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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 June 30, 2004
[ ] 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 July 28, 2004 was 35,609,942.
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
Results of Operations 7
Item 3: Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
PART I. FINANCIAL INFORMATION
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited)
June 30, March 31,
2004 2004
Assets
Current assets:
Cash and cash equivalents $ 193,557,848 $ 188,608,729
Short-term investments - 2,000,000
Restricted investments 27,404,296 24,732,024
Receivables, net of allowance for doubtful accounts of $139,000
and $225,000 at June 30, 2004 and March 31, 2004, respectively 26,267,559 26,570,443
Security and other deposits 946,250 215,000
Prepaid expenses and other assets 16,962,222 13,093,499
Inventories, net of allowance of $3,317,000 and $2,991,000
at June 30, 2004 and March 31, 2004, respectively 6,875,306 6,126,573
Deferred tax assets 6,016,121 8,386,390
Total current assets 278,029,602 269,732,658
Property and equipment, net 472,694,867 440,470,566
Security and other deposits 18,469,245 16,261,690
Aircraft pre-delivery payments 9,702,070 28,329,370
Restricted investments 9,534,473 9,971,212
Deferred loan expenses and other assets 4,675,644 4,940,102
$ 793,105,901 $ 769,705,598
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 33,201,985 $ 31,167,168
Air traffic liability 98,130,203 83,339,560
Other accrued expenses 46,328,155 44,660,868
Current portion of long-term debt 17,502,986 17,386,538
Deferred revenue and other current liabilities 7,076,926 5,105,136
Total current liabilities 202,240,255 181,659,270
Long-term debt 296,258,009 280,000,752
Deferred tax liability 26,345,460 32,225,150
Deferred revenue and other liabilities 15,787,197 17,878,800
Total liabilities 540,630,921 511,763,972
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; 35,609,942 and 35,597,442
issued and outstanding at June 30, 2004 and March 31,
2004, respectively 35,610 35,597
Additional paid-in capital 185,159,948 185,078,386
Unearned ESOP shares (1,455,089) (2,182,634)
Other comprehensive income (loss) 160,167 (137,785)
Retained earnings 68,574,344 75,148,062
Total stockholders' equity 252,474,980 257,941,626
$ 793,105,901 $ 769,705,598
================ ================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Operations
For the Three Months Ended June 30, 2004 and 2003
(Unaudited)
June 30, June 30,
2004 2003
Revenues:
Passenger $ 169,437,481 $ 139,009,546
Passenger- regional partner 19,126,445 -
Cargo 1,427,495 1,689,025
Other 2,431,649 1,667,379
Total revenues 192,423,070 142,365,950
Operating expenses:
Flight operations 31,789,164 24,973,318
Aircraft fuel expense 40,003,182 22,600,769
Aircraft lease expense 18,890,826 17,192,003
Aircraft and traffic servicing 31,692,204 23,997,510
Maintenance 19,282,232 17,877,972
Promotion and sales 19,838,676 14,719,997
General and administrative 10,294,244 8,935,636
Operating expenses - regional partner 21,293,435 -
Loss on sale-leaseback of aircraft 488,889 -
Aircraft lease and facility exit costs - 686,295
Depreciation and amortization 6,618,439 5,187,198
Total operating expenses 200,191,291 136,170,698
Operating income (loss) (7,768,221) 6,195,252
Nonoperating income (expense):
Interest income 570,570 413,363
Interest expense (2,908,016) (3,834,393)
Emergency Wartime Supplemental
Appropriations Act compensation - 15,024,188
Other, net (106,302) (176,093)
Total nonoperating income (expense), net (2,443,748) 11,427,065
Income (loss) before income tax (benefit) expense (10,211,969) 17,622,317
Income tax (benefit) expense (3,638,251) 6,688,627
Net income (loss) $ (6,573,718) $ 10,933,690
================= ================
Earnings (loss) per share:
Basic $ (0.18) $ 0.37
================= ================
Diluted $ (0.18) $ 0.36
================= ================
Weighted average shares of
common stock outstanding
Basic 35,603,426 29,823,179
================= ================
Diluted 35,603,426 30,172,499
================= ================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Stockholders' Equity and Other Comprehensive Income (Loss)
For the Year Ended March 31, 2004 and the Three Months Ended June 30, 2004
Accumulated
Common Stock Additional Unearned other Total
Shares Stated paid-in ESOP comprehensive Retained stockholders'
(000s) value capital shares income (loss) earnings equity
Balances, March 31, 2003 29,674 29,674 96,424,525 - - 62,512,927 158,967,126
Net income - - - - - 12,635,135 12,635,135
Other comprehensive loss -
unrealized loss on
derivative instruments,
net of tax - - - - (137,785) - (137,785)
Total comprehensive income
12,497,350
Sale of common stock, net
of offering costs of
$257,000 5,050 5,050 81,072,096 - - - 81,077,146
Exercise of common stock
options 227 227 1,000,487 - - - 1,000,714
Tax benefit from exercises
of common stock options - - 1,261,937 - - - 1,261,937
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 (note 13) 646 646 5,202,640 (5,203,286) - - -
Amortization of employee
stock compensation
(note 13) - - - 3,020,652 - - 3,020,652
Balances, March 31, 2004 35,597 $35,597 $185,078,386 $(2,182,634) $(137,785) $75,148,062 $257,941,626
Net loss - - - - - (6,573,718) (6,573,718)
Other comprehensive income-
unrealized gain on
derivative instruments,
net of tax - - - - 297,952 - 297,952
Total comprehensive loss (6,275,766)
Exercise of common stock
options 13 13 63,350 - - - 63,363
Tax benefit from exercises
of common stock options - - 18,212 - - - 18,212
Amortization of employee
stock compensation - - - 727,545 - - 727,545
Balances, June 30, 2004 35,610 $35,610 $185,159,948 $(1,455,089) $ 160,167 $68,574,344 $252,474,980
==================================================================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Cash Flows
For the Three Months Ended June 30, 2004 and 2003
(Unaudited)
Three Months Ended
June 30, June 30,
2004 2003
Cash flows from operating activities:
Net income (loss) $ (6,573,718) $ 10,933,690
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Employee stock option plan compensation expense 727,545 624,601
Depreciation and amortization 6,618,439 6,193,479
Depreciation and amortization - regional partner 75,413 -
Impairment recorded on inventories 387,635 -
Deferred tax (benefit) expense (3,675,807) 6,677,197
Unrealized derivative (gain) loss 476,928 (751,666)
Loss on disposal of equipment 525,722 19,365
Changes in operating assets and liabilities:
Restricted investments (3,531,333) (5,051,245)
Receivables 302,884 955,216
Security and other deposits (207,239) (1,629,285)
Prepaid expenses and other assets (3,868,723) (819,652)
Inventories (1,136,368) (39,311)
Deferred loan expenses and other assets 346,900 -
Accounts payable 2,034,817 (7,067,609)
Air traffic liability 14,790,643 14,037,199
Other accrued expenses 1,848,304 10,968,909
Deferred revenue and other liabilities (119,813) 701,615
Net cash provided by operating activities 9,022,229 35,752,503
Cash flows from investing activities:
Decrease in short-term investments 2,000,000 -
Decrease (increase) in aircraft lease and purchase deposits, net 15,895,734 (7,598,511)
Decrease in restricted investments 1,295,800 205,900
Proceeds from the sale of aircraft and equipment 63,625,010 -
Capital expenditures (103,068,885) (2,127,768)
Net cash used in investing activities (20,252,341) (9,520,379)
Cash flows from financing activities:
Net proceeds from issuance of common stock 63,363 -
Proceeds from long-term borrowings 22,000,000 -
Principal payments on long-term borrowings (5,626,295) (2,845,707)
Payment of financing fees (257,837) -
Net cash provided by (used in) financing activities 16,179,231 (2,845,707)
Net increase in cash and cash equivalents 4,949,119 23,386,417
Cash and cash equivalents, beginning of period 188,608,729 102,880,404
Cash and cash equivalents, end of period $ 193,557,848 $ 126,266,821
================ ================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Financial Statements
June 30, 2004
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the instructions to Form 10-Q
and Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements and should be read in
conjunction with the Company's Annual Report on Form 10-K/A for the year ended March 31, 2004. 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 months ended June 30, 2004 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. If compensation cost for the Company's stock-based compensation plan
had 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:
2004 2003
Net Income (loss) as reported $ (6,573,718) $10,933,690
Less: total compensation expense
determined under fair value method,
net of tax 406,518 453,596
Pro Forma net income (loss) as reported $ (6,980,236) $10,480,094
============= ===========
Earnings (loss) per share, basic:
As Reported $ (0.18) $ 0.37
Pro Forma $ (0.20) $ 0.35
Earnings (loss) per share, diluted:
As Reported $ (0.18) $ 0.36
Pro Forma $ (0.20) $ 0.35
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
(3) Long-term Debt
During the quarter ended June 30, 2004, the Company borrowed an additional $22,000,000 for the
purchase of one Airbus A318 aircraft. The aircraft loan has a term of 12 years and is payable
in monthly installments of $144,000 as of June 30, 2004, including interest, payable in arrears,
with a floating interest rate adjusted quarterly based on LIBOR plus a margin of 1.95% for an
overall rate of 3.09% at June 30, 2004. At the end of the term, there is a balloon payment of
$2,640,000. A security interest in the aircraft secures the loan.
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; failure of our new markets to perform
as anticipated; 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 ("United") and other competitors and other
actions taken by United either in or out of bankruptcy protection; the availability of suitable aircraft,
which may inhibit our ability to achieve operating economies and implement our business strategy; the
unavailability of, or inability to secure upon acceptable terms, financing necessary to purchase aircraft
which we have ordered; issues relating to our transition to an Airbus aircraft fleet; uncertainties
regarding aviation fuel prices; and uncertainties as to when and how fully consumer confidence in the
airline industry will be restored, if ever. Because our business, like that of the airline industry
generally, is characterized by high fixed costs relative to revenues, small fluctuations in our yield per
available seat mile ("RASM") or cost per available seat mile ("CASM") can significantly affect operating
results.
General
Now in our eleventh year of operations, we are a low cost, affordable fare airline operating
primarily in a hub and spoke fashion connecting cities coast to coast primarily through our hub at
Denver International Airport ("DIA"). We are the second largest jet service carrier at DIA based on
departures. As of July 28, 2004, we, in conjunction with Frontier JetExpress operated by Horizon Air
Industries, Inc. ("Horizon"), operate routes linking our Denver hub to 43 U.S. cities spanning the
nation from coast to coast and to five cities in Mexico. In April 2004, we began our first expansion of
point-to-point routes outside of our DIA hub with three routes from our focus city Los Angeles, California
and added an additional route in May 2004. In July 2004, we began our first point-to-point routes to
Mexico with one weekly round-trip frequency to Cancun, Mexico from Kansas City and from Salt Lake City.
We were organized in February 1994 and began flight operations in July 1994 with two leased
Boeing 737-200 aircraft. We have since expanded our fleet in service to 46 aircraft as of July 28, 2004
(32 of which we lease and 14 of which we own), consisting of eight Boeing 737-300s, 32 Airbus A319s,
and six 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 September 2005.
As of November 1, 2003, we no longer operate Boeing 737-200 aircraft. During the quarters ended June 30,
2004 and 2003, we increased year-over-year capacity by 32.0% and 22.3%, respectively. During the quarter
ended June 30, 2004, we increased passenger traffic by 39.0% over the prior comparable period, outpacing
our increase in capacity during the period.
In September 2003, we signed a 12-year agreement with 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 in service and one spare aircraft. This service replaced our code-
share arrangement with Mesa Airlines which terminated on December 31, 2003. We have increased JetExpress
aircraft to a total of eight aircraft in service and one spare aircraft. 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 July 28, 2004, Frontier JetExpress provides service to Tucson,
Arizona; Ontario, California; Boise, Idaho; Billings, Montana; Oklahoma City, Oklahoma; El Paso,
Texas and Spokane, Washington, and supplements our mainline service to, San Jose, California;
Minneapolis/St. Paul, Minnesota; Omaha, Nebraska; Albuquerque, New Mexico; Portland, Oregon and Austin,
Texas.
We currently operate on 16 gates on Concourse A at DIA on a preferential basis. Together with our
regional jet codeshare partner, Frontier JetExpress, we use these 16 gates and share use of up to four
common use regional jet parking positions to operate approximately 228 daily system mainline flight
departures and arrivals and 50 Frontier JetExpress daily system flight departures and arrivals.
During the quarter ended June 30, 2004 and as of June 30, 2004, we added departures from DIA to the
following cities with commencement dates as follows:
Destination Commencement Date
Washington, D.C. (Dulles International) April 11, 2004
Anchorage, Alaska (1) May 9, 2004
Billings, Montana (2) May 23, 2004
Spokane, Washington (2) May 23, 2004
Philadelphia, Pennsylvania May 23, 2004
Nashville, Tennessee June 20, 2004
(1) Service to this destination is seasonal.
(2) Operated exclusively by Frontier JetExpress.
On April 11, 2004, we began our first significant point-to-point routes from our focus city Los
Angeles, California. We began service from Los Angeles International Airport to the following cities
with commencement dates as follows:
Destination Commencement Date
Kansas City, Missouri April 11, 2004
Minneapolis/St. Paul, Minnesota April 11, 2004
St. Louis, Missouri April 11, 2004
Philadelphia, Pennsylvania May 23, 2004
In August 2004, we intend to cease non-stop service between Los Angeles International Airport
and Minneapolis/St. Paul and intend to reduce non-stop service to St. Louis and Kansas City to adjust
for seasonal demand and poor operating results.
On July 3, 2004, we began our first point-to-point routes to Mexico with one weekly round-trip
frequency to Cancun, Mexico from Kansas City International Airport and from Salt Lake City International
Airport. We intend to increase service to Cancun from Kansas City International to three weekly round-trip
frequencies and to begin three weekly round-trip frequencies from Nashville International Airport and Austin-
Bergstrom International Airport in November 2004. We have also filed an application with the U.S. Department
of Transportation ("DOT") for authorization to serve Cancun from Lambert-St. Louis International Airport.
We intend to begin Frontier JetExpress service to Little Rock, Arkansas from our DIA hub with two
daily round-trip frequencies and terminate our service to Ontario, California on October 10, 2004.
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.
Overview
We intend to continue our focused growth strategy, which includes a fleet transition from a Boeing
fleet to an all Airbus fleet. We intend to operate an all Airbus fleet by September 2005. One of the key
elements of this strategy is to produce cost savings because crew training is standardized for aircraft
of a common type, maintenance issues are simplified, spare parts inventory is reduced, the Airbus aircraft
are more fuel efficient, and scheduling is more efficient. As of July 28, 2004, we have remaining firm
purchase commitments for 13 Airbus aircraft and intend to lease as many as 13 additional A318 or A319 aircraft
from third party lessors over the next three years. We intend to use these additional aircraft to either
replace Boeing aircraft being retired, provide service to new markets and/or to add frequencies to existing
markets that we believe are underserved.
The airline industry continues to be intensely competitive. We expect competition will remain intense.
Business and leisure travelers continue to reevaluate their travel budgets and remain highly price sensitive.
Increased competition has prompted aggressive strategies from competitors through discounted fares and sales
promotions. Additionally, the intense competition has created financial hardships for some of our competitors
that have been forced to reduce capacity or have been forced into bankruptcy protection.
We believe we have a proven management team and a strong company culture and will continue to focus
on differentiating the product and service we provide to our passengers. We intend for our product and
service to be affordable, flexible, and accommodating. This begins with our employees who strive to offer
friendly customer service and keep operations running efficiently, which we believe leads to lower operating
costs.
Quarter in Review
During the quarter ended June 30, 2004, we had a net loss of $6,574,000. This was driven by rising
fuel costs and a decline in our average fare as we continue to operate in a highly competitive environment.
We have seen a sharp rise in fuel costs since January 2004, and it may continue to increase. Our average
fuel cost per gallon was $1.25 during the quarter ended June 30, 2004 compared to 93(cent) during the quarter
ended June 30, 2003, an increase of 34.4%.
Highlights from the Quarter
o Took delivery of nine new aircraft including seven Airbus A319 aircraft and two Airbus A318
aircraft and retired one Boeing B737 aircraft.
o Began mainline service to Washington, D.C. (Dulles International); Anchorage, Alaska;
Philadelphia, Pennsylvania; Nashville, Tennessee and Frontier JetExpress service to Billings,
Montana and Spokane, Washington.
o Expanded service to Washington, D.C. (Reagan National) from one daily round-trip to three daily
round-trips.
o Began our first non-stop, point-to-point flights outside of the Denver hub departing
from our new "focus" city in Los Angeles with two daily non-stop flights from Los Angeles
to Minneapolis/St. Paul, St. Louis, and Kansas City and one daily non-stop flight to
Philadelphia.
Results of Operations
We had a net loss of $6,574,000 or 18(cent) per diluted share for the quarter ended June 30, 2004 as
compared to net income of $10,934,000 or 36(cent) per diluted share for the quarter ended June 30, 2003.
Included in our net loss for the quarter ended June 30, 2004 were the following special items before the
effect of income taxes: a loss of $489,000 on the sale of two Airbus A319 aircraft in sale-leaseback
transactions, a write down of $388,000 of the carrying value of expendable Boeing 737 inventory, and
an unrealized loss on fuel hedges of $477,000. These items, net of income taxes, increased net loss
by 2(cent) per share. Our net income for the quarter ended June 30, 2003 included $15,024,000 received
under the Appropriations Act and an unrealized gain on fuel hedges of $752,000, offset by aircraft lease
exit costs of $686,000. The net effect of these items, net of income taxes and related profit sharing
contributions, increased net income by 29(cent) per diluted share.
Our mainline passenger yield per RPM was 10.79(cent) and 12.30(cent) for the quarters ended June 30,
2004 and 2003, respectively, or a decrease of 12.3%. Our mainline average fare was $100.50 for the quarter
ended June 30, 2004 as compared to $104.70 for the quarter ended June 30, 2003, a decrease of 4.0%. Our
length of haul was 988 and 917 miles for the quarters ended June 30, 2004 and 2003, respectively, or an
increase of 7.7%. The decrease in the average fare is offset by an increase in our mainline load factor to
70.7% for the quarter ended June 30, 2004 as compared to 67.2% for the quarter ended June 30, 2003, an
increase of 3.5 points. Our mainline passenger revenue per available seat mile ("RASM") for the quarter
ended June 30, 2004 and 2003 was 7.63(cent) and 8.26(cent), respectively, a decrease of 7.6%. We believe
that our average fare during the quarter ended June 30, 2004 was negatively impacted as a result of
entering six new markets during the quarter ended June 30, 2004 and offering introductory fares along with
aggressive pricing actions by our competitors in these new markets. We did not add any new markets during
the quarter ended June 30, 2003.
Our mainline cost per ASM for the quarters ended June 30, 2004 and 2003 was 8.09(cent) and 8.13(cent),
respectively, a decrease of .5%. Mainline CASM excluding fuel for the quarters ended June 30, 2004 and
2003 was 6.28(cent) and 6.78(cent), respectively, a decrease of 7.4%. Our mainline CASM decreased during the
quarter ended June 30, 2004 as a result of an increase in the average number of owned aircraft from nine
to 13.9, which generated a corresponding decrease of .18(cent) in aircraft lease expense, a decrease in the
maintenance cost per ASM of .20(cent) as a result of the reduction in our Boeing fleet that were replaced with
new Airbus A319 aircraft, a decrease of .07(cent) per ASM in employee performance bonuses, an increase
in aircraft utilization and economies of scale associated with lower increases in indirect costs as
compared to the 32.0% increase in mainline ASMs over the prior comparable period. This decrease was
significantly offset by an increase in the average price of fuel per gallon from 93(cent) to $1.25 or an
increase of .46(cent) per ASM.
An airline's mainline break-even load factor is the passenger load factor that will result in
operating revenues being equal to operating expenses, assuming constant revenue per passenger mile and
expenses. For the quarter ended June 30, 2004, our mainline break-even load factor adjusted for special
items was 73.5% compared to our achieved passenger load factor of 70.7%. Our mainline break-even load
factor adjusted for special items for the quarter ended June 30, 2003, was 65.4% compared to our achieved
passenger load factor of 67.2%. Our mainline break-even load factor increased from the prior comparable
period as a result of a decrease in our RASM to 7.63(cent) during the period ended June 30, 2004 from
8.26(cent) during the period ended June 30, 2003, partially offset by a decrease in our mainline CASM.
During the quarter ended June 30, 2004, our mainline average daily block hour utilization increased
to 11.7 from 10.2 for the quarter ended June 30, 2003. The calculation of our block hour utilization includes
all aircraft that are on our operating certificate, which includes scheduled aircraft, as well as aircraft
out of service for maintenance and operational spare aircraft, and excludes aircraft removed permanently
from revenue service or new aircraft not yet placed in revenue service. It also excludes Frontier
JetExpress aircraft operated by Horizon.
Small fluctuations in our RASM or 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.
The following table provides certain of our financial and operating data for the year ended March 31,
2004 and the quarters ended June 30, 2004 and 2003.
Year Ended
March 31, Quarters Ended June 30,
2004 2004 2003
Selected Operating Data:
Passenger revenue (000s) (1)
Mainline $ 615,390 $ 169,438 $ 139,010
Regional Partner (2) 11,191 19,126 -
System Combined 626,581 188,564 139,010
Revenue passengers carried (000s)
Mainline 5,569 1,584 1,227
Regional Partner (2) 115 203 -
System Combined 5,684 1,787 1,227
Revenue passenger miles (RPMs) (000s) (3)
Mainline 5,120,587 1,564,587 1,125,233
Regional Partner (2) 75,974 131,554 -
System Combined 5,196,561 1,696,141 1,125,233
Available seat miles (ASMs) (000s) (4)
Mainline 7,153,740 2,211,652 1,675,050
Regional Partner (2) 111,144 177,578 -
System Combined 7,264,884 2,389,230 1,675,050
Passenger load factor (5)
Mainline 71.6% 70.7% 67.2%
Regional Partner (2) 68.4% 74.1% -
System Combined 71.5% 71.0% 67.2%
Mainline break-even load factor (6) 68.8% 73.5% 65.4%
Mainline block hours (7) 142,466 43,974 33,127
Mainline departures 61,812 17,650 14,610
Mainline average seats per departure 132 131 132
Mainline average stage length 877 957 869
Mainline average length of haul 919 988 917
Mainline average daily block hour utilization (8) 10.4 11.7 10.2
Yield per RPM (cents) (9) (10)
Mainline 11.96 10.79 12.30
Regional Partner (2) 14.73 14.54 -
System Combined 12.01 11.08 12.30
Total yield per RPM (cents) (11)
Mainline 12.35 11.08 12.65
Regional Partner (2) 14.73 14.54 -
System Combined 12.39 11.34 12.65
Yield per ASM (cents) (10) (12)
Mainline 8.56 7.63 8.26
Regional Partner (2) 10.07 10.77 -
System Combined 8.59 7.86 8.26
Total yield per ASM (cents) (13)
Mainline 8.84 7.84 8.50
Regional Partner (2) 10.07 10.77 -
System Combined 8.86 8.05 8.50
Year Ended
March 31, Quarters Ended June 30,
2004 2004 2003
Selected Operating Data (continued):
Cost per ASM (cents)
Mainline 8.40 8.09 8.13
Regional Partner (2) 13.17 11.99 -
System Combined 8.47 8.38 8.13
Mainline fuel expense per ASM (cents) 1.52 1.81 1.35
Mainline cost per ASM excluding
fuel (cents) (14) 6.88 6.28 6.78
Mainline average fare (15) $ 103.50 $ 100.50 $ 104.70
Mainline average aircraft in service 37.3 41.4 35.6
Mainline aircraft in service at end of period 38 46 36
Mainline average age of aircraft at end of period 3.9 3.1 6.7
(1) "Passenger revenue" includes revenues for non-revenue passengers, charter revenues, administrative fees,
and revenue recognized for unused tickets that are greater than one year from issuance date. The
incremental revenue from passengers connecting from regional flights to mainline flights is included
in our mainline passenger revenue.
(2) In September 2003, we signed a 12-year agreement with Horizon, under which Horizon operates up to nine
70-seat CRJ 700 aircraft under our Frontier JetExpress brand. The service began on January 1, 2004 and
replaced our codeshare with Mesa Airlines which terminated on December 31, 2003. In accordance with
Emerging Issues Task Force No. 01-08, "Determining Whether an Arrangement Contains a Lease" ("EITF 01-08"),
we have concluded that the Horizon agreement contains leases as the agreement conveys the right to use a
specific number and specific type of aircraft over a stated period of time. Therefore, we began recording
revenues and expenses related to the Horizon agreement gross. Under the Mesa agreement, we recorded
JetExpress revenues reduced by related expenses net in other revenues. JetExpress operations under the Mesa
agreement from April 1, 2003 to December 31, 2003 are not included in regional partner statistics in 2003
as the Mesa arrangement was effective prior to May 28, 2003, the effective date of EITF 01-08.
Amounts included in other revenues for Mesa for the year ended March 31, 2004, and for the three months
ended June 30, 2004 and 2003 were as follows:
Year Ended March 31, Quarters Ended June 30,
2004 2004 2003
Mesa revenues (000s) $ 25,155 $ - $ 7,847
Mesa expenses (000s) (23,438) - (7,775)
Net amount included in other
revenues $ 1,717 $ - $ 72
==============================================================
Mesa's revenue passenger miles (RPMs) and available seat miles (ASMs) for the year ended March 31,
2004 and for the three months ended June 30, 2004 and 2003 were as follows:
Year Ended March 31, Quarters Ended June 30,
2004 2004 2003
Mesa RPMs (000s) 148,163 - 47,773
Mesa ASMs (000s) 174,435 - 68,642
(3) "Revenue passenger miles," or RPMs, are determined by multiplying the number of fare-paying passengers
carried by the distance flown.
(4) "Available seat miles," or ASMs, are determined by multiplying the number of seats available for passengers
by the number of miles flown.
(5) "Passenger load factor" is determined by dividing revenue passenger miles by available seat miles.
(6) "Break-even load factor" is the passenger load factor that will result in operating revenues being equal
to operating expenses, net of certain adjustments, assuming constant yield per RPM and no change in ASMs.
Break-even load factor as presented above may be deemed a non-GAAP financial measure under regulations
issued by the Securities and Exchange Commission. We believe that presentation of break-even load factor
calculated after certain adjustments is useful to investors because the elimination of special or unusual
items allows a meaningful period-to-period comparison. Furthermore, in preparing operating plans and
forecasts we rely on an analysis of break-even load factor exclusive of these special and unusual items.
Our presentation of non-GAAP results should not be viewed as a substitute for our financial or statistical
results based on GAAP, and other airlines may not necessarily compute break-even load factor in a manner
that is consistent with our computation.
A reconciliation of the components of the calculation of the mainline break-even load factor is as
follows:
Year Ended
March 31, Quarters Ended June 30,
2004 2004 2003
(In thousands)
Net (income) loss $(12,635) $ 6,574 $(10,934)
Income tax (expense) benefit (7,822) 3,638 (6,689)
Passenger revenue 615,390 169,437 139,010
Revenue - regional partner 11,191 19,126 -
Charter revenue (2,724) (656) (614)
Operating expenses - regional partner (14,634) (21,293) -
Passenger revenue - mainline (excluding charter
and regional partner revenue) required to break
even (based on GAAP amounts) $ 588,766 $ 176,826 $ 120,773
Non-GAAP adjustments:
Emergency Wartime Supplemental Appropriations
Act compensation, net of bonuses 13,842 - 13,842
Aircraft and facility lease exit costs, net
of bonuses (4,949) - (632)
Early retirement of debt costs, net of bonuses (9,677) - -
Loss on sale-leaseback of aircraft, net of bonuses (1,219) (489) -
Loss on sale of aircraft engine, net of bonuses (445) - -
Impairment of Boeing engine and rotable parts,
net of bonuses (2,807) - -
Provision for Boeing spare parts inventory,
net of bonuses (569) (388) -
Horizon start-up costs, net of bonuses (1,061) - -
Unrealized derivative gain (loss), net of bonuses - (477) 693
Passenger revenue- mainline (excluding charter and
regional partner revenue) required to break-even
(based on adjusted amounts) $ 581,881 $ 175,472 $ 134,676
====================================
The calculation of the break-even load factor follows:
Year Ended
March 31, Quarters Ended June 30,
2004 2004 2003
Calculation of mainline break-even load factor
using GAAP amounts:
Passenger revenue- mainline (excluding charter
and regional partner revenue) required to break
even (based on GAAP amounts) ($000s) $ 588,766 $ 176,826 $ 120,773
Mainline yield per RPM (cents) 11.96 10.79 12.30
Mainline revenue passenger miles (000s) to break
even assuming constant yield per RPM 4,922,793 1,638,795 981,894
Mainline available seat miles (000s) 7,153,740 2,211,652 1,675,050
=======================================
Mainline break-even load factor using GAAP amounts 68.8% 74.1% 58.6%
=======================================
Calculation of mainline break-even load factor using
Non-GAAP amounts:
Passenger revenue (excluding charter and regional
partner revenue) required to break even (based
on adjusted amounts) ($000s) $ 581,881 $ 175,472 $ 134,676
Mainline yield per RPM (cents) 11.96 10.79 12.30
Mainline revenue passenger miles (000s) to break
even assuming constant yield per RPM 4,865,226 1,626,247 1,094,926
Mainline available seat miles (000's) 7,153,740 2,211,652 1,675,050
=======================================
Mainline break-even load factor using non-GAAP amounts 68.0% 73.5% 65.4%
=======================================
(7) "Mainline block hours" represent the time between aircraft gate departure and aircraft gate arrival.
(8) "Mainline 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.
(9) "Yield per RPM" is determined by dividing passenger revenues (excluding charter revenue) by revenue
passenger miles.
(10) 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:
Year Ended March 31, Quarters Ended June 30,
2004 2004 2003
Passenger revenues - mainline, as reported $ 615,390 $ 169,437 $ 139,010
Less: charter revenue 2,724 656 614
Passenger revenues - mainline excluding charter 612,666 168,781 138,396
Add: Passenger revenues - regional partner 11,191 19,126 -
Passenger revenues, system combined $ 623,857 $ 187,907 $ 138,396
=============== =========== ===========
(11) "Total yield per RPM" is determined by dividing total revenues by revenue passenger miles.
(12) "Yield per ASM" is determined by dividing passenger revenues (excluding charter revenue) by available
seat miles.
(13) "Total yield per ASM" is determined by dividing total revenues by available seat miles.
(14) 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.
(15) "Mainline average fare" excludes revenue included in passenger revenue for charter and 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 for our mainline operations expressed
as cents per total mainline ASMs and as a percentage of total mainline operating revenues, as rounded, for the
year ended March 31, 2004 and the quarters ended June 30, 2004 and 2003. Regional partner revenues, expenses
and ASMs were excluded from this table to provide comparable amounts to the prior period presented.
Year Ended March 31, Quarters Ended June 30,
2004 2004 2003
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger - mainline 8.60 97.3% 7.66 97.8% 8.30 97.6%
Cargo 0.11 1.3% 0.07 0.8% 0.10 1.2%
Other 0.13 1.4% 0.11 1.4% 0.10 1.2%
Total revenues 8.84 100.0% 7.84 100.0% 8.50 100.0%
====================== ======================= =======================
Operating expenses:
Flight operations 1.47 16.6% 1.44 18.3% 1.49 17.5%
Aircraft fuel expense 1.52 17.2% 1.81 23.1% 1.35 15.9%
Aircraft lease expense 0.98 11.1% 0.85 10.9% 1.03 12.1%
Aircraft and traffic servicing 1.54 17.5% 1.43 18.3% 1.43 16.9%
Maintenance 1.04 11.7% 0.87 11.1% 1.07 12.5%
Promotion and sales 0.91 10.3% 0.90 11.5% 0.88 10.3%
General and administrative 0.52 5.8% 0.47 5.9% 0.53 6.3%
Aircraft lease and facility
exit costs 0.07 0.8% - - 0.04 0.5%
Loss on sale-leaseback of
aircraft 0.02 0.2% 0.02 0.3% - -
Depreciation and amortization 0.33 3.8% 0.30 3.8% 0.31 3.6%
Total operating expenses 8.40 95.0% 8.09 103.2% 8.13 95.6%
====================== ======================= ======================
Revenues
Industry fare pricing behavior has a significant impact on our revenues. Because of the elasticity of
passenger demand, we believe that increases in fares may at certain levels result in a decrease in passenger
demand in many markets. We cannot predict future fare levels, which depend to a substantial degree on actions
of competitors and the economy. When sale prices or other price changes are initiated by competitors in our
markets, we believe that we must, in most cases, match those competitive fares in order to maintain our market
share. Passenger revenues are seasonal in leisure travel markets depending on the markets' locations.
Passenger Revenues. Mainline passenger revenues totaled $169,437,000 for the quarter ended June 30,
2004 compared to $139,010,000 for the quarter ended June 30, 2003, an increase of 21.9%. Mainline passenger
revenue includes revenues for reduced rate standby passengers, administrative fees, revenue recognized for
tickets that are not used within one year from their issue dates, and revenue recognized from our co-branded
credit card arrangement. We carried 1,584,000 mainline revenue passengers during the quarter ended June 30, 2004
compared to 1,227,000 in the quarter ended June 30, 2003, an increase of 29.1%. We had an average of 41.4
aircraft in service during the quarter ended June 30, 2004 compared to an average of 35.6 aircraft during the
quarter ended June 30, 2003, an increase of 16.3%. Mainline ASMs increased to 2,211,652,000 for the quarter
ended June 30, 2004 from 1,675,050,000 for the quarter ended June 30, 2003, an increase of 32.0%. Mainline RPMs
for the quarter ended June 30, 2004 were 1,564,587,000 compared to 1,125,233,000 for the quarter ended June 30,
2003, an increase of 39.0%, outpacing the increase in mainline ASMs. Our mainline RASM decreased from 8.26(cent)
to 7.63(cent), a decrease of 7.6%. Our mainline average fare was $100.50 for the quarter ended June 30, 2004 as
compared to $104.70 for the quarter ended June 30, 2003, a decrease of 4.0%. Our length of haul was 988 and 917
miles for the quarters ended June 30, 2004 and 2003, respectively, or an increase of 7.7%, causing some downward
pressure on our yield. We offered introductory fares in the six new markets we entered during the quarter
ended June 30, 2004, which we believe negatively impacted our average fare. The decrease in the average
fare was partially offset by an increase in our mainline load factor to 70.7% for the quarter ended June 30, 2004
as compared to 67.2% for the quarter ended June 30, 2003, an increase of 3.5 points. In May 2003, we launched a
unique branding campaign, `A Whole Different Animal,' and we believe customer response to this initiative
in addition to our lower fare structure is a positive contributor to our results for the quarters ended June 30,
2004 and 2003.
Passenger Revenues - Regional Partner. Regional partner revenues, consisting of revenues from Frontier
JetExpress operated by Horizon, totaled $19,126,000 for the quarter ended June 30, 2004 and none for the quarter
ended June 30, 2003. The incremental revenue from passengers connecting from regional flights to mainline
flights is included in our mainline passenger revenue. Horizon began service January 1, 2004 and replaced the
Frontier JetExpress service formerly provided by Mesa. For the three months ended June 30, 2003, revenues of
$7,847,000 from regional jet operations, at the time provided by Mesa Airlines, were netted against related
expenses and included in "Other revenues". See footnote (2) in "Selected Financial Data", which explains the
different accounting methods for our Frontier JetExpress operations.
Cargo Revenues. Cargo revenues, consisting of revenues from freight and mail service, totaled
$1,427,000 and $1,689,000 for the quarters ended June 30, 2004 and 2003, representing .8% and 1.2% of total
operating revenues excluding regional partner revenues, respectively, or a decrease of 15.5%. 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. During the quarter ended June 30, 2004 we
determined that carrying mail for the United States Postal Service was not profitable and we terminated our
contract effective July 1, 2004.
Other Revenues. Other revenues, comprised principally of interline handling fees, liquor sales, LiveTV
sales and excess baggage fees, totaled $2,432,000 and $1,667,000 or 1.4% and 1.2% of total operating revenues
excluding regional partner revenue for the quarters ended June 30, 2004 and 2003, respectively, an increase of
45.9%. Other revenue increased over the prior comparable period as a result of an increase in LiveTV and liquor
sales.
Operating Expenses
Operating expenses include those related to flight operations, aircraft and traffic servicing,
maintenance, promotion and sales, Frontier JetExpress operations, general and administrative and depreciation and
amortization. Total operating expenses were $200,191,000 and $136,171,000 for the quarters ended June 30, 2004
and 2003 and represented 104.0% and 95.6% of total revenue, respectively. Operating expenses increased as a
percentage of revenue during the quarter ended June 30, 2004 largely a result of a 34.4% increase in our aircraft
fuel cost per gallon for the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003.
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 $47,581,000 and $37,002,000 and were 27.5% and 26.0% of total mainline revenues for the quarter ended
June 30, 2004 and 2003, respectively, an increase of 28.6%. Salaries, wages and benefits increased over the
prior comparable periods largely as a result of overall wage increases and an increase in the number of
employees to support our continued ASM growth as well as the ASM growth that we expect for the remainder
of fiscal year 2005. Our mainline ASMs increased 32.0% for the quarter ended June 30, 2004 as compared to
the quarter ended June 30, 2003. Our employees increased from approximately 3,400 in June 2003 to approximately
4,400 in June 2004, or 29.4%. During the quarter ended June 30, 2004, we increased the number of Airbus aircraft
in service by nine and took one Boeing aircraft out of service. During the quarter ended June 30, 2003, we
added one Airbus aircraft and retired one Boeing aircraft. We pay pilot and flight attendant salaries for
training, consisting of approximately six and three weeks, respectively, prior to scheduled increases in
service, which can cause the compensation expense during such periods to appear high in relationship to the
average number of aircraft in service.
Flight Operations. Flight operations expenses of $31,789,000 and $24,973,000 were 18.3% and 17.5% of
total mainline revenue for the quarters ended June 30, 2004 and 2003, respectively, an increase of 27.3%. Flight
operations expenses include all expenses related directly to the operation of the aircraft excluding depreciation
of owned aircraft and lease expenses and including insurance expenses, pilot and flight attendant compensation,
in-flight catering, crew overnight expenses, flight dispatch and flight operations administrative expenses.
Aircraft insurance expenses totaled $2,646,000 (1.5% of total mainline revenue) and $2,746,000
(1.9% of total mainline revenue) for the quarters ended June 30, 2004 and 2003, respectively. Aircraft
insurance expenses were .12(cent) and .16(cent) per mainline ASM for the quarters ended June 30, 2004 and
2003, respectively. Aircraft insurance decreased per mainline ASM as a result of a 30% decrease in our
basic hull and liability insurance rates effective June 7, 2003 through June 6, 2004 as compared to our
previous policy and an additional 25% decrease in our basic hull and liability insurance rates effective
June 7, 2004. The FAA currently provides war risk coverage at a less expensive rate as compared to the
coverage that was previously provided by commercial underwriters. The current FAA war risk policy is in
effect until December 31, 2004. We do not know whether the government will extend the coverage beyond
December 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 $16,889,000 and
$12,485,000 or 10.0% and 9.0% of passenger mainline revenue, for the quarters ended June 30, 2004 and 2003,
respectively, or an increase of 35.3%. Pilot and flight attendant compensation increased as a result of a
16.3% increase in the average number of aircraft in service, an increase of 32.7% in block hours, a general
wage increase in pilot and flight attendant salaries, and additional crews required to replace crews attending
transitional training on the Airbus equipment.
Aircraft fuel expense. Aircraft fuel expenses include both the direct cost of fuel including taxes
as well as the cost of delivering fuel into the aircraft. Aircraft fuel costs of $40,003,000 for 32,118,000
gallons used and $22,601,000 for 24,412,000 gallons used resulted in an average fuel cost of 1.25(cent) and
93(cent) per gallon for the quarters ended June 30, 2004 and 2003, respectively. Aircraft fuel expenses
represented 23.1% and 15.9% of total mainline revenue for the quarters ended June 30, 2004 and 2003,
respectively. The average fuel cost per gallon increased 34.4% over the prior comparable period. Fuel
prices are subject to change weekly, as we purchase a very small portion in advance for inventory.
The results of operations for the quarter ended June 30, 2004 include an unrealized derivative loss of
$477,000 and a realized net gain of approximately $543,000 in cash settlements received from a counter-party
recorded as a decrease in fuel expense. The results of operations for the quarter ended June 30, 2003
include an unrealized derivative gain of $752,000 and a realized loss of approximately $213,000 in cash
payments made to a counter-party recorded as an increase in fuel expense. Fuel consumption for the
quarters ended June 30, 2004 and 2003 averaged 730 and 737 gallons per block hour, respectively,
or a decrease of .9%. Fuel consumption per block hour decreased during the quarter ended June 30, 2004
from the prior comparable period because of the more fuel-efficient Airbus aircraft added to our fleet
coupled with the reduction in our Boeing fleet, which has slightly higher fuel burn rates.
Aircraft Lease Expenses. Aircraft lease expenses totaled $18,891,000 (10.9% of total mainline revenue)
and $17,192,000 (12.1% of total mainline revenue) for the quarters ended June 30, 2004 and 2003, respectively,
or an increase of 9.9%. The average number of leased aircraft increased to 27.5 from 26.6, an increase of 3.4%.
Aircraft lease expense increased slightly as a result of newer and larger aircraft leased during the quarter
ended June 30, 2004 compared to the aircraft leased during the quarter ended June 30, 2003.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $31,692,000 and
$23,998,000 (an increase of 32.1%) for the quarters ended June 30, 2004 and 2003, respectively, and represented
18.3% and 16.9% of total mainline revenue. Aircraft and traffic servicing expenses include all expenses
incurred at airports including landing fees, facilities rental, station labor, ground handling expenses, and
interrupted trip expenses associated with delayed or cancelled flights. Interrupted trip expenses are amounts
paid to other airlines to protect 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. As of June 30,
2004, we served 49 cities compared to 38 cities as of June 30, 2003, or an increase of 28.9%. During the
quarter ended June 30, 2004, our departures increased to 17,650 from 14,610, or an increase of 20.8%. Aircraft
and traffic servicing expenses were $1,796 per departure for the quarter ended June 30, 2004 as compared to
$ 1,643 per departure for the quarter ended June 30, 2003, or an increase of 9.3%. Aircraft and traffic
servicing expenses increased per departure as a result of overall wage increases, increase in airport facilities
at existing cities and costs associated with the start-up of six new cities in the quarter and the additional
flying from our Los Angeles focus city.
Maintenance. Maintenance expenses of $19,282,000 and $17,878,000 were 11.1% and 12.5% of total revenue
for the quarters ended June 30, 2004 and 2003, respectively. These include all labor, parts and supplies
expenses related to the maintenance of the aircraft. Maintenance is charged to maintenance expense as incurred.
Maintenance cost per block hour was $438 and $540 for the quarters ended June 30, 2004 and 2003, respectively, a
decrease of 18.9%. 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.
Our mainline average age of aircraft was 3.1 years as of June 30, 2004 as compared to 6.7 years as of June 30,
2003. The owned Airbus fleet comprising about 37.8% of our total Airbus fleet is new and we are experiencing
lower maintenance costs as compared to the older aircraft that are in our fleet. Maintenance reserves are
required to be paid on a monthly basis to lessors of our leased Boeing and Airbus fleet and are expensed monthly
as incurred. As the Airbus aircraft age, they will require more maintenance and maintenance expenses per block
hour will increase.
Promotion and Sales. Promotion and sales expenses totaled $19,839,000 and $14,720,000 and were 11.5%
and 10.3% of total revenue excluding revenues from our regional partner operations for the quarters ended June
30, 2004 and 2003, respectively. These expenses include advertising expenses, telecommunications expenses, wages
and benefits for reservation agents and related supervision as well as marketing management and sales personnel,
credit card fees, travel agency commissions and computer reservations costs. During the quarter ended June 30,
2004, promotion and sales expenses per mainline passenger increased to $12.52 from $12.00 for the quarter ended
June 30, 2003. Promotion and sales expenses per mainline passenger increased as a result of our branding
awareness campaign, which began May 2003 and includes television, print and radio components. Additionally, we
have increased our involvement in professional and collegiate sports team sponsorships resulting in increased
promotion expense during the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003.
Advertising expenses also increased as a result of increased advertising in the Los Angeles, California area
to promote brand awareness in our new focus city.
General and Administrative. General and administrative expenses for the quarters ended June 30, 2004
and 2003 totaled $10,294,000 and $8,936,000, respectively, and were 5.9% and 6.3% of total mainline revenue,
respectively. During the quarter ended June 30, 2003, we accrued for employee performance bonuses totaling
$1,125,000 or .8% of total revenue. Bonuses are based on profitability. As a result of our pre-tax loss for
the quarter ended June 30, 2004, 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 3,400 in June 2003 to approximately 4,400 in June 2004, an increase of 29.4%. Accordingly,
we experienced increases in our human resources, training, information technology, and health insurance benefit
expenses.
Regional Partner Expense. Regional partner expense for the quarter ended June 30, 2004 totaled
$21,293,000 and was 111.3% of total regional partner revenues. Regional partner expenses include all direct
costs associated with Frontier JetExpress operated by Horizon. Horizon began service January 1, 2004 and
replaced the JetExpress service formerly provided by Mesa. During the quarter ended June 30, 2003, $7,775,000 in
Mesa expenses were netted against related revenues and included in other revenues. See footnote (2) in "Selected
Financial Data", which explains the different accounting methods for our Frontier JetExpress operations.
Aircraft Lease and Facility Exit Costs. In May 2003, we ceased using one of our Boeing 737-200
leased aircraft that had a lease termination date in October 2005 and recorded a charge of $686,000. This
amount includes the estimated fair value of the remaining lease payments and the write off of the unamortized
leasehold improvements on the aircraft.
Loss on Sale-leaseback of Aircraft. During the quarter ended June 30, 2004, we incurred a loss
totaling $489,000 on the sale-leaseback of two Airbus A319 aircraft.
Depreciation and Amortization. Depreciation and amortization expenses of $6,618,000 and $5,187,000,
an increase of 27.6%, were approximately 3.8% and 3.6% of total mainline revenue for the quarters ended
June 30, 2004 and 2003, respectively. These expenses include depreciation of aircraft and aircraft components,
office equipment, ground station equipment, and other fixed assets. Depreciation expense increased over the
prior year largely as a result of an increase in the average number of Airbus A319 and A318 aircraft owned
from nine during the quarter ended June 30, 2003 to 13.9 during the quarter ended June 30, 2004.
Nonoperating Income (Expense). Net nonoperating expense totaled $2,444,000 for the quarter ended
June 30, 2004 compared to net nonoperating income of $11,427,000 for the quarter ended June 30, 2003.
During the quarter ended June 30, 2003, we recognized $15,024,000 of compensation as a result of payments under
the Appropriations Act for expenses and revenue foregone related to aviation security. We received a total of
$15,573,000 in May 2003, of which we paid $549,000 to Mesa for the revenue passengers Mesa carried as Frontier
JetExpress.
Interest income increased to $571,000 from $413,000 during the quarter ended June 30, 2004 from the
prior comparable period as a result of an increase in invested cash. Interest expense decreased to $2,908,000
for the quarter ended June 30, 2004 from $3,834,000 for the quarter ended June 30, 2003. Interest expense for
the quarter ended June 30, 2003 included the interest expense associated with a $70,000,000 government guaranteed
loan we obtained in February 2002 and subsequently repaid in December 2003. The decrease in interest expense
from the government guaranteed loan for the quarter ended June 30, 2004 from the prior comparable period is
partially offset by the interest expense associated with the financing of five additional Airbus aircraft
purchased since June 30, 2003.
Income Tax Expense (Benefit). We recorded an income tax benefit of $3,638,000 during the quarter
ended June 30, 2004 at a 36.0% rate, compared to an income tax expense of $6,689,000 for the quarter ended
June 30, 2003, at a 38.0% rate.
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 26 additional Airbus
aircraft that as of July 28, 2004 are scheduled for delivery through March 2008.
We had cash, cash equivalents and short-term investments of $193,558,000 and $190,609,000 at
June 30, 2004 and March 31, 2004, respectively. At June 30, 2004, total current assets were $278,030,000
as compared to $202,240,000 of total current liabilities, resulting in working capital of $75,790,000. At
March 31, 2004, total current assets were $269,733,000 as compared to $181,659,000 of total current liabilities,
resulting in working capital of $88,074,000. The decrease in our working capital from March 31, 2004 is
largely a result of capital expenditures and debt principal payments.
Cash provided by operating activities for the quarter ended June 30, 2004 was $9,022,000.
This is attributable to our net loss adjusted for non-cash charges and credits and changes in working capital
accounts. Our restricted investments increased largely a result of increased collateral requirements
for our bankcard processor associated with the increase in our business. Prepaid expenses increased
principally as a result of an increase in fuel deposits as a result of the increase in the price of fuel
and an increase in fuel consumption associated with the increase in block hours flown. Our air traffic
liability increased as a result of 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 expenses increased as a result of increases in employee benefits associated
with the increase in the number of employees and increases in health care expenses, and increases in
passenger related taxes associated with our increase in revenue and passengers carried. Cash provided
by operating activities for the quarter ended June 30, 2003 was $35,753,000. This is attributable to our
net income adjusted for non-cash charges and credits and changes in working capital accounts. Restricted
investments increased as a result of increased collateral requirements for our bankcard processor
associated with the increase in our business and an increase in collateral for our workers'
compensation insurance.
Cash used in investing activities for the quarter ended June 30, 2004 was $20,252,000. Net
aircraft lease and purchase deposits decreased by $15,896,000 during the period. Capital expenditures
were $103,069,000 for the quarter ended June 30, 2004 and included the purchase of one Airbus A318 aircraft
and two Airbus A319 aircraft we took delivery of and subsequently completed sale-leaseback transactions
on both A319 aircraft. Additionally, capital expenditures included the purchase of LiveTV equipment,
rotable aircraft components, aircraft improvements and ground equipment. We applied the pre-delivery
payments totaling $6,412,000 for the purchase of an Airbus A318 aircraft to the purchase of that aircraft
and the pre-delivery deposits totaling $14,716,000 for the two Airbus A319 aircraft were returned to us.
We received $63,625,000 from the sale of the two A319 aircraft and other equipment. Cash used in investing
activities for the quarter ended June 30, 2003 was $9,520,000. Net aircraft lease and purchase deposits
increased by $7,599,000 during this period, principally for pre-delivery payments. We used $2,128,000 to
purchase rotable aircraft components and other general equipment purchases.
Cash provided by financing activities for the quarter ended June 30, 2004 was $16,179,000. During
the quarter ended June 30, 2004, we borrowed $22,000,000 for the purchase of one Airbus A318 aircraft
and paid $5,626,000 of debt principal payments. Cash used in financing activities for the quarter ended
June 30, 2003 was $2,846,000 for debt principal payments.
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 in order to accommodate our anticipated growth over the next several
years. In the interim, we have gained temporary rights to two gates, and permanent rights to one gate,
previously used by United on the East end of Concourse A. We are currently obligated to return the two
temporary gates to United in October 2005. DIA has also completed construction of two temporary gates on
the West end of Concourse A. We are currently using all five of these temporary gates until a permanent
expansion can be completed. Initial negotiations with the City and County of Denver and its primary
contractor have stalled, and we are working with the City and County of Denver to establish a process to obtain
a second round of competitive bids for design and construction of the expansion project. If final agreement
is reached, upon completion of the permanent expansion to Concourse A we would be obligated to lease the
additional gates, thereby increasing our overall rates and charges paid to the airport. Because our overall
rates and charges will be based on the final project costs as well as the number of passengers and gross
weight landed at the airport, it is impossible at this time to determine what our future rates and charges at
DIA will be.
As part of the lease restructure between the City and County of Denver and United, 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. The City and County of Denver has indicated that it 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 DIA, we may incur a larger impact of any increase in
rates and charges imposed by DIA. At this time, we cannot quantify what the increase in our rates and
charges would be, if any, due to the concessions being provided to United.
In April 2004, we entered into a services agreement with Sabre, Inc. for its SabreSonic passenger
solution to power our reservations and check-in capabilities along with a broad scope of technology for
streamlining our operations and improving revenues. With SabreSonic, we will have access to real-time
passenger data including the customer's history with Frontier and any EarlyReturns frequent flyer activity,
current travel plans and any changes made to an existing reservation. The data can be accessed by our
customer service agents via an open-source, Windows-based interface at all customer touch points including
the website, reservations, the ticket counter and the gate, providing a seamless customer service experience
from the time the customer books the ticket until they arrive at their final destination. We expect to
complete implementation of SabreSonic in the first half of calendar 2005. We are estimating that the
transition costs for the implementation which includes training of our customer service and reservation
agents to be approximately $2,800,000 and will largely fall in the last half of our fiscal year ended
March 31, 2005.
On July 22, 2004, the National Mediation Board (NMB) reported that our twenty Materials Specialists
elected not to join the International Brotherhood of Teamsters (IBT) Union. On July 30, 2004, the IBT filed
an allegation of election interference with the NMB, requesting a new election. We believe the IBT's
allegations are without merit and we will file our response with the NMB in the near future. Our Materials
Specialists are part of the Materials Management group, which is under the finance department. Materials
Specialists are involved in the receiving, shipping, transporting, issuing, handling, and relocating of parts
and equipment to the appropriate internal customers.
In July 2004 we entered into an agreement with a vendor and are in final negotiations with another
to market and sell all of our Boeing 737-200 and certain Boeing 737-300 spare parts inventories. We are
in the process of putting the initial inventory package together which will include all of the Boeing
737-200 expendables and rotables and certain spares that support the Boeing 737-300 fleet. We expect
to begin to actively sell these parts in August 2004. During the quarter ended September 30, 2004, we
expect to record the value of the rotables as "Assets held for sale" on our balance sheet, at which time we
will record a charge of the estimated costs of selling these assets. At this time we have not quantified
the total value of the assets to be sold, however, as of June 30, 2004, the total net book value of our
Boeing rotables including two spare engines approximated $15,285,000. The total value of our Boeing
expendable inventory at June 30, 2004 was $2,735,000.
We have been assessing our liquidity position in light of our aircraft purchase commitments and
other capital requirements, 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 and our results of operations have
improved our liquidity, we may need to continue to explore avenues to enhance our liquidity if
our current economic and operating environment changes. 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 June 30, 2004:
Less than 1-3 4-5 After
1 year years years 5 years Total
Long-term debt (1) $ 17,503,000 $ 38,008,000 $ 42,439,000 $ 215,811,000 $ 313,761,000
Operating leases (2) 124,644,000 239,128,000 235,239,000 704,651,000 $1,303,662,000
Unconditional purchase
obligations (3)(4) 60,359,000 316,420,000 127,583,000 - $ 504,362,000
Total contractual cash
obligations $202,506,000 $ 593,556,000 $405,261,000 $ 920,462,000 $2,121,785,000
========================================================================
(1) At June 30, 2004, we had 14 loan agreements for nine Airbus A319 aircraft and five Airbus A318
aircraft. Two of the loans have a term of 10 years and are payable in equal monthly installments,
including interest, payable in arrears. These loans require monthly principal and interest payments
of $215,000 and $218,000, bear 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.
The remaining 12 loans have interest rates based on LIBOR plus margins that adjust quarterly or
semi-annually. At June 30, 2004, interest rates for these loans ranged from 2.44% to 3.72%. Each
of these loans have a term of 12 years, and each loan has balloon payments ranging from $2,640,000
to $7,770,000 at the end of the term. All of the loans are secured by the aircraft.
(2) As of June 30, 2004, we lease 22 Airbus A319 type aircraft, one Airbus A318 aircraft, and 11 Boeing
737 type aircraft under operating leases with expiration dates ranging from 2004 to 2016. Three
of the Boeing 737 type aircraft are no longer in service, one is being stored until the lease return
date of October 2005 and the other two aircraft will be returned to their lessors in the August and
September 2004. 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 June 30, 2004,
we had made cash security deposits of $13,986,000 and had arranged for letters of credit of $3,808,000
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 June 30, 2004,
we had taken delivery of 13 of these aircraft and have letters of credit on the remaining two
aircraft to be delivered totaling $411,800 to secure these leases, collateralized by restricted cash
balances.
During the year ended March 31, 2004, we entered into additional aircraft lease agreements for two
Airbus A318 aircraft and 18 Airbus A319 aircraft. Three of the aircraft leases were a result of
sale-leaseback transactions of three new Airbus aircraft. As of June 30, 2004, we have taken
delivery of eight of these aircraft. The remaining 12 aircraft are scheduled for delivery
beginning in July 2004 through February 2007. As of June 30, 2004, we have made $2,362,000 in security
deposit payments for future leased aircraft deliveries.
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) As of June 30, 2004, we have remaining firm purchase commitments for 13 additional aircraft and
three spare engines, which have scheduled delivery dates beginning in September 2004 and continuing
through 2008. Included in the purchase commitments are the remaining amounts due Airbus and amounts
for spare aircraft components to support the additional purchase and leased aircraft. We are
not under any contractual obligations with respect to spare parts. 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 June 30, 2004, we had made pre-delivery
payments on future deliveries totaling $9,702,000 to secure these aircraft.
We signed two letters of intent for the debt financing for two of our 13 A319 aircraft scheduled
for delivery from Airbus in fiscal year 2006. The terms of these agreements permit us to
borrow up to $24,500,000 per aircraft at 80% of the appraised base value of the aircraft, whichever
is less, over a period of 12 years at floating interest rates with a balloon payment equal to 20%
of the original loan amount due at maturity.
We have signed a letter of intent for the sale-leaseback of one owned and three spare engines
scheduled for delivery between September 2004 and February 2006. The terms of this agreement
allow us to sell each spare engine to the buyer at the time of delivery, and then lease the engines
back for a period of ten years commencing on the delivery date. The agreement will provide financing
for an additional two spare engines which we expect we will order at some point in the future.
(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. As of June 30, 2004, we have purchased 35 units and have made deposits
toward the purchase of six additional units. The table above includes the remaining purchase commitment
amounts for the six units on which we have made partial payments and all amounts not yet paid on the
remaining firm five units.
Commercial Commitments
As we enter new markets, increase the amount of space we lease, or add leased aircraft, we
are often required to provide the airport authorities and lessors with a letter of credit, bonds or cash
security deposits. These generally approximate up to three months of rent and fees. We also provide
letters of credit for our workers' compensation insurance. As of June 30, 2004, we had outstanding
letters of credit, bonds, and cash security deposits totaling $12,908,000, $1,467,000, and $19,415,000,
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 June 30, 2004, we have utilized $12,908,000 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 of deposit
equal to a certain percentage of our air traffic liability associated with bankcard customers. As of
June 30, 2004, that amount totaled $23,388,000. The amount is adjusted quarterly in arrears based on our
air traffic liability associated with bankcard transactions. As of September 1, 2004, we are required to
increase the amount by approximately $4,705,000.
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, working capital ratio, and percent of debt to
debt plus equity. As of June 30, 2004, 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
July 28, 2004, the coverage would be increased to $7,991,000 if we failed the tests. If we were
unable to increase the bond amount as a result of our then financial condition, we could be required to
issue a letter of credit that would restrict cash in an amount equal to the letter of credit.
In 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, in the case of a
three-way collar, 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 hedged product's 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, 2004 to June 30, 2004. The fixed price of the swap was 74.50 cents
per gallon and the agreement is estimated to represent 7% of our fuel purchases for that period. On
May 21, 2004, we entered into a two way collar agreement that hedges approximately 25% of our expected
fuel requirements in the quarters ended December 31, 2004 and March 31, 2005. The collar uses West Texas
Intermediate crude oil as its basis. The cap price is set at $39.00 per barrel, and the floor is set at
$34.85 per barrel.
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.
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 the engines were operated during that month. The amounts due based on flight
hours are not included in table above. As of June 30, 2004, the agreement covers 14 purchased Airbus
aircraft and 23 leased Airbus aircraft. The costs under this agreement for our purchased aircraft for the
quarters ended June 30, 2004 and 2003 were approximately $663,000 and $395,000, respectively. For our
leased aircraft, the lessors pay GE directly for the repair of aircraft engines in conjunction with this
agreement from reserve accounts established under the applicable lease documents.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Critical accounting policies are defined as those that are both important to the portrayal of our
financial condition and results, and require management to exercise significant judgments. Our most
critical accounting policies are described briefly below.
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.
Inventories
Inventories consist of expendable aircraft spare parts, supplies and aircraft fuel and are stated
at the lower of cost or market. Inventories are accounted for on a first-in, first out basis and are
charged to expense as they are used. During the fiscal years ended March 31, 2004 and 2003, we recorded
a provision for excess Boeing expendable parts inventory totaling $618,000 and $2,478,000, respectively.
The provision in 2004 was principally the result of declining resale values of excess Boeing expendable parts.
We monitor resale values for Boeing parts quarterly using estimates obtained from our vendors. We believe
the decline in resale values of parts for the less fuel efficient Boeing 737-200 and Boeing 737-300 aircraft
was due in part to increasing fuel prices during the quarter. The provision in 2003 was principally the
result of returning five Boeing aircraft to the lessors in 2003, and our decision during the quarter ended
March 31, 2003, to discontinue the use of our three remaining Boeing 737-200 aircraft in advance of the end
of the term of their respective leases. This decision was in response to the significant decline in passenger
demand as a result of the war in Iraq and the continuing economic recession. The provision was based on
estimates of the resale value of the excess expendable parts, which were obtained from our vendors. We
evaluated our estimated usage of these parts and the current resale value at June 30, 2004 and recorded an
additional provision of $388,000.
Impairment of Long-Lived Assets
We record impairment losses on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by those assets are
less than the carrying amount of the assets. If an impairment occurs, the loss is measured by comparing
the fair value of the asset to its carrying amount. During the year ended March 31, 2004, we recorded
an impairment charge for engines and rotable parts that support the Boeing 737-300 aircraft of $3,047,000.
The impairment charge for rotables totaling $901,000 was principally the result of declining resale values
for Boeing rotables. We monitor resale values for Boeing rotables quarterly using estimates obtained from
our vendors. The impairment for the two Boeing 737-300 spare engines totaling $2,146,000 was the result
of our decision in the fourth quarter to sell these remaining spare engines. The impairment was based on
three separate quotes from third parties. No further indicators of impairment exist at June 30, 2004
based on current resale values.
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 year 2003, we accrued for major overhaul costs on a per-flight-hour basis
in advance of performing the maintenance services.
Effective January 1, 2003, we and GE executed a 12-year engine services agreement covering the
scheduled and unscheduled repair of Airbus engines. Under the terms of the services agreement, we agreed
to pay GE a fixed rate per-engine-hour, payable monthly, and GE assumed the responsibility to overhaul
our engines on Airbus aircraft as required during the term of the services agreement, subject to certain
exclusions. We believe the fixed rate per-engine hour approximates the periodic cost we would have
incurred to service those engines. Accordingly, these payments are expensed as the obligation is incurred.
Derivative Instruments
We account for derivative financial instruments in accordance with the provisions of Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 requires us to measure all derivatives at fair value and to recognize them in the
balance sheet as an asset or liability. For derivatives designated as cash flow hedges, changes in
fair value of the derivative are generally reported in other comprehensive income ("OCI") and are subsequently
reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative
instruments not designated as hedging instruments and ineffective portions of hedges are recognized in earnings
in the current period.
We enter into derivative transactions to hedge the interest payments associated with a portion
of our LIBOR-based borrowings and fuel purchases. We designate certain interest rate swaps as qualifying
cash flow hedges. We also enter into derivative transactions to reduce exposure to the effect of
fluctuations in fuel prices. These transactions are accounted for as trading instruments under SFAS 133.
As a result, we record these instruments at fair market value and recognizes realized and unrealized
gains and losses in aircraft fuel expense.
Customer Loyalty Program
In February 2001, we established EarlyReturns, a frequent flyer program to encourage travel on
our airline and customer loyalty. We account for the EarlyReturns program under the incremental cost
method whereby travel awards are valued at the incremental cost of carrying one passenger based on expected
redemptions. Those incremental costs are based on expectations of expenses to be incurred on a per passenger
basis and include food and beverages, fuel, liability insurance, and ticketing costs. The incremental
costs do not include a contribution to overhead, aircraft cost or profit. We do not record a liability
for mileage earned by participants who have not reached the level to become eligible for a free
travel award. We believe this is appropriate because the large majority of these participants are not
expected to earn a free flight award. We do not record a liability for the expected redemption of miles for
non-travel awards since the cost of these awards to us is negligible.
Co-branded Credit Card Arrangement
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. 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 which 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
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, whereas we require only 15,000 frequent flyer miles for a domestic round-trip ticket.
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, 2004. Based on fiscal year 2004 actual fuel usage, such a change would have
had the effect of increasing or decreasing our aircraft fuel expense by approximately $10,886,000
in fiscal year 2004. Comparatively, based on projected fiscal year 2005 fuel usage, including fuel
required for our regional partner, such a change would have the effect of increasing or decreasing
our aircraft fuel expense by approximately $15,205,000 in fiscal year 2005, excluding the effects of
our fuel hedging arrangements. The increase in exposure to fuel price fluctuations in fiscal year 2005
is due to the increase of our average aircraft fleet size projected for the year ending March 31, 2005
and related gallons expected to be purchased.
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 was 74.50
cents per gallon and the agreement was estimated to represent 7% of our fuel purchases for that period.
The results of operations for the quarter ended June 30, 2004 include an unrealized derivative loss
of $302,000 that is included in fuel expense and a realized net gain of approximately $543,000 in cash
settlements received from a counter-party recorded as a decrease in fuel expense. On May 21, 2004, we
entered into an additional derivative transaction that is designed to economically hedge approximately
25% of our projected fuel requirements in the quarters ending December 31, 2004 and March 31, 2005. The
additional derivative transaction is a collar agreement that uses West Texas Intermediate crude oil
as its basis. The cap price is set at $39.00 per barrel, and the floor is set at $34.85 per barrel. The
results of operations for the quarter ended June 30, 2004 include an unrealized derivative loss of
$175,000 that is included in fuel expense for a total unrealized loss of $477,000.
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 86.8% of our owned Airbus A319 and A318 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 $2,722,000, assuming the loans outstanding that are subject to interest
rate adjustments at June 30, 2004 totaling $272,197,000 are outstanding for the entire 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 over the
term of the swap that expires in March 2007. As of June 30, 2004, we had hedged approximately 9.9% of
our variable interest rate loans. As of June 30, 2004, the fair value of the swap agreement is an asset
of $127,000.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of our "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15
or 15d-15) as of June 30, 2004, and concluded that as of June 30, 2004, 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 were no changes in our internal control over financial reporting in connection with the
evaluation required by paragraph (d) of the Exchange Act Rules 13a-15 or 15d-15, that occurred during the
quarter ended June 30, 2004, that has materially affected, or is reasonable likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
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)
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 June 30, 2004, the Company filed the following reports on Form 8-K:
Date of Reports Item Numbers Financial Statements
Required to be Filed
May 27, 2004 7 and 12 None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRONTIER AIRLINES, INC.
Date: August 4, 2004 By: /s/ Paul H. Tate
Paul H. Tate, Senior Vice President and
Chief Financial Officer
Date: August 4, 2004 By: /s/ Elissa A. Potucek
Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer