paid by United
from increasing the rates and charges being paid by other airlines. However, the City and County
of Denver has also made it clear that in certain circumstances it will have no choice but to increase
rates and charges being paid by other airlines in order to comply with their own cash flow,
reserve account and bond financing requirements. Because we are the second largest airline operating
out of Denver, we may incur a larger impact of any increase in rates and charges imposed by DIA. At
this time, it is impossible to quantify what the increase in our rates and charges would be, if
any, due to the concessions being provided to United.
We have been assessing our liquidity position in light of our aircraft purchase commitments
and other capital needs, the economy, our competition, 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 allows us to
sell equity or debt securities from time to time as market conditions permit. In September 2003,
we completed a public offering of 5,050,000 shares of our common stock. Although the stock offering
has improved our liquidity, we may need to continue to explore avenues to enhance our liquidity
if our current economic and operating environment changes. As of February 9, 2004, $64,150,000
of the shelf registration remains available. We intend to continue to examine domestic or foreign
bank aircraft financing, bank lines of credit and aircraft sale-leasebacks, the sale of equity or debt
securities, and other transactions as necessary to support our capital and operating needs. For
further information on our financing plans and activities and commitments, see "Contractual
Obligations" and "Commercial Commitments" below.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2003:
Less than 1-3 4-5 After
1 year years years 5 years Tota l
Long-term debt (1) $ 16,043,000 $ 34,801,000 $ 38,779,000 $ 211,414,000 $ 301,037,000
Operating leases (2) 92,526,000 188,695,000 188,253,000 609,005,000 1,078,479,000
Unconditional purchase
obligations (3) (4) 104,188,000 214,468,000 235,108,000 553,764,000
Total contractual cash
obligations 212,757,000 437,964,000 462,140,000 820,419,000 1,933,280,000
=================================================================================
(1) During the year ended March 31, 2002, we entered into two loan agreements for two Airbus A319 aircraft.
Each 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. The 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 Airbus aircraft with interest rates based on LIBOR plus margins that adjust quarterly or semi-
annually. At December 31, 2003 interest rates for these loans ranged from 2.44% to 2.89%. 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 the aircraft. During the nine months ended December 31, 2003, we
borrowed an additional $98,500,000 for the purchase of four Airbus A318 aircraft. Each aircraft
loan has a term of 12 years and is payable in monthly installments, including interest, payable in
arrears, with a floating interest rate adjusted quarterly based on LIBOR plus a margin of 2.25% for
three of the loans, and LIBOR plus a margin of 1.95% for the fourth. At the end of the term, there is
a balloon payment of $3,060,000 for three of the aircraft loans and $2,640,000 for the fourth. At
December 31, 2003, interest rates for these loans ranged from 3.12% to 3.42%. The loans are secured by
the aircraft.
(2) As of December 31, 2003, we lease 14 Airbus A319 type aircraft and 13 Boeing 737 type aircraft under
operating leases with expiration dates ranging from 2004 to 2015. One of the Boeing 737 type aircraft
is no longer in service and is being stored until the lease return date of October 2005. Under all of
our leases, we have made cash security deposits or arranged for letters of credit representing
approximately two months of lease payments per aircraft. At December 31, 2003, we had made cash
security deposits of $7,916,000 and had arranged for letters of credit of $4,962,000 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.
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 December 31, 2003, we had
taken delivery of 11 of these aircraft and have letters of credit on the remaining four aircraft to
be delivered totaling $824,000, to secure these leases, collateralized by restricted cash balances.
During the nine months ended December 31, 2003, we entered into additional aircraft lease agreements
for two Airbus A318 aircraft and 16 Airbus A319 aircraft, one of which we took delivery of in September
2003 and the remaining are scheduled for delivery beginning in February 2004 through February
2007. Two of the aircraft leases were a result of sale-leaseback transactions of two new Airbus
aircraft. As of December 31, 2003, we have made $3,562,000 in security deposit payments for these
aircraft.
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 2004 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 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 32 Airbus aircraft. Included in the purchase commitments
are amounts for spare aircraft components to support the aircraft. We are not under any contractual
obligations with respect to spare parts. As of December 31, 2003, we had taken delivery of 16 of
these aircraft, one of which we sold in December 2002. Prior to the delivery of the aircraft we assigned
two of the purchase commitments to two lessors in February 2003 and September 2003. We agreed to lease
two of these aircraft over a five-year term and the third for a 12 year term. Our purchase agreement
with Airbus also includes purchase rights for up to 23 additional aircraft, and allows us to purchase
Airbus A318 or A320 aircraft in lieu of the A319 aircraft at our option. Under the terms of the amended
agreement, we have rights to modify some or all of these additional aircraft into A320 aircraft by
providing Airbus notice prior to December 31, 2004. The agreement also requires us to lease at
least three new Airbus A319 or A320 aircraft from operating lessors for delivery in calendar year 2004.
Including these three aircraft, we intend to lease as many as 14 additional A318 or A319 aircraft from
third party lessors over the next five years. As of December 31, 2003, we have remaining firm
purchase commitments for sixteen additional aircraft that have scheduled delivery dates beginning
in calendar year 2004 and continuing through 2008. Under the terms of the purchase agreement, we are
required to make scheduled pre-delivery payments for these aircraft. These payments are non-refundable
with certain exceptions. As of December 31, 2003, we had made pre-delivery payments on future
deliveries totaling $24,276,000 to secure these aircraft.
We 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, which was subsequently
amended to add the fifth A318 aircraft scheduled for delivery in April 2004. As of December 31, 2003,
four of these A318 aircraft were purchased and financed under this facility. The terms permit us to
borrow $22,000,000 per aircraft over a period of either 120 or 144 months at floating interest rate
with either a $6,600,000 balloon payment due at maturity if we elect a 120 month term or $2,640,000
if we elect a 144 month term. The amendment to the term sheet requires us to prepay $1,200,000 on the
loan for the A318 aircraft that we financed under this agreement in September 2004. At our option,
we can elect to prepay $2,500,000, which would allow us to reduce the interest rate on the loan.
In January 2004, we executed an agreement for the sale-leaseback of two A319 aircraft scheduled for
delivery in June and July 2004. There are no other purchased aircraft scheduled for delivery until
June 2005. The inability to close on the A318 financing or the inability to obtain financing or
additional sale-leaseback transactions on our purchase commitments could result in delays in or our
inability to take delivery of Airbus aircraft we have agreed to purchase, which would have a material
adverse effect on us.
(4) In October 2002, we entered into a purchase and 12 year services agreement with LiveTV to bring DIRECTV
AIRBORNE(TM)satellite programming to every seatback in our Airbus fleet. We have agreed to the purchase
of 46 units; however, we have the option to cancel up to a total of five units by providing written
notice of cancellation at least 12 months in advance of installation. As of December 31, 2003, we have
purchased 24 units and have made deposits toward the purchase of eight units. The table above includes
the remaining purchase commitment amounts not yet paid for on the remaining firm nine 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 airport authorities and lessors with a letter of credit, bond or cash security
deposits. These generally approximate up to three months of rent and fees. As of December 31, 2003, we had
outstanding letters of credit, bonds, and cash security deposits totaling $10,614,000, $4,267,000, and
$15,514,000, 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, 2004, and another credit agreement with
a second financial institution for up to $20,000,000, which expires December 1, 2004. These credit lines can
be used solely for the issuance of standby letters of credit. Any amounts drawn under the credit
agreements are fully collateralized by certificates of deposit, which are carried as restricted investments
on our balance sheet. As of December 31, 2003, we have drawn $10,614,000 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 have a contract with a bankcard processor that requires us to pledge a certificate equal to a
certain percentage of our air traffic liability associated with bankcard customers. As of December 31, 2003
that amount totaled $20,758,000. The amount is adjusted quarterly in arrears based on our air traffic
liability associated with bankcard transactions. As of February 9, 2004, we will be required to increase
the amount by approximately $2,000,000.
We use the Airline Reporting Corporation ("ARC") to provide reporting and settlement services for
travel agency sales and other related transactions. In order to maintain the minimum bond (or
irrevocable letter of credit) coverage of $100,000, ARC requires participating carriers to meet, on a
quarterly basis, certain financial tests such as, but not limited to, net profit margin percentage,
working capital ratio, and percent of debt to debt plus equity. As of December 31, 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 February 6, 2004, the coverage would be increased
to $8,787,000 if we failed the tests. If we were unable to increase the bond amount as a result of our
financial condition at the time, we could be required to issue a letter of credit that would restrict cash
in an amount equal to the letter of credit.
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. When the price is
between the cap price and the primary floor, no payments are required.
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 price for this agreement was 82
cents per gallon, and the primary and secondary floor prices were at 72 and 64.5 cents per gallon,
respectively. This agreement represented approximately 5% of our fuel purchases for that period. In
April 2003, we entered into a 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 was 71.53 cents per gallon
and the agreement represented approximately 15% of our fuel purchases for that period. In September 2003,
we entered into a swap agreement with a notional volume of 630,000 gallons per month for the period from
January 1, 2004 to June 30, 2004. The fixed price of the swap is 74.50 cents per gallon and the agreement
is estimated to represent 7% of our fuel purchases for that period.
In March 2003, we entered into an interest rate swap agreement with a notional amount of $27,000,000
to hedge a portion of our LIBOR based borrowings. 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 December 31, 2003,
our interest rate swap agreement had an estimated unrealized loss of $173,000, $41,000 of which was
recorded as accumulated other comprehensive loss and is included in the balance sheet. We did not have any
interest rate swap agreements outstanding during the nine months ended December 31, 2002.
Effective January 1, 2003, we entered into an engine maintenance agreement with GE Engine Services,
Inc. ("GE") covering the scheduled and unscheduled repair of our aircraft engines used on most of 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 flight hours are not included in
table above. As of December 31, 2003, the agreement covers 13 purchased Airbus aircraft and 11 leased
Airbus aircraft. The cost associated with this agreement for our purchased aircraft for the three months
ended December 31, 2003 and December 31, 2002 were $492,000 and $0, respectively. For our leased aircraft,
the lessors pay GE directly for the repair of aircraft engines in conjunction with this agreement. We pay
lessors engine maintenance reserves on a monthly basis under the terms of our various lease agreements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to adopt accounting policies and make estimates and
assumptions to develop amounts reported in our financial statements and accompanying notes. We believe
that our estimates and judgments are reasonable; however, actual results and the timing of recognition
of such amounts could differ from those estimates. In addition, estimates routinely require adjustment
based on changing circumstances and the receipt of new or better information.
Critical accounting policies are defined as those that require management to exercise significant
judgments, and potentially result in materially different results under different assumptions and conditions.
Our most critical accounting policies and estimates are described briefly below. For additional
information about these and our other significant accounting policies, see Note 1 of the Notes to Financial
Statements and our Form 10-K for the year ended March 31, 2003.
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 sheets as air
traffic liability. In limited circumstances, we grant credit for tickets that have expired. We do not
recognize as revenue the amount of credits estimated to be granted after the date a ticket expires. These
estimates are based upon the evaluation of historical ticket useage trends.
Impairment of Long-Lived Assets
In accounting for long-lived assets, we make estimates about the expected useful lives, projected
residual values and the potential for impairment. In estimating useful lives and residual values of our
aircraft, we have relied upon actual industry experience with the same or similar aircraft types and our
anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government
regulations and changes in our maintenance program or operations could result in changes to these
estimates. Our long-lived assets are evaluated for impairment when events and circumstances indicate
that the assets may be impaired. 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.
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 executed a 12-year engine services agreement with GE covering
the scheduled and unscheduled repair of most of our Airbus engines. Under the terms of this 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.
Fuel Derivative Instruments
We have entered into derivative instruments that are intended to reduce our exposure to changes
in fuel prices. 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.
Interest Rate Hedging Program
During the nine months ending December 31, 2003, we designated certain interest rate swaps as
qualifying cash flow hedges. Under these hedging arrangements, we are hedging the interest payments
associated with a portion of our LIBOR-based borrowings. Under the swap agreements, we pay a fixed rate
of interest on the notional amount of the contracts of $27 million, and we receive a variable rate
if interest based on the three month LIBOR rate, which is reset quarterly. Changes in the fair value of
interest rate swaps designated as hedging instruments are reported in accumulated other comprehensive
income. These amounts are subsequently reclassified into interest expense as a yield adjustment in the
same period in which the related interest payments on the LIBOR-based borrowings affects earnings.
Customer Loyalty Programs
We entered into a co-branded credit card arrangement with a Mastercard issuing bank in March 2003.
The terms of this affinity agreement provide that we will receive a fixed fee for each new account, which
varies based on the type of account, and a percentage of the annual renewal fees that the bank receives.
We receive an increased fee for new accounts solicited by us. We also receive fees for the purchase of
frequent flier miles awarded to the credit card customers.
During the year ended March 31, 2003, we received a $10,000,000 advance from the issuing bank for
fees expected to be earned under the program. This advance was recorded as deferred revenue when it was
received. For the year ended March 31, 2003, we had not yet earned or recognized any revenue from this
arrangement. Fees earned as credit cards are issued or renewed, and as points are awarded to the credit
card customers are applied against this advance.
We account for all fees received under the co-branded credit card program by allocating the fees
between the portion that represents the estimated value of the subsequent travel award to be provided,
and the portion that represents a marketing fee to cover marketing and other related costs to administer
the program. This latter portion (referred to as the marketing component) represents the residual after
determination of the value of the travel component. The component representing travel is determined by
reference to an equivalent restricted fare, which is used as a proxy for the value of travel of a frequent
flyer mileage award. The travel component is deferred and recognized as revenue monthly over the
estimated usage period of the frequent flyer mileage awards of 20 months. We record the marketing component
of the revenue earned under this agreement as a reduction of sales and promotion expenses in the month
received.
Because of our limited history with our frequent flier program, we have estimated the period over
which the frequent flier mileage awards will be used based on industry averages adjusted downward to
take into account that most domestic airlines require 25,000 frequent flyer miles for a domestic round-trip
ticket while we require only 15,000 frequent flyer miles for a domestic round-trip ticket.
For the nine months ended December 31, 2003, we earned total fees of $2,581,000, all of which
were applied to the original $10,000,000 advance. Of that amount, $2,095,000 was deferred as the travel
award component, and the remaining marketing component of $486,000 was recognized in earnings. Amortization
of deferred revenue recognized in earnings in this period was $366,105.
Item 3: 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 $9,890,000 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,
2004 and related gallons purchased.
In November 2002, we initiated a fuel hedging program comprised of swap, calls 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. When
the price is between the cap price and the primary floor, no payments are required.
In September 2003, we entered into a swap agreement with a notional volume of 630,000 gallons per
month for the period from January 1, 2003 to June 30, 2004. The fixed price of the swap is 74.50 cents per
gallon and the agreement is estimated to represent 7% of our fuel purchases for that period. The results
of operations for the quarter ended December 31, 2003 include an unrealized derivative gain of $64,000
that is included in fuel expense and a realized gain of approximately $488,000 in cash settlements received
from a counter-party recorded as a decrease in fuel expense.
Interest
We are susceptible to market risk associated with changes in variable interest rates on long-term debt
obligations we incurred and will incur to finance the purchases of our Airbus aircraft. Interest expense
on seven of our owned Airbus A319 aircraft is subject to interest rate adjustments every three to six months
based upon changes in the applicable LIBOR rate. 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 $2,583,000
assuming the loans outstanding that are subject to interest rate adjustments at December 31, 2003 totaling
$258,296,000 are outstanding for the entire period. As of December 31, 2003, approximately 85.8% of our
loans had variable interest rates.
In March 2003, we entered into an interest rate swap agreement with a notional amount of $27,000,000
to hedge a portion of our LIBOR based borrowings. 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 that expires in March 2007. As of December 31, 2003, we had hedged approximately 10.5% of our
variable interest rate loans. As of December 31, 2003, the fair value of the swap agreement is a liability
of $173,000.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we conducted 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 Rules 13a-15 and 15d-15. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and procedures that are designed to ensure that information required
to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized
and completely and accurately reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There have been no significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date we carried out this evaluation.
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Numbers
Exhibit 10 - Material Contracts
10.24 Aircraft Lease Agreement dated as of December 5, 2003 between International Lease
Finance Corporation, Inc., and Frontier Airlines, Inc., Lessee, in respect of 1 Airbus A319
Aircraft. Frontier has signed leases for 4 additional Airbus 319 aircraft with this Lessor
under Aircraft Lease Agreements that are substantially identical in all material respects to
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. (1)
Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications
31.1 Section 302 certification of President and Chief Executive Officer, Jeffery S. Potter. (1)
31.2 Section 302 certification of Chief Financial Officer, Paul H. Tate. (1)
Exhibit 32 - Section 1350 Certifications
32 Section 906 certification of President and Chief Executive Officer, Jeffery S. Potter,
and Chief Financial Officer, Paul H. Tate (1)
(1) Filed herewith.
(b) Reports on Form 8-K
During the quarter ended December 31, 2003, the Company furnished the following reports on Form 8-K.
Date of Reports Item Numbers Financial Statements
Required to be Filed
October 30, 2003 7 and 12 None
December 18, 2003 7 and 9 None
December 22, 2003 7 and 9 None
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRONTIER AIRLINES, INC.
Date: February 12, 2004 By: /s/ Paul H. Tate
Paul H. Tate, Vice President and
Chief Financial Officer
Date: February 12, 2004 By: /s/ Elissa A. Potucek
Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer