Frontier Airlines, Inc 10q
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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction of incorporated or organization) (I.R.S. Employer Identification No.)
7001 Tower Road, Denver, CO 80249
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (720) 374-4200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
The number of shares of the Company's Common Stock outstanding as of July 31, 2002 was 29,633,644.
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 5
Item 3: Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited) June 30, March 31,
2002 2002
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 77,050,260 $87,555,189
Short-term investments 2,000,000 2,000,000
Restricted investments 16,171,000 11,574,000
Receivables, net of allowance for doubtful accounts of $149,945
and $155,000 at June 30, 2002 and March 31, 2002, respectively 29,783,810 35,391,857
Maintenance deposits 39,214,071 36,046,157
Prepaid expenses and other assets 10,170,164 11,013,602
Inventories 6,993,521 6,604,378
Deferred tax assets 1,768,664 1,788,078
Deferred lease and other expenses 119,095 74,952
----------------------------
Total current assets 183,270,585 192,048,213
Security, maintenance and other deposits 65,087,439 65,591,608
Property and equipment, net 204,069,119 142,861,771
Deferred lease and other expenses 863,071 523,134
Restricted investments 13,511,826 12,660,210
----------------------------
$ 466,802,040 $ 413,684,936
============================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 13,977,921 $20,152,888
Air traffic liability 69,011,089 64,123,083
Other accrued expenses 24,700,091 22,060,082
Accrued maintenance expense 40,646,828 37,527,906
Deferred stabilization act compensation 835,381 4,835,381
Current portion of long-term debt 5,619,208 3,225,651
Current portion of obligations under capital leases 139,355 138,604
----------------------------
Total current liabilities 154,929,873 152,063,595
Long-term debt 112,854,181 66,832,018
Accrued maintenance expense 17,485,022 15,796,330
Deferred tax liability 9,546,248 6,716,815
Deferred rent 4,078,807 3,077,326
Obligations under capital leases, excluding current portion 32,044 65,559
----------------------------
Total liabilities 298,926,175 244,551,643
----------------------------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares; none issued - -
Common stock, no par value, stated value of $.001 per share, authorized
100,000,000; 29,566,581 and 29,421,331 issued and outstanding
outstanding at June 30, 2002 and March 31, 2002, respectively 29,567 29,422
Additional paid-in capital 86,838,929 85,867,486
Unearned ESOP shares (1,413,114) (2,119,670)
Retained earnings 82,420,483 85,356,055
----------------------------
Total stockholders' equity 167,875,865 169,133,293
----------------------------
$ 466,802,040 $ 413,684,936
============================
FRONTIER AIRLINES, INC.
Statements of Operations
(Unaudited)
Three Months Ended June 30,
2002 2001
----------------------------
Revenues:
Passenger $ 109,291,882 120,727,839
Cargo 1,579,936 1,965,573
Other 940,589 622,945
----------------------------
Total revenues 111,812,407 123,316,357
----------------------------
Operating expenses:
Flight operations 54,479,395 49,736,454
Aircraft and traffic servicing 19,349,109 17,845,970
Maintenance 17,157,362 18,347,190
Promotion and sales 14,719,308 16,424,719
General and administrative 6,121,871 7,334,596
Depreciation and amortization 3,798,412 2,321,868
----------------------------
Total operating expenses 115,625,457 112,010,797
----------------------------
Operating income (loss) (3,813,050) 11,305,560
----------------------------
Nonoperating income (expense):
Interest income 706,962 1,530,758
Interest expense (1,259,311) (252,874)
Other, net (151,550) (49,683)
----------------------------
Total nonoperating income
(expense), net (703,899) 1,228,201
----------------------------
Income (loss) before income tax expense (4,516,949) 12,533,761
Income tax (benefit) expense (1,581,377) 4,794,164
----------------------------
Net income (loss) $ (2,935,572) $ 7,739,597
============================
Earnings per share:
Basic ($0.10) $0.27
============================
Diluted ($0.10) $0.26
============================
Weighted average shares of
common stock outstanding
Basic 29,534,304 28,288,629
============================
Diluted 29,534,304 29,879,414
============================
FRONTIER AIRLINES, INC.
Statement of Cash Flows
(Unaudited)
Three Months Ended June 30,
2002 2001
----------------------------
Cash flows from operating activities:
Net income (loss) $ (2,935,572) $ 7,739,597
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Employee stock ownership plan compensation expense 706,556 554,062
Depreciation and amortization 3,818,879 2,365,341
Deferred tax expense (benefit) 2,848,847 (15,380)
Changes in operating assets and liabilities:
Restricted investments (5,654,516) (2,600,000)
Receivables 5,608,047 10,990,258
Security, maintenance and other deposits (5,163,710) (4,282,507)
Prepaid expenses and other assets 438,891 (778,278)
Inventories (389,143) (1,029,116)
Accounts payable (6,174,967) (4,204,317)
Air traffic liability 4,888,006 6,077,072
Other accrued expenses 2,640,009 1,995,247
Stabilization Act compensation repayment (4,000,000) -
Income taxes payable - 891,563
Accrued maintenance expense 4,807,614 4,804,708
Increase in deferred rent 1,001,481 618,151
----------------------------
Net cash provided by operating activites 2,440,422 23,126,401
----------------------------
Cash flows from investing activities:
Decrease (increase) in aircraft lease and purchase deposits, net 2,499,965 (4,109,607)
Decrease in restricted investments 205,900 205,900
Capital expenditures (65,005,760) (52,896,402)
----------------------------
Net cash used by investing activities (62,299,895) (56,800,109)
----------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 971,588 604,701
Proceeds from long-term borrowings 49,200,000 24,000,000
Principal payments on long-term
borrowings (784,280) (70,402)
Principal payments on obligations under capital leases (32,764) (29,968)
----------------------------
Net cash provided by financing activities 49,354,544 24,504,331
----------------------------
Net decrease in cash and cash equivalents (10,504,929) (9,169,377)
Cash and cash equivalents, beginning of period 87,555,189 109,251,426
---------------------------
Cash and cash equivalents, end of period $ 77,050,260 $100,082,049
============================
FRONTIER AIRLINES, INC.
Notes to Financial Statements
June 30, 2002
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions to Form 10-Q and Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended March 31, 2002. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for the three months ended June 30, 2002 are not necessarily indicative
of the results that will be realized for the full year.
(2) Long-term Debt
In May 2001, the Company entered into a credit agreement to borrow up to $72,000,000 for the purchase of
three Airbus aircraft with a maximum borrowing of $24,000,000 per aircraft. Each aircraft loan has a term
of 10 years and is payable in equal monthly installments, including interest payable in arrears. The loans
are secured by the aircraft. During the year ended March 31, 2002, the Company had borrowed $72,000,000 for
the purchase of these three aircraft. Each loan provides for monthly principal and interest payments
ranging from $207,579 to $218,109, bears interest with rates ranging from 6.05% to 6.71%, averaging 6.43%
for the three aircraft loans, with maturities in May, August and September 2011, at which time balloon
payments totaling $10,200,000 are due with respect to each aircraft loan. As of June 30, 2002, the Company
had $69,273,388 of debt outstanding secured by these three Airbus aircraft.
In May 2002, the Company secured a loan for $25,200,000 for the purchase of an Airbus aircraft. The loan
has a term of 12 years and is payable in quarterly installments, including interest payable in arrears, with
a floating interest rate adjusted quarterly based on LIBOR plus a margin of 1.5%. The total interest rate
for the first quarter is 3.4375%. The loan amortizes using an assumed interest rate of 6% maturing in May
2014, at which time a balloon payment of $7,560,000 is due. As of June 30, 2002, the Company had
$25,200,000 of debt outstanding secured by this aircraft.
In June 2002, the Company secured a $48,000,000 loan facility for the purchase of two Airbus aircraft, one
of which was delivered in June 2002 and the other in July 2002, with a maximum borrowing of $24,000,000 per
aircraft. Each aircraft loan has a term of 12 years and is payable in quarterly installments, including
interest payable in arrears, with a floating interest rate adjusted quarterly based on LIBOR plus a margin
of 1.7%. The total interest rate for the first quarter is 3.575%. The loan amortizes using an assumed
interest rate of 3.55% with maturities in June and July 2014, at which time balloon payments totaling
$4,800,000 are due. As of June 30, 2002, the Company had $24,000,000 of debt outstanding secured by this
aircraft.
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act
of 1934 that describe the business and prospects of Frontier Airlines, Inc. ("Frontier" or the "Company") and the
expectations of our Company and management. Unless the context otherwise requires, references to "we", "us" or
"our" refer to Frontier Airlines, Inc. All statements, other than statements of historical facts, included in
this report that address activities, events or developments that we expect, believe, intend or anticipate will or
may occur in the future, are forward-looking statements. When used in this document, the words "estimate,"
"anticipate," "project" and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. These risks and uncertainties include, but are
not limited to: the timing of, and expense associated with, expansion and modification of our operations in
accordance with our business strategy or in response to competitive pressures or other factors; general economic
factors and behavior of the fare-paying public and its potential impact on our liquidity; increased federal
scrutiny of low-fare carriers generally that may increase our operating costs or otherwise adversely affect us;
actions of competing airlines, such as increasing capacity and pricing actions of United Airlines and other
competitors; the availability of suitable aircraft, that may inhibit our ability to achieve operating economies
and implement our business strategy; the unavailability of, or inability to secure upon acceptable terms,
financing necessary to purchase aircraft that we have ordered; issues relating to our transition to an Airbus
aircraft fleet; uncertainties regarding aviation fuel prices; uncertainties regarding future terrorist attacks on
the United States or military actions that may be taken; and uncertainties as to when and how fully consumer
confidence in the airline industry will be restored, if ever. Because our business, like that of the airline
industry generally, is characterized by high fixed costs relative to revenues, small fluctuations in our yield
per RPM or expense per ASM can significantly affect operating results.
General
We are a scheduled passenger airline based in Denver, Colorado. As of July 31, 2002, we, in conjunction
with Frontier JetExpress operated by Mesa Air Group ("Mesa"), operate routes linking our Denver hub to 33 cities
in 20 states spanning the nation from coast to coast. We were organized in February 1994 and we began flight
operations in July 1994 with two leased Boeing 737-200 jets. We have since expanded our fleet to 28 leased jets
and six purchased Airbus aircraft, including seven Boeing 737-200s, 17 larger Boeing 737-300s, and 10 Airbus
A319s. Beginning in May 2001, we began a fleet replacement plan by which we will replace our Boeing aircraft
with new purchased and leased Airbus jet aircraft, a transition we expect to complete by approximately the second
quarter of calendar year 2006. During fiscal year 2002, we advanced the return of one leased Boeing 737-300
aircraft to its owner from April 2002 to September 2001, and two leased Boeing 737-200 aircraft from September
and November 2004 to November 2002 and January 2003, respectively. We plan to accept delivery of an additional
seven Airbus A319s during our fiscal year ending March 31, 2003. Including the anticipated return of five Boeing
aircraft, we plan to operate a fleet of three Boeing 737-200s, 16 Boeing 737-300s, and 17 Airbus A319s, or a
total of 35 aircraft, by the end of our fiscal year ending March 31, 2003.
We currently use up to 11 gates at our hub, Denver International Airport ("DIA"), where we operate
approximately 158 daily system flight departures and arrivals. Prior to the September 11, 2001 terrorist
attacks, we operated approximately 126 daily system flight departures and arrivals. Following the terrorist
attacks, we reduced our service to approximately 103 daily system flight departures and arrivals. On November
15, 2001, we added an additional eight daily system flight departures and arrivals to our schedule, and we
reinstated service to Ronald Reagan Washington National Airport on December 12, 2001 with one daily round-trip.
As of March 31, 2002, we have expanded our service to a level that was higher than our pre-September 11, 2001
levels through additional capacity added after September 11, 2001. We intend to continue to monitor passenger
demand and other competitive factors and adjust the number of flights we operate accordingly. During the quarter
ended June 30, 2002, we added service to Indianapolis, Indiana on May 23, 2002; and Boise, Idaho and Tampa,
Florida on June 24, 2002.
In September 2001, we entered into a codeshare agreement with Mesa Air Group. Under the terms of the
agreement, we will market and sell flights operated by Mesa as Frontier JetExpress. This codeshare began
February 17, 2002 with service between Denver and San Jose, California, and with supplemental flights to our
current service between Denver and Houston, Texas. Effective April 7, 2002, the codeshare was expanded to
include service to St. Louis, Missouri and Ontario, California. On May 1, 2002, Frontier JetExpress expanded its
services using five 50-passenger Bombardier CRJ-200 regional jets and began supplemental service between Denver
and San Diego, California and Minneapolis, Minnesota. This codeshare is expected to expand to include the
operation by Mesa of at least five 50-passenger Bombardier CRJ-200 regional jets, providing service to new
destinations as well as additional frequencies to our current route system.
Effective July 9, 2001, we began a codeshare agreement with Great Lakes Aviation, Ltd. ("Great Lakes") by
which Great Lakes provides daily service to seven regional markets from our Denver hub. The codeshare agreement
initially included Casper, Cody, Gillette, and Cheyenne, Wyoming; Amarillo, Texas; Santa Fe, New Mexico; and
Hayden, Colorado. Effective November 15, 2001, we expanded the codeshare agreement to include nine additional
Great Lakes cities including Laramie, Riverton, Rock Springs, and Worland, Wyoming; Cortez and Telluride,
Colorado; Scottsbluff, Nebraska; and Farmington, New Mexico and we commenced a Great Lakes codeshare to Sheridan,
Wyoming, on October 31, 2001. Effective December 14, 2001, an additional 20 cities were added including Page and
Phoenix, Arizona; Alamosa and Pueblo, Colorado; Dodge City, Garden City, Hays, and Liberal, Kansas; Dickinson and
Williston, North Dakota; Alliance, Chadron, Grand Island, Kearney, McCook, Norfolk, and North Platte, Nebraska;
Pierre, South Dakota; and Moab and Vernal, Utah. Service between Denver and Hayden, Colorado was removed from the
codeshare agreement effective December 13, 2001.
As a result of the September 11, 2001 terrorist attacks on the United States, on September 22, 2001
President Bush signed into law the Air Transportation Safety and System Stabilization Act (the "Act"). The
Stabilization Act includes for all U.S. airlines and air cargo carriers the following key provisions: (i) $5
billion in cash compensation, of which $4.5 billion is available to commercial passenger airlines and is
allocated based on the lesser of each airline's share of available seat miles during August 2001 or the direct
and incremental losses (including lost revenues) incurred by the airline from September 11, 2001 through December
31, 2001; (ii) subject to certain conditions, the availability of up to $10 billion in federal government
guarantees of certain loans made to air carriers for which credit is not reasonably available as determined by a
newly established Air Transportation Stabilization Board; (iii) the authority of the Secretary of Transportation
to reimburse air carriers (which authority expires 180 days after the enactment of the Stabilization Act) for
increases in the cost of war risk insurance over the premium in effect for the period September 4, 2001 to
September 10, 2001; (iv) at the discretion of the Secretary of Transportation, a $100 million limit on the
liability of any air carrier to third parties with respect to acts of terrorism committed on or to such air
carrier during the 180 day period following enactment of the Act; and (v) the extension of the due date for the
payment by air carriers of certain payroll and excise taxes until November 15, 2001 and January 15, 2002,
respectively. During the fiscal year ended March 31, 2002, we recognized $12,703,000 of the federal grant as a
result of the Act to offset direct and incremental losses we experienced as a result of the terrorist attacks on
September 11, 2001. We had received a total of $17,538,000; the remaining $4,835,000 represents amounts received
in excess of estimated allowable direct and incremental losses incurred from September 11, 2001 to December 31,
2001. During the quarter ended June 30, 2002, we repaid $4,000,000 of the excess amounts received and the
remaining $835,000 is included as a deferred liability on our balance sheet awaiting final audit of our Form 330
filing by the Federal government.
Results of Operations
We had a net loss of $2,936,000 or $.10 per share for the quarter ended June 30, 2002 as compared to net
income of $7,740,000 or $.26 per diluted share for the quarter ended June 30, 2001. During the quarter ended June
30, 2002, as compared to the prior comparable period, we experienced lower fares as a result of the slowing
economy. Our average fare was $108 for the quarter ended June 30, 2002, compared to $134 for the quarter ended
June 30, 2001. During the quarter ended June 30, 2001, we were forced to cancel a significant number of flights
as a result of weather conditions in the Denver area. We believe that this had an adverse effect on our revenue
during that quarter.
During the quarter ended June 30, 2001, we took delivery of our first two Airbus aircraft. As this was a
new aircraft type for us, we were required by the Federal Aviation Administration ("FAA") to demonstrate that our
crews were proficient in flying this type aircraft and that we were capable of properly maintaining the aircraft
and related maintenance records before we placed these aircraft in scheduled passenger service. This process took
longer than we originally had anticipated and, as a result, we were required to cancel scheduled flights that the
first aircraft was scheduled to perform. Because of this delay in receiving necessary FAA approvals, we believe
that our passenger revenues were adversely affected during the quarter ended June 30, 2001.
Our cost per ASM for the quarters ended June 30, 2002 and 2001 were 8.44(cent)and 9.75(cent),
respectively, a decrease of 1.31(cent)or 13.4%. Cost per ASM excluding fuel for the quarters ended June 30, 2002
and 2001 were 7.17(cent) and 8.22(cent), respectively, a decrease of 1.05(cent)or 12.8%. Our cost per ASM decreased
during the quarter ended June 30, 2002 as a result of a significantly reduced level of Airbus transition expenses,
a decrease in the price of fuel, a decrease in the cost per block hour on our Boeing fleet for rotable repairs
and engine overhauls, a decrease in our distribution expenses in relation to the reduction in the average fare
and a reduction in travel agency commissions as a result of the elimination of travel agency commissions effective
June 1, 2002, the lack of a bonus accrual as a result of the net loss for the quarter, and economies of scale
associated with the 19.2% increase in ASMs over the prior comparable period. These reductions were partially
offset by an increase of .12(cent) per ASM as a result of an increase in war risk insurance premiums after the
events of September 11. Our cost per ASM during the quarter ended June 30, 2001 was impacted as a result of unusual
weather conditions including an unusual spring blizzard and a hail storm which caused damage to five of our aircraft,
or approximately 20% of our fleet, during the quarter ended June 30, 2001. We incurred short-term lease expense
for substitute aircraft to minimize the number of flight cancellations while our aircraft were being repaired,
additional maintenance expenses for the repair of the hail damage, and interrupted trip expenses as a result
of the number of flight cancellations related to the aircraft out of service for repair. We estimate that the total
adverse impact on our cost per ASM associated with these unusual weather conditions was .16(cent), or approximately
$1,800,000. Additionally, due to the number of flight cancellations as a result of these weather conditions, we
had fewer ASMs than we had planned, which caused our fixed costs to be spread over fewer ASMs and, we believe,
distorted our cost per ASM for the quarter. During the quarter ended June 30, 2001, we incurred approximately
$2,000,000 in transition expenses associated with the induction of the Airbus aircraft which had an adverse
effect on our CASM of approximately .15(cent). These include crew salaries; travel, training and induction
team expenses; and depreciation expense. This compared to $865,000 in Airbus transition expenses during the
quarter ended June 30, 2002.
An airline's break-even load factor is the passenger load factor that will result in operating revenues
being equal to operating expenses, assuming constant revenue per passenger mile and expenses. For the quarter
ended June 30, 2002, our break-even load factor was 65.4% compared to our achieved passenger load factor of
62.8%. For the quarter ended June 30, 2001, our break-even load factor was 60.6% compared to our achieved
passenger load factor of 67.6%. Our break-even load factor increased from the prior comparable period largely as
a result of a decrease in our average fare to $108 during the quarter ended June 30, 2002 from $134 during the
quarter ended June 30, 2001, offset by a decrease in our expense per ASM to 8.44(cent)for the quarter ended June 30,
2002 from 9.75(cent)for the quarter ended June 30, 2001.
Small fluctuations in our yield per available seat mile ("RASM") or expense per available seat mile
("ASM") can significantly affect operating results because we, like other airlines, have high fixed costs in
relation to revenues. Airline operations are highly sensitive to various factors, including the actions of
competing airlines and general economic factors, which can adversely affect our liquidity, cash flows and results
of operations.
As a result of the expansion of our operations during the quarter ended June 30, 2002, our results of
operations are not necessarily indicative of future operating results or comparable to the prior quarter ended
June 30, 2001.
The following table provides certain of our financial and operating data for the year ended March 31, 2002
and the quarters ended June 30, 2002 and 2001.
Year
Ended
March 31, Quarters Ended June 30,
2002 2002 2001
--------------- -------------- ---------------
Passenger revenue (000s) (2) 435,946 109,292 120,728
Revenue passengers carried (000s) 3,069 928 846
Revenue passenger miles (RPMs) (000s) (3) 2,756,965 859,604 776,764
Available seat miles (ASMs) (000s) (4) 4,592,298 1,369,399 1,148,546
Passenger load factor (5) 60.0% 62.8% 67.6%
Break-even load factor (1) (6) 57.6% 65.4% 60.6%
Block hours (7) 92,418 27,680 22,660
Departures 41,736 12,184 10,190
Average seats per departure 132 132 132
Average stage length 834 851 854
Average length of haul 898 926 918
Average daily block hour utilization (8) 9.1 9.9 9.9
Yield per RPM (cents) (9) 15.78 12.71 15.54
Total yield per RPM (cents) (10) 16.14 13.01 15.88
Yield per ASM (cents) (11) 9.47 7.98 10.51
Total yield per ASM (cents) (12) 9.69 8.17 10.74
Expense per ASM (cents) 9.33 8.44 9.75
Expense per ASM excluding fuel (cents) 8.00 7.17 8.22
Passenger revenue per block hour $ 4,717 $ 3,948 $ 5,328
Average fare (13) $ 132 $ 108 $ 134
Average aircraft in fleet 27.8 30.6 25.2
Aircraft in fleet at end of period 30.0 33.0 27.0
Average age of aircraft at end of period 10.6 9.6 10.8
EBITDAR (000s) (14) 100,403 16,763 29,896
EBITDAR as a % of revenue 22.6% 15.0% 24.2%
(1) The write-down of the carrying values of the Boeing 737-200 aircraft parts totaling $1,512,000, the
Stabilization Act compensation of $12,703,000, and the unusual charge for the early lease termination of
$4,914,000, all of which occurred during the year ended March 31, 2002, have been excluded from the
calculation of the break-even load factor, expense per ASM and expense per ASM excluding fuel.
(2) "Passenger revenue" includes revenues for non-revenue passengers, administrative fees, and revenue
recognized for unused tickets that are greater than one year from issuance date.
(3) "Revenue passenger miles," or RPMs, are determined by multiplying the number of fare-paying passengers
carried by the distance flown.
(4) "Available seat miles," or ASMs, are determined by multiplying the number of seats available for passengers
by the number of miles flown.
(5) "Passenger load factor" is determined by dividing revenue passenger miles by available seat miles.
(6) "Break-even load factor" is the passenger load factor that will result in operating revenues being equal to
operating expenses, assuming constant revenue per passenger mile and expenses.
(7) "Block hours" represent the time between aircraft gate departure and aircraft gate arrival.
(8)"Average daily block hour utilization" represents the total block hours divided by the number of aircraft
days in service, divided by the weighted average of aircraft in our fleet during that period. The number of
aircraft includes all aircraft on our operating certificate, which includes scheduled aircraft, as well as
aircraft out of service for maintenance and operation spare aircraft.
(9) "Yield per RPM" is determined by dividing passenger revenues (excluding charter revenue) by revenue
passenger miles.
(10) "Total yield per RPM" is determined by dividing total revenues by revenue passenger miles.
(11) "Yield per ASM" is determined by dividing passenger revenues (excluding charter revenue) by available seat
miles.
(12) "Total yield per ASM" is determined by dividing passenger revenues by available seat miles.
(13) "Average fare" excludes revenue included in passenger revenue for non-revenue passengers, administrative
fees, and revenue recognized for unused tickets that are greater than one year from issuance date.
(14) "EBITDAR", or "earnings before interest, income taxes, depreciation, amortization and aircraft rentals," is
a supplemental financial measurement many airline industry analysts and we use in the evaluation of our
business. However, EBITDAR should only be read in conjunction with all of our financial statements
appearing elsewhere herein, and should not be construed as an alternative either to operating income (as
determined in accordance with generally accepted accounting principles) as an indicator of our operating
performance or to cash flows from operating activities (as determined in accordance with generally accepted
accounting principles) as a measure of liquidity. Our calculation of EBITDAR may not be comparable to
similarly titled measures reported by other companies.
The following table provides our operating revenues and expenses expressed as cents per total ASMs and as
a percentage of total operating revenues, as rounded, for the year ended March 31, 2002 and the quarters ended
June 30, 2002 and 2001.
Year Ended March 31, Quarters Ended June 30,
--------------------------- -------------------------------------------------------
2002 2002 2001
--------------------------- -------------------------------------------------------
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- -------
Revenues:
Passenger 9.49 97.9% 7.98 97.7% 10.51 97.9%
Cargo 0.14 1.5% 0.12 1.4% 0.17 1.6%
Other 0.05 0.6% 0.07 0.8% 0.05 0.5%
--------------------------- -------------------------------------------------------
Total revenues 9.68 100.0% 8.17 100.0% 10.74 100.0%
Operating expenses:
Flight operations 4.16 42.9% 3.98 48.7% 4.33 40.3%
Aircraft and traffic servicing 1.53 15.8% 1.41 17.3% 1.55 14.4%
Maintenance 1.53 15.8% 1.25 15.3% 1.60 14.9%
Promotion and sales 1.29 13.4% 1.07 13.2% 1.44 13.4%
General and administrative 0.57 5.9% 0.45 5.5% 0.63 5.9%
Depreciation and amortization 0.25 2.6% 0.28 3.4% 0.20 1.9%
--------------------------- -------------------------------------------------------
Total operating expenses 9.33 96.4% 8.44 103.4% 9.75 90.8%
=========================== =======================================================
Total ASMs (000s) 4,592,298 1,369,399 1,148,546
Revenues
Our revenues are highly sensitive to changes in fare levels. Competitive fare pricing policies have a
significant impact on our revenues. Because of the elasticity of passenger demand, we believe that increases in
fares may 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. When sale prices or other price changes are initiated
by competitors in our markets, we believe that we must, in most cases, match those competitive fares in order to
maintain our market share. Passenger revenues are seasonal in leisure travel markets depending on the markets'
locations and when they are most frequently patronized.
Our average fare for the quarters ended June 30, 2002 and 2001 was $108 and $134, respectively, a decrease
of 19.4%. We believe that the decrease in the average fare during the quarter ended June 30, 2002 from the prior
comparable period was a result of the slowing economy, competitive pricing on discount fares available inside 14
days of travel in our markets, and low introductory fares by new carriers serving the Denver market.
Passenger Revenues. Passenger revenues totaled $109,292,000 for the quarter ended June 30, 2002 compared
to $120,728,000 for the quarter ended June 30, 2001, a decrease of 9.5%. Passenger revenue includes revenues for
non-revenue passengers, administrative fees, and revenue recognized for tickets that are not used within one year
from their issue dates. We carried 928,000 revenue passengers during the quarter ended June 30, 2002 compared to
846,000 in the quarter ended June 30, 2001, an increase of 9.7%. We had an average of 30.6 aircraft in our fleet
during the quarter ended June 30, 2002 compared to an average of 25.2 aircraft during the quarter ended June 30,
2001, an increase of 21.4%. ASMs increased to 1,369,399,000 for the quarter ended June 30, 2001 from
1,148,546,000 for the quarter ended June 30, 2001, an increase of 19.2%. RPMs for the quarter ended June 30,
2002 were 859,604,000 compared to 776,764,000 for the quarter ended June 30, 2001, an increase of 10.7%. Our
load factor decreased to 62.8% for the quarter ended June 30, 2002 from 67.6% for the prior comparable period.
During the quarter ended June 30, 2001, we had to cancel numerous flights as a result of the weather conditions
the Denver area experienced. We believe that this had an adverse effect on our revenue during that quarter.
Cargo revenues, consisting of revenues from freight and mail service, totaled $1,580,000 and $1,966,000
for the quarters ended June 30, 2002 and 2001, representing 1.4% and 1.6% of total operating revenues,
respectively, or a decrease of 19.6%. This adjunct to the passenger business is highly competitive and depends
heavily on aircraft scheduling, alternate competitive means of same day delivery service and schedule
reliability.
Other revenues, comprised principally of interline handling fees, liquor sales and excess baggage fees,
totaled $941,000 and $623,000 or .8% and .5% of total operating revenues for the quarters ended June 30, 2002 and
2001, respectively. Other revenue increased over the prior comparable period as a result of an increase in
interline handling fees primarily due to the Mesa codeshare agreement and an increase in ground handling for
other airlines.
Operating Expenses
Operating expenses include those related to flight operations, aircraft and traffic servicing,
maintenance, promotion and sales, general and administrative and depreciation and amortization. Total operating
expenses were $115,625,000 and $112,011,000 for the quarters ended June 30, 2002 and 2001 and represented 103.4%
and 90.8% of total revenue, respectively. Operating expenses increased as a percentage of revenue during the
quarter ended June 30, 2002 as a result of the 19.4% decrease in the average fare during the quarter ended June
30, 2001 to the quarter ended June 30, 2002.
Flight Operations. Flight operations expenses of $54,479,000 and $49,736,000 were 48.7% and 40.3% of
total revenue for the quarters ended June 30, 2002 and 2001, respectively. Flight operations expenses include
all expenses related directly to the operation of the aircraft including fuel, lease and insurance expenses,
pilot and flight attendant compensation, in-flight catering, crew overnight expenses, flight dispatch and flight
operations administrative expenses.
Aircraft fuel expenses are comprised of both the direct cost of fuel, including taxes and the cost of
delivering fuel into the aircraft. Aircraft fuel costs of $17,396,000 for 20,858,000 gallons used and
$17,633,000 for 18,207,000 gallons used resulted in an average fuel cost of 83.4(cent)and 96.9(cent)per gallon and
represented 31.9% and 35.4% of total flight operations expenses for the quarters ended June 30, 2002 and 2001,
respectively. The average fuel cost per gallon decreased for the quarter ended June 30, 2002 from the comparable
prior period due to an overall decrease in the market price of fuel. Fuel prices are subject to change weekly,
as we do not purchase supplies in advance for inventory. We do not hedge our fuel expense exposure. Fuel
consumption for the quarters ended June 30, 2002 and 2001 averaged 754 and 804 gallons per block hour,
respectively. Fuel consumption decreased from the prior comparable period because of a decrease in our load
factors, the more fuel-efficient Airbus aircraft added to our fleet and a fuel conservation program we
implemented in August 2001.
.
Aircraft lease expenses totaled $16,929,000 (14.6% of total revenue) and $16,318,000 (13.2% of total
revenue) for the quarters ended June 30, 2002 and 2001, respectively, or an increase of 3.7%. The increase is
largely due to an increase in the average number of leased aircraft to 27.1 from 25.1, an increase of 8.0%.
During the quarter ended June 30, 2001, to minimize the number of flight cancellations while our aircraft were
being repaired, we incurred short-term lease expenses of $541,000 for aircraft to partially replace our aircraft
damaged by hail.
Aircraft insurance expenses totaled $2,618,000 (2.3% of total revenue) and $859,000 (.7% of total
revenue) for the quarters ended June 30, 2002 and 2001, respectively. Aircraft insurance expenses were .30(cent)and
..11(cent)per RPM for the quarters ended June 30, 2002 and 2001, respectively. Aircraft insurance expenses increased
during the quarter ended June 30, 2002 as a result of the terrorist attacks on September 11, 2001. Immediately
following the events of September 11, our aviation war risk underwriters issued seven days notice of cancellation
to us. On September 24, 2001, these underwriters reinstated war risk passenger liability coverage but limited
third party bodily injury and property damage to $50 million per occurrence. A special surcharge of $1.25 per
passenger carried was established as the premium for this coverage. At the same time, the FAA provided us
supplemental third party war risk coverage from the $50 million limit to $1.6 billion. The premium for this
supplemental coverage is $7.50 per flight departure and is now set to expire on August 17, 2002, unless renewed
by Congress. While the government may extend the deadline for when it will stop providing excess war risk
coverage, there are not assurances that any extension will occur, or 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.
Pilot and flight attendant salaries before payroll taxes and benefits totaled $9,859,000 and $7,775,000 or
9.0% and 6.4% of passenger revenue for each of the quarters ended June 30, 2002 and 2001, respectively, or an
increase of 26.8%. Pilot and flight attendant compensation increased as a result of a 21.4% increase in the
average number of aircraft in service, an increase of 22.2% in block hours, a general wage increase in flight
attendant salaries, and additional crew required to replace those who were attending training on the Airbus
equipment. We pay pilot and flight attendant salaries for training, consisting of approximately six and three
weeks, respectively, prior to scheduled increases in service, which can cause the compensation expense during
such periods to appear high in relationship to the average number of aircraft in service.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $19,349,000 and $17,846,000
(an increase of 8.4%) for the quarters ended June 30, 2002 and 2001, respectively, and represented 17.3% and
14.5% of total revenue. Aircraft and traffic servicing expenses include all expenses incurred at airports
including landing fees, facilities rental, station labor, ground handling expenses, and interrupted trip expenses
associated with delayed or cancelled flights. Interrupted trip expenses are amounts paid to other airlines to
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. During the quarter ended June 30, 2002, we
served 31 cities compared to 23 during the quarter ended June 30, 2001, or an increase of 34.8%. During the
quarter ended June 30, 2002, our departures increased to 12,184 from 10,190, or 19.6%. Aircraft and traffic
servicing expenses were $1,588 per departure for the quarter ended June 30, 2002 as compared to $1,751 per
departure for the quarter ended June 30, 2001, or a decrease of 9.3%. Aircraft and traffic servicing expenses
during the quarter ended June 30, 2001 were adversely impacted as a result of expenses associated with deicing in
April 2001 as a result of an unusual spring blizzard and an increase in interrupted trip expenses as a result of
the number of flight cancellations related to the aircraft out of service for repair of hail damage.
Additionally, due to the number of flight cancellations as a result of these weather conditions, the number of
departures was less than we had planned, which caused our fixed costs to be spread over fewer departures and, we
believe, distorted our expenses per departure for the June 2001quarter.
Effective February 17, 2002, the DOT began providing security services through the newly established
Transportation Security Agency ("TSA") or assumed many of the contracts and oversight of those security vendors
that we and other carriers use to provide airport security services. Additionally, the DOT will reimburse us, as
well as all other air carriers, for certain security services provided by our own personnel. In order to be able
to provide and fund these security services, the DOT has imposed a $2.50 security service fee per passenger
segment flown, not to exceed $5.00 for one-way travel or $10.00 for a round trip, on tickets purchased on and
after February 1, 2002. In anticipation that these fees will not be adequate to cover the costs of the TSA, a
security infrastructure fee has been assessed to all air carriers in an amount equal to the security fees paid by
each carrier during the calendar year ended December 31, 2000. These are included in expenses during the
quarter ended June 30, 2002 and are payable monthly to the DOT.
Maintenance. Maintenance expenses of $17,157,000 and $18,347,000 were 15.3% and 14.9% of total revenue
for the quarters ended June 30, 2002 and 2001, respectively. These include all labor, parts and supplies expenses
related to the maintenance of the aircraft. Routine maintenance is charged to maintenance expense as incurred
while major airframe, engine, landing gear and auxiliary power unit overhauls are accrued monthly. Maintenance
cost per block hour was $620 and $810 for the quarters ended June 30, 2002 and 2001, respectively. Maintenance
cost per block hour decreased as a result of decreases on our Boeing fleet for rotable repairs and engine
overhauls, and the additional new Airbus aircraft that are less costly to maintain than our older Boeing
aircraft. During the quarter ended June 30, 2001, we had hail damage to five of our aircraft, estimated at
$560,000 ($25 per block hour). Additionally, due to the number of flight cancellations as a result of adverse
spring weather conditions, the number of block hours was less than we planned, which caused our fixed costs to be
spread over fewer block hours and, we believe, distorted our cost per block hour for the quarter ended June 30,
2001.
Promotion and Sales. Promotion and sales expenses totaled $14,719,000 and $16,425,000 and were 13.2% and
13.3% of total revenue for the quarters ended June 30, 2002 and 2001, respectively. These include advertising
expenses, telecommunications expenses, wages and benefits for reservationists and reservations supervision as
well as marketing management and sales personnel, credit card fees, travel agency commissions and computer
reservations costs. During the quarter ended June 30, 2002, promotion and sales expenses per passenger decreased
to $15.86 from $19.41 for the quarter ended June 30, 2001. Promotion and sales expenses per passenger decreased
as a result of variable expenses in relation to lower average fares and partially as a result of our elimination
of travel agency commissions effective on tickets sold on or after June 1, 2002 and a decrease in advertising
expenses. During the quarter ended June 30, 2001, we incurred costs associated with the start-up and promotion
of our frequent flyer program as well as the redesign of our web site.
General and Administrative. General and administrative expenses for the quarters ended June 30, 2002 and
2001 totaled $6,122,000 and $7,335,000, respectively, and were 5.5% and 5.9% of total revenue, respectively.
During the quarter ended June 30, 2001, we accrued for employee performance bonuses totaling $1,065,000 or .9% of
total revenue. Bonuses are based on profitability. As a result of our pre-tax loss for the quarter ended June
30, 2002, we did not accrue bonuses. General and administrative expenses include the wages and benefits for
several of our executive officers and various other administrative personnel including legal, accounting,
information technology, aircraft procurement, corporate communications, training and human resources and other
expenses associated with these departments. Employee health benefits, accrued vacation and bonus expenses,
general insurance expenses including worker's compensation, and write-offs associated with credit card and check
fraud are also included in general and administrative expenses. We experienced increases in our human resources,
training and information technology expenses as a result of an increase in employees from approximately 2,500 in
June 2001 to approximately 2,960 in June 2002, an increase of 18.4%. Because of the increase in personnel, our
health insurance benefit expenses increased accordingly. During the quarter ended June 30, 2002, we brought
revenue accounting in-house. We previously had outsourced this function. We expect to realize a reduction in
expenses associated with revenue accounting.
Depreciation and Amortization. Depreciation and amortization expenses of $3,798,000 and $2,322,000, an
increase of 63.4%, were approximately 3.4% and 1.9% of total revenue for the quarters ended June 30, 2002 and
2001, respectively. These expenses include depreciation of aircraft and aircraft components, office equipment,
ground station equipment, other fixed assets. Depreciation expense increased over the prior year due to
additional aircraft purchases.
Nonoperating Income (Expense). Net nonoperating expense totaled $704,000 for the quarter ended June 30,
2002 compared to net nonoperating income of $1,228,000 for the quarter ended June 30, 2001. Interest income
decreased to $707,000 from $1,531,000 during the quarter ended June 30, 2002 from the prior comparable period as
a result of a decrease in interest rates and invested cash balances. Interest expense increased to $1,259,000
for the quarter ended June 30, 2002 from $253,000 as a result of interest expense associated with the financing
of additional aircraft purchases since the prior comparable period.
Income Tax Expense. We accrued an income tax benefit of $1,581,000 during the quarter ended June 30, 2002
at a 35% rate, compared to an income tax expense accrual of $4,794,000 for the quarter ended June 30, 2001, at a
39% rate.
Liquidity and Capital Resources
Our liquidity depends to a large extent on the number of passengers who fly with us and the fares we
charge. Also, we depend on financing to acquire many of our aircraft, including 11 Airbus aircraft scheduled for
delivery by 2004. We have incurred $121,200,000 in debt to finance six Airbus aircraft we have purchased through
June 30, 2002. We seek to control our operating costs, but our airline, like other airlines, has many fixed
costs.
We had cash and cash equivalents and short-term investments of $79,050,000 and $89,555,000 at June 30,
2002 and March 31, 2002, respectively. At June 30, 2002, total current assets were $183,271,000 as compared to
$154,930,000 of total current liabilities, resulting in working capital of $28,341,000. At March 31, 2002, total
current assets were $192,048,000 as compared to $152,064,000 of total current liabilities, resulting in working
capital of $39,984,000. The decrease in our cash and working capital from March 31, 2002 is largely a result of
cash used by investing activities, principally as a result of an increase in pre-delivery payments totaling
$10,893,000 for additional aircraft purchases.
Cash provided by operating activities for the quarter ended June 30, 2002 was $2,420,000. This is
attributable to an increase in deferred tax expense, a decrease in receivables, and increases in air traffic
liability, other accrued expenses, accrued maintenance expenses, and deferred rent, offset by our net loss for
the period and increases in restricted investments, security, maintenance and other deposits, and decreases in
accounts payable and deferred Stabilization Act compensation. Included in cash provided by operating activities
is a $4,000,000 repayment of the excess amounts received under the Stabilization Act. Cash provided by operating
activities for the quarter ended June 30, 2001 was $23,126,000. This is attributable to our net income for the
period, decreases in trade receivables, increases in air traffic liability, other accrued expenses, income taxes
payable, and accrued maintenance expense, offset by increases in restricted investments, security, maintenance
and other deposits, prepaid expenses and inventories, and a decrease in accounts payable.
Cash used by investing activities for the quarter ended June 30, 2002 was $62,300,000. Net aircraft lease
and purchase deposits decreased by $2,500,000 during this quarter. During the quarter ended June 30, 2002, we
took delivery of two purchased Airbus aircraft and applied their respective pre-delivery payments to the purchase
of those aircraft. We also used $65,006,000 for the purchase of these additional Airbus aircraft and to purchase
rotable aircraft components, leasehold improvements other general equipment purchases. Cash used by investing
activities for the quarter ended June 30, 2001 was $56,800,000. We used $4,110,000 for pre-delivery payments,
net of amounts applied to the purchase of our first Airbus aircraft, for future purchases of Airbus aircraft and
a cash security deposit on the first leased Airbus aircraft. During the quarter ended June 30, 2001, we
converted two purchase options into firmly ordered Airbus A319 aircraft, and advanced their delivery dates from
the third and fourth calendar quarters of 2004 to May and June 2002 that required deposits of $9,203,000. We
also used $52,896,000 for the purchase of these aircraft and to purchase rotable aircraft components to support
the Airbus fleet, as well as a spare engine for the Boeing fleet, and other general equipment purchases during
the quarter ended June 30, 2001.
Cash provided by financing activities for the quarters ended June 30, 2002 and 2001 was $49,375,000 and
$24,504,000, respectively. During the quarters ended June 30, 2002 and 2001, we borrowed $49,200,000 and
$24,000,000 to finance the purchase of Airbus aircraft, of which $784,000 and $70,000 were repaid during the
respective quarters. During the quarters ended June 30, 2002 and 2001, we received $992,000 and $605,000,
respectively, from the exercise of common stock options.
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2002:
Less than 1-3 4-5 After
1 year years years 5 years Total
-------------------------------------------------------------------------------
Long-term debt (1) $ 5,467,000 $ 12,226,000 $ 13,725,000 $ 87,055,000 $ 118,473,000
Capital lease obligations 139,000 32,000 171,000
Operating leases (2) (4) 78,305,000 140,959,000 104,578,000 364,677,000 688,519,000
Unconditional purchase obligations (3) 161,400,000 181,000,000 342,400,000
-------------------------------------------------------------------------------
Total contractual cash obligations $245,311,000 $334,217,000 $118,303,000 $451,732,000 $1,149,563,000
===============================================================================
(1) In May 2001, we entered into a credit agreement to borrow up to $72,000,000 for the purchase of three
Airbus aircraft with a maximum borrowing of $24,000,000 per aircraft. Each aircraft loan has a term of 10
years and is payable in equal monthly installments, including interest, payable in arrears. The aircraft
secures the loans. The credit agreement contains certain events of default, including events of default for
failure to make payments when due or to comply with covenants in the agreement. As of March 31, 2002, we
had $70,058,000 of debt outstanding for purchase of these three Airbus aircraft. Each loan provides for
monthly principal and interest payments ranging from $207,579 to $218,109, bears interest with rates ranging
from 6.05% to 6.71%, averaging 6.43% for the three aircraft loans, with maturities in May, August and
September 2011, at which time a balloon payment totaling $10,200,000 is due with respect each aircraft loan.
In May 2002, we secured a loan for $25,200,000 for the purchase of an Airbus aircraft. The loan has a term
of 12 years and is payable in quarterly installments, including interest payable in arrears, with a floating
interest rate adjusted quarterly based on LIBOR plus a margin of 1.5%. The total interest rate for the
first quarter is 3.4375%. The loan amortizes using an assumed interest rate of 6% maturing in May 2014, at
which time a balloon payment of $7,560,000 is due. As of June 30, 2002, we had $25,200,000 of debt
outstanding secured by this aircraft.
In June 2002, we secured a $48,000,000 loan facility for the purchase of two Airbus aircraft, one of which
was delivered in June 2002 and the other in July 2002, with a maximum borrowing of $24,000,000 per
aircraft. Each aircraft loan has a term of 12 years and is payable in quarterly installments, including
interest payable in arrears, with a floating interest rate adjusted quarterly based on LIBOR plus a margin
of 1.7%. The total interest rate for the first quarter is 3.575%. The loan amortizes using an assumed
interest rate of 6% with maturities in June and July 2014, at which time balloon payments totaling
$4,800,000 are due. As of June 30, 2002, the Company had $24,000,000 of debt outstanding secured by this
aircraft.
(2) As of June 30, 2002, we lease four Airbus 319 type aircraft and 24 Boeing 737 type aircraft under operating
leases with expiration dates ranging from 2002 to 2014. Under these leases, we are required to make cash
security deposits or issue letters of credit representing approximately two months of lease payments per
aircraft. At June 30, 2002, we had made cash security deposits and had arranged for issuance of letters of
credit totaling $5,705,000 and $8,870,000, respectively. Accordingly, our restricted cash balance includes
$8,870,000 that collateralizes the outstanding letters of credit. Additionally, we make deposits to cover
the cost of major scheduled maintenance overhauls of these aircraft. These deposits are based on the number
of flight hours flown and/or flight departures and are not included as an obligation in the above schedule.
At June 30, 2002, we had remaining unused maintenance deposits of $55,798,000 classified as an asset on our
balance sheet.
As a complement to our Airbus purchase agreement, in April and May 2000 we signed two agreements to lease 16
new Airbus aircraft for a term of 12 years. Four of these aircraft have been delivered to us as of June 30,
2002. As of June 30, 2002, we have made cash security deposits on the remaining 12 aircraft we agreed to
lease and have made cash security deposits and arranged for issuance of letters of credit totaling $400,000
and $2,265,000, respectively, to secure these leases.
We also lease office and hangar space, spare engines and office equipment for our headquarters and airport
facilities, and certain other equipment with expiration dates ranging from 2002 to 2014. In addition we
also lease certain airport gate facilities on a month-to-month basis. Amounts for leases that are on a
month-to-month basis are not included as an obligation in the above schedule.
Denver International Airport, our primary hub for operations, is in the planning stages for a significant
expansion of the concourse where we currently have our aircraft gates. The expansion will add as many as 10
gates for full-size commercial jet aircraft and several more gates for smaller regional jets. We have
voiced preliminary interest in entering into a long term lease arrangement with the airport authority for
the use of additional aircraft gates in connection with our overall expansion plans. The amount we would be
charged under this lease will be contingent upon the ultimate cost of the overall project, the amount of
space to which we commit, the financing structure and interest cost and the final method by which the
airport authority allocates the constructions costs among the airlines. Currently, construction on the
concourse expansion is anticipated to start in the Spring of 2003 with completion targeted for the Winter of
2004.
(3) We have adopted a fleet replacement plan to phase out our Boeing 737 aircraft and replace them with a
combination of Airbus A319 and A318 aircraft. In March 2000, we entered into an agreement, as subsequently
amended, to purchase up to 31 new Airbus aircraft. Included in the purchase commitment are amounts for
spare aircraft components to support the aircraft. We are not under any contractual obligations with
respect to spare parts. We have agreed to firm purchases of 17 of these aircraft, and have options to
purchase up to an additional 14 aircraft. As of June 30, 2002, we have taken delivery of six of these
aircraft. Under the terms of the purchase agreement, we are required to make scheduled pre-delivery
payments for these aircraft. These payments are non-refundable with certain exceptions. As of June 30,
2002, we had made pre-delivery payments on future deliveries totaling $41,747,000 to secure these aircraft
and option aircraft. We expect to be operating up to 37 purchased and leased Airbus aircraft by the first
quarter of calendar 2005.
As of June 30, 2002, we have executed financing commitments for five purchased Airbus A319 aircraft. We have
signed a term sheet with a German bank to provide debt financing for two of our eight A319 aircraft
scheduled for delivery from Airbus in fiscal year 2003, one of which was delivered and financed in May
2002. The terms permit us to borrow up to $51,100,000 over a period of 120 months at either a fixed or
floating interest rate with a $7,600,000 balloon payment per aircraft due at maturity. We have also signed
a term sheet with a group of European banks for the debt financing of two of these A319 aircraft (one of
these has been delivered, and financing completed at June 30, 2002). The terms permit an aggregate
borrowing of $48,000,000 over a 10 year term of either fixed or floating rates with a $4,800,000 balloon
payment per aircraft due at maturity. In addition, we have signed a term sheet with a French bank group for
the debt financing of three of the fiscal year 2003 A319 aircraft deliveries with a borrowed amount not to
exceed $72,000,000 over a period of 12 years. The interest rate can be set by the borrower at either a
fixed or floating rate with a $7,000,000 balloon payment due at maturity. The eighth A319 aircraft delivery
scheduled for March 2003 currently has no committed long-term financing.
Commercial Commitments
As we enter new markets, increase the amount of space leased, or add leased aircraft, we are often
required to provide the lessor with a letter of credit, bond or cash security deposits. These generally
approximate up to three months of rent and fees. As of June 30, 2002, we had outstanding letters of credit,
bonds, and cash security deposits totaling $13,430,000, $2,135,000, and $6,756,000, respectively. In order to
meet these requirements, we have a credit agreement with a financial institution for up to $1,500,000, which
expires August 31, 2002, and another credit agreement with a second financial institution for up to $20,000,000,
which expires November 30, 2002. These credit lines can be used solely for the issuance of standby letters of
credit. Any amounts drawn under the credit agreements are fully collateralized by certificates of deposit, which
are carried as restricted investments on our balance sheet. As of June 30, 2002, we have drawn $13,430,000 under
these credit agreements for standby letters of credit that collateralize certain leases. In the event that these
credit agreements are not renewed beyond their present expiration dates, the certificates of deposit would be
redeemed and paid to the various lessors as cash security deposits in lieu of standby letters of credit. As a
result there would be no impact on our liquidity if these agreements were not renewed. In the event that the
surety companies determined that issuing bonds on our behalf were a risk they were no longer willing to
underwrite, we would be required to collateralize certain of these lease obligations with either cash security
deposits or standby letters of credit, which would decrease our liquidity.
We use the Airline Reporting Corporation ("ARC") to provide reporting and settlement services for travel
agency sales and other related transactions. In order to maintain the minimum bond (or irrevocable letter of
credit) coverage of $100,000, ARC requires participating carriers to meet, on a quarterly basis, certain
financial tests such as, but not limited to, net profit margin percentage, working capital ratio, and percent of
debt to debt plus equity. As June 30, 2002, we met these financial tests and presently are only obligated to
provide the minimum amount of $100,000 in coverage to ARC. If we were to fail the minimum testing requirements,
we would be required to increase our bonding coverage to four times the weekly agency net cash sales (sales net
of refunds and agency commissions). Based on net cash sales remitted to us for the week ended July 26, 2002, the
coverage would be increased to $2,058,000 if we failed the tests. If we were unable to increase the bond amount
as a result of our then financial condition, we could be required to issue a letter of credit that would restrict
cash in an amount equal to the letter of credit.
In attempting to maximize the efficiency of our fleet replacement plan, we may from time to time endeavor
to return certain leased B737 aircraft to their owners on dates before the currently scheduled lease expiration
dates for these aircraft. We returned one Boeing aircraft during the year ended March 31, 2002. If we early
return these aircraft from service and are unable to sublease these aircraft to third parties, we may incur
additional expense, or pay the lessor all or a portion of the remaining lease payments, that could result in a
charge against earnings in the period in which the agreement is entered into. We have entered into an agreement
to early return two 737-200 aircraft to the lessor, for which we recorded an unusual charge of approximately
$3,000,000, net of income taxes, against earnings in our year ended March 31, 2002.
We are assessing our liquidity position in light of our aircraft purchase commitments and other capital
needs, the economy, our competition, the events of September 11, and other uncertainties surrounding the airline
industry. We believe it may be appropriate to enhance our liquidity, and are actively considering several
financing alternatives. In that regard, we filed a shelf registration with the Securities and Exchange
Commission in April 2002 that would allow us to sell equity or debt securities from time to time as market
conditions permit. On June 28, 2002, we filed an application with the Air Transportation Stabilization Board for
a $70 million line of credit, of which 85 percent would be secured by a federal government guarantee. If
approved, we plan to obtain this line of credit in order to enhance our liquidity. In addition, we may pursue
domestic or foreign bank financing, private debt financing or public debt financing such as enhanced equipment
trust certificates or leveraged lease arrangements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Critical accounting policies are defined as those that are both important to the portrayal of our
financial condition and results, and require management to exercise significant judgments. Our most critical
accounting policies are described briefly below. For additional information about these and our other
significant accounting policies, see Note 1 of the Notes to the Financial Statements.
Maintenance
Routine maintenance and repairs are charged to operations as incurred.
Under the terms of our aircraft lease agreements, we are required to make monthly maintenance deposits to
the lessor and a liability for accrued maintenance is established based on aircraft usage. The deposits are
applied against the cost of major airframe maintenance checks, landing gear overhaul and engine overhauls.
Deposit balances remaining at lease termination remain with the lessor and any remaining liability for
maintenance checks is reversed against the deposit balance. Additionally, a provision is made for the estimated
costs of scheduled major overhauls required to be performed on leased aircraft and components under the
provisions of the aircraft lease agreements if the required monthly deposit amounts are not adequate to cover the
entire cost of the scheduled maintenance. We also accrues for major airframe maintenance checks, landing gear
overhauls and engine overhauls on our owned aircraft. Accrued maintenance expense expected to be incurred beyond
one year is classified as long-term. The amounts accrued for maintenance are based on estimates of the time
required to complete the procedures and cost of parts used. Additional maintenance accruals may be required if
these estimates prove to be inadequate.
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 on tickets that have been sold but not yet used been deferred and included in the
accompanying balance sheet as air traffic liability.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The risk inherent in our market risk sensitive position is the potential loss arising from an adverse
change in the price of fuel as described below. The sensitivity analysis presented does not consider either the
effect that such an adverse change may have on overall economic activity or additional action management may take
to mitigate our exposure to such a change. Actual results may differ from the amounts disclosed. At the present
time, we do not utilize fuel price hedging instruments to reduce our exposure to fluctuations in fuel prices.
Our earnings are affected by changes in the price and availability of aircraft fuel. Market risk is
estimated as a hypothetical 10 percent increase in the average cost per gallon of fuel for the year ended March
31, 2002. Based on fiscal year 2002 actual fuel usage, such an increase would have resulted in an increase to
aircraft fuel expense of approximately $6,482,000 in fiscal year 2002. Comparatively, based on projected fiscal
year 2003 fuel usage, such an increase would result in an increase to aircraft fuel expense of approximately
$8,020,000 in fiscal year 2003. The increase in exposure to fuel price fluctuations in fiscal year 2003 is due
to the increase of our average aircraft fleet size during the year ended March 31, 2002, projected increases to
our fleet during the year ended March 31, 2003 and related gallons purchased.
Our average cost per gallon of fuel for the period ended June 30, 2002 decreased 13.9% from the average
cost for the quarter ended June 30, 2001. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Operating Expenses."
We will be susceptible to increased interest expense associated on A319 aircraft debt financings that have
floating interest rates and on expected future long-term debt obligations to fund the purchases of our Airbus
aircraft.
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Numbers
10.68 Aircraft Lease Agreement dated as of May 1, 2002 between AFS Investments XVILLC as
Lessor and Frontier Airlines, Inc. as Lessee. (1)
10.69 Credit Agreement [Frontier/2002-A] dated as of June 26, 2002 between Frontier Airlines,
Inc., Borrower, and Landesbank Schleswig-Holstein Girozentrale, as Administrative
Agent on behalf of the lenders. Portions of this exhibit have been excluded from the
publicly available document and an order granting confidential treatment of the excluded
material has been requested. (1)
10.70 Mortgage and Security Agreement [Frontier/2002-A] dated as of June 26, 2002 between
Frontier Airlines, Inc., Borrower, and Landesbank Schleswig-Holstein Girozentrale, as
Administrative Agent on behalf of the lenders. (1)
10.71 Credit Agreement [Frontier/2002-B] dates as of July 16, 2002 between Frontier Airlines,
Inc., Borrower, and Erste Bank Der Oesterreichschen Sparkassen AG, as Administrative
Agent on behalf of the lenders. Portions of this exhibit have been excluded from the
publicly available document and an order granting confidential treatment of the excluded
material has been requested. (1)
10.72 Mortgage and Security Agreement [Frontier/2002-B] dated as of July 16, 2002 between
Frontier Airlines, Inc., Borrower, and Erste Bank Der Oesterreichschen Sparkassen AG,
as Administrative Agent on behalf of the lenders. (1)
10.73 Credit Agreement {Frontier/HLB] dated as of May 23, 2002 between Frontier Airlines, Inc.,
Borrower, and Hamburgische Landesbank-Girozentrale, as Administrative Agent on behalf of
the lenders. Portions of this exhibit have been excluded from the publicly available document
and an order granting confidential treatment of the excluded material has been requested. (1)
10.74 Mortgage and Security Agreement [Frontier/HLB] dated as of May 23, 2002 between Frontier
Airlines, Inc., Borrower, and Hamburgische Landsebank-Girozentrale, as Administrative Agent
on behalf of the lenders. (1)
99.1 Certification of President and Chief Executive Officer, Jeffery S. Potter. (1)
99.2 Certification of Chief Financial Officer, Paul H. Tate. (1)
(1) Filed herewith.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of 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 5, 2002 By: /s/ Paul H. Tate
-----------------------------------------------------------
Paul H. Tate, Vice President and
Chief Financial Officer
Date: August 5, 2002 By: /s/ Elissa A. Potucek
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Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer