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 September 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 Rd., 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 November 8, 2002 was
29,647,050.
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 19
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited)
September 30, March 31,
2002 2002
Assets
Current assets:
Cash and cash equivalents $ 42,565,746 $ 87,555,189
Short-term investments 2,000,000 2,000,000
Restricted investments 18,946,000 11,574,000
Receivables, net of allowance for doubtful accounts
of $352,000 and $155,000 at September 30, 2002
and March 31, 2002, respectively 24,779,983 28,536,313
Income taxes receivable 9,112,976 6,855,544
Maintenance deposits 37,304,251 36,046,157
Prepaid expenses and other assets 9,332,657 11,013,602
Inventories 7,294,278 6,604,378
Deferred tax assets 2,199,684 1,788,078
Deferred lease and other expenses 127,752 74,952
Total current assets 153,663,327 192,048,213
Security, maintenance and other
deposits 25,312,920 20,932,709
Aircraft pre-delivery payments 54,071,186 44,658,899
Property and equipment, net 233,685,626 142,861,771
Deferred lease and other expenses 1,406,388 523,134
Restricted investments 13,310,833 12,660,210
$481,450,280 $413,684,936
=======================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 21,744,064 $ 23,185,266
Air traffic liability 57,990,178 61,090,705
Accrued maintenance expense 41,548,425 37,527,906
Other accrued expenses 18,955,695 22,060,082
Deferred stabilization act
compensation 835,381 4,835,381
Current portion of long-term debt 7,065,704 3,225,651
Current portion of obligations under capital leases 137,230 138,604
Total current liabilities 148,276,677 152,063,595
Long-term debt 133,649,527 66,832,018
Accrued maintenance expense 17,614,980 15,796,330
Deferred tax liability 11,804,862 6,716,815
Deferred lease and other expenses 5,303,643 3,077,326
Obligations under capital leases, excluding current
portion - 65,559
Total liabilities 316,649,689 244,551,643
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000
shares; none issued - -
Common stock, no par value, stated value of $.001
per share, authorized 100,000,000 shares;
29,647,050 and 29,421,331 shares issued and
outstanding at September 30, 2002 and March 31, 2002,
respectively 29,647 29,421
Additional paid-in capital 87,044,694 85,867,487
Unearned ESOP shares (706,557) (2,119,670)
Retained earnings 78,432,807 85,356,055
164,800,591 169,133,293
481,450,280 413,684,936
=======================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
Revenues:
Passenger $ 116,709,640 $ 113,743,975 $ 226,001,522 $ 234,471,814
Cargo 1,366,251 1,572,891 2,946,187 3,538,464
Other 1,278,633 689,345 2,219,222 1,312,290
Total revenues 119,354,524 116,006,211 231,166,931 239,322,568
Operating expenses:
Flight operations 59,568,910 50,959,339 114,048,305 100,695,793
Aircraft and traffic servicing 21,274,015 17,954,683 40,623,124 35,800,653
Maintenance 18,942,128 20,016,709 36,099,490 38,363,899
Promotion and sales 13,505,113 16,386,217 28,224,421 32,910,980
General and administrative 6,574,920 5,974,368 12,696,791 13,208,920
Depreciation and amortization 4,133,227 2,744,541 7,931,639 5,066,409
Total operating expense 123,998,313 114,035,857 239,623,770 226,046,654
Operating income (loss (4,643,789) 1,970,354 (8,456,839) 13,275,914
Nonoperating income (expense):
Interest income 487,798 1,116,222 1,194,760 2,646,980
Interest expense (1,895,668) (673,552) (3,154,979) (926,426)
Stabilization act compensation - 8,802,235 - 8,802,235
Other, net (286,772) (147,125) (438,322) (196,808)
Total nonoperating income
(expense) net (1,694,642) 9,097,780 (2,398,541) 10,325,981
Income (loss) before income
tax expense (6,338,431) 11,068,134 (10,855,380) 23,601,895
Income tax (benefit) expense (2,350,755) 3,789,551 (3,932,132) 8,583,715
Net income (loss) $ (3,987,676) $ 7,278,583 $(6,923,248) $ 15,018,180
=======================================================================================
Earnings per share:
Basic $ (0.13) $0.26 $ (0.23) $0.53
======================================================================================
Diluted $ (0.13) $0.24 $ (0.23) $0.50
======================================================================================
Weighted average shares of
common stock outstanding
Basic 29,632,898 28,360,534 29,583,870 28,324,778
======================================================================================
Diluted 29,632,898 29,807,169 29,583,870 29,807,470
======================================================================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Cash Flows
For the Six Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
Cash flows from operating activities:
Net income (loss) $ (6,923,248) $ 15,018,180
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Employee stock option plan compensation expense 1,413,113 1,108,124
Depreciation and amortization 7,983,936 5,113,021
Deferred tax expense 5,282,898 1,714,264
Changes in operating assets and liabilities
Restricted investments (8,434,423) (3,825,000)
Receivables 3,756,330 15,569,800
Income taxes receivable (2,257,432) -
Security, maintenance and other deposits (4,814,705) (5,519,404)
Prepaid expenses and other assets 1,680,945 1,337,267
Inventories (689,900) (1,527,393)
Accounts payable (1,441,202) (7,221,166)
Air traffic liability (3,100,527) (12,126,229)
Other accrued expenses (3,104,387) (833,766)
Deferred stabilization act compensation (4,000,000) 1,316,239
Accrued maintenance expense 5,839,169 5,679,350
Deferred lease and other expenses 2,226,317 1,579,592
Net cash provided (used) by operating activities (6,583,116) 17,382,879
Cash flows from investing activities:
Aircraft lease and purchase deposits, net (10,235,887) 4,132,112
Decrease in restricted investments 411,800 931,800
Capital expenditures (98,755,494) (115,109,871)
Net cash used by investing activities (108,579,581) (110,045,959)
Cash flows from financing activities:
Net proceeds from issuance of common stock 570,976 571,109
Proceeds from long-term borrowings 73,200,000 72,000,000
Payment of financing fees (988,351) -
Principal payments on long-term borrowings (2,542,438) (400,378)
Principal payments on obligations under capital leases (66,933) (60,731)
Net cash provided by financing activities 70,173,254 72,110,000
Net decrease in cash and cash equivalents (44,989,443) (20,553,080)
Cash and cash equivalents, beginning of period 87,555,189 109,251,426
Cash and cash equivalents, end of period $ 42,565,746 $ 88,698,346
========================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Financial Statements
September 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 six months ended September 30, 2002 are not necessarily indicative
of the results that will be realized for the full year.
Reclassifications
Certain reclassifications have been made to the March 31, 2002 balances to conform to
the September 30, 2002 presentation.
(2) Long-term Debt
In May 2002, the Company obtained 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 interest rate at September 20,
2002 was 3.3125%. The loan matures in May 2014, at which time a balloon payment of
$7,560,000 is due. As of September 30, 2002, the Company had $24,946,000 of debt
outstanding secured by this aircraft.
In June 2002, the Company obtained 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.
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 interest rates for each of the
loans at September 30, 2002 were 3.5288% and 3.575%, respectively. The loans mature
in June 2014 and July 2014, at which time balloon payments totaling $4,800,000 are due.
As of September 30, 2002, the Company had $47,288,000 of debt outstanding secured by
these aircraft.
In April 2002, the Company obtained a $72,000,000 loan facility for the purchase of
three Airbus aircraft, one of which was delivered in October 2002. Each aircraft loan
will have a term of 12 years and will be payable in semi-annual installments,
including interest, payable in arrears, with a floating interest rate adjusted
semi-annually based on LIBOR plus a margin of 1.25%. The loans are secured by the
aircraft. At the end of the term, there is a balloon payment for each aircraft loan
that is not to exceed $7,000,000. As of October 31, 2002, we have borrowed
$24,000,000 for the purchase of the first Airbus aircraft. The loan matures in
October 2014, at which time a balloon payment totaling $7,000,000 is due.
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 that describe the business and prospects of Frontier
Airlines, Inc. ("Frontier" or the "Company") and the expectations of our Company and
management. All statements, other than statements of historical facts, included in this
report that address activities, events or developments that we expect, believe, intend or
anticipate will or may occur in the future, are forward-looking statements. When used in
this document, the words "estimate," "anticipate," "project" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are inherently
subject to risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated. These risks and uncertainties include, but
are not limited to: the timing of, and expense associated with, expansion and modification
of our operations in accordance with our business strategy or in response to competitive
pressures or other factors; general economic factors and behavior of the fare-paying
public, including the current economic slowdown, which has put significant downward
pressure on fares; increased federal scrutiny of low-fare carriers generally that may
increase our operating costs or otherwise adversely affect us; actions of competing
airlines, such as increasing capacity and pricing actions of United Airlines and other
competitors; the unavailability of, or inability to secure upon acceptable terms, financing
necessary to purchase aircraft that we have ordered; issues relating to our transition to
an Airbus aircraft fleet; uncertainties regarding aviation fuel price; uncertainties
regarding future terrorist attacks on the United States or military actions that may be
taken; and uncertainties as to when and how fully consumer confidence in the airline
industry will be restored, if ever. Because our business, like that of the airline
industry generally, is characterized by high fixed costs relative to revenues, small
fluctuations in our yield per RPM or expense per ASM can significantly affect operating
results. See "Risk Factors" in our Form 10-K for the year ended March 31, 2002 as they may
be modified by the disclosures contained in this report.
General
We are a scheduled passenger airline based in Denver, Colorado. As of October 31,
2002, we, in conjunction with Frontier JetExpress operated by Mesa Air Group ("Mesa"),
operate routes linking our Denver hub to 37 cities in 20 states spanning the nation from
coast to coast. 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 seven purchased Airbus aircraft, including five Boeing 737-200s, 17 larger Boeing
737-300s, and 12 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. At the end of September 2002 we took two Boeing 737-200s out of service with
the return to the lessor anticipated in November 2002 pursuant to bringing the aircraft in
compliance with return conditions. We plan to accept delivery of an additional five Airbus
A319s during our fiscal year ending March 31, 2003. Including the anticipated return of an
additional three 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 13 gates at our hub, Denver International Airport ("DIA"),
where we operate approximately 160 daily system flight departures and arrivals. Prior to
the September 11, 2001 terrorist attacks, we operated approximately 126 daily system flight
departures and arrivals. Following the terrorist attacks, we reduced our service to
approximately 103 daily system flight departures and arrivals. The reduced service was
entirely reinstated by February 2002. Since that time, we have re-established our
long-term business plan of moderate capacity increases by taking delivery of new A319
aircraft. We intend to continue to monitor passenger demand and other competitive
factors and adjust the number of flights we operate accordingly. During the six months
ended September 30, 2002, we added service to Indianapolis, Indiana on May 23, 2002; and
Boise, Idaho and Tampa, Florida on June 24, 2002; Tucson, Arizona, San Jose, California,
Fort Myers, Florida, Wichita, Kansas (operated by Frontier JetExpress) and Oklahoma City,
Oklahoma and terminated service to Boston, Massachusetts and St. Louis, Missouri (operated
by Frontier JetExpress) on October 22, 2002. We intend to begin our first international
service between Denver and Cancun, Mexico on December 20, 2002 and Denver and Mazatlan,
Mexico on December 21, 2002.
We have filed an application requesting two additional beyond perimeter slot
exemptions at Ronald Reagan Washington National Airport (DCA), that would enable us to
operate an additional DCA round-trip daily non-stop flight to our Denver hub. These slot
exemptions were abandoned by National Airlines. Six other carriers also have filed
applications seeking use of the beyond perimeter slot exemptions. The DOT has not
indicated when they plan to issue a decision on the award of the two beyond perimeter slot
exemptions. However, if our application is successful, we would plan to add service
between Denver and DCA approximately 60 days after notification.
We have also filed an application for up to four slots at John Wayne International
Airport in Santa Ana, California (SNA), which would enable us to operate two daily non-stop
flights between that airport and our Denver hub. Orange County airport officials currently
are obtaining comments on new service from interested carriers, and Frontier has submitted
a formal request to add service at SNA. We are currently awaiting a response to that
request, and anticipate receiving a response from SNA officials by December 2002. If our
application is successful, we plan to add service between Denver and SNA approximately 60
days after notification.
During the six months ended September 30, 2002, we signed a letter of intent with
LiveTV to bring DIRECTV AIRBORNE(TM)satellite programming to every seatback in our Airbus
fleet and in October we signed a purchase and long-term services agreement with LiveTV for
that system. We recently completed the installation of the LiveTV system on our first
Airbus aircraft, and we plan to have all of our Airbus aircraft equipped with the LiveTV
system by next spring. The installed systems will become operational upon receipt of
regulatory approval, which we anticipate to be sometime in the current quarter. We plan to
offset the usage costs for the system by implementing a $5 per segment usage charge for
access to the system. We believe the DIRECTV(TM) product represents a significant value to
our customers and may encourage more customers to choose Frontier over our competitors.
In September 2001, we entered into a codeshare agreement with Mesa. Under the terms
of the agreement, we market and sell flights operated by Mesa as Frontier JetExpress. This
codeshare began February 17, 2002 with service between Denver and San Jose, California, and
with supplemental flights to our current service between Denver and Houston, Texas.
Frontier JetExpress currently provides service to San Diego, San Jose, Oakland, and
Ontario, California, and Wichita, Kansas using four 50-passenger Bombardier CRJ-200
regional jets.
Effective July 9, 2001, we began a codeshare agreement with Great Lakes Aviation,
Ltd. ("Great Lakes") by which Great Lakes provides daily service to regional markets from
our Denver hub. The codeshare agreement initially included Casper, Cody, Gillette, and
Cheyenne, Wyoming; Amarillo, Texas; Santa Fe, New Mexico; and Hayden, Colorado. Effective
November 15, 2001, we expanded the codeshare agreement to include nine additional Great
Lakes cities including Laramie, Riverton, Rock Springs, and Worland, Wyoming; Cortez and
Telluride, Colorado; Scottsbluff, Nebraska; and Farmington, New Mexico and we commenced a
Great Lakes codeshare to Sheridan, Wyoming, on October 31, 2001. Effective December 14,
2001, an additional 20 cities were added including Page and Phoenix, Arizona; Alamosa and
Pueblo, Colorado; Dodge City, Garden City, Hays, and Liberal, Kansas; Dickinson and
Williston, North Dakota; Alliance, Chadron, Grand Island, Kearney, McCook, Norfolk, and
North Platte, Nebraska; Pierre, South Dakota; and Moab and Vernal, Utah. Service between
Denver and Hayden, Colorado was removed from the codeshare agreement effective December 13,
2001.
As a result of the September 11, 2001 terrorist attacks on the United States, on
September 22, 2001 President Bush signed into law the Air Transportation Safety and System
Stabilization Act (the "Stabilization Act"). The Stabilization Act includes for all U.S.
airlines and air cargo carriers the following key provisions: (i) $5 billion in cash
compensation, of which $4.5 billion is available to commercial passenger airlines and is
allocated based on the lesser of each airline's share of available seat miles during August
2001 or the direct and incremental losses (including lost revenues) incurred by the airline
from September 11, 2001 through December 31, 2001; (ii) subject to certain conditions, the
availability of up to $10 billion in federal government guarantees of certain loans made to
air carriers for which credit is not reasonably available as determined by a newly
established Air Transportation Stabilization Board; (iii) the authority of the Secretary of
Transportation to reimburse air carriers (which authority expires 180 days after the
enactment of the Stabilization Act) for increases in the cost of war risk insurance over
the premium in effect for the period September 4, 2001 to September 10, 2001; (iv) at the
discretion of the Secretary of Transportation, a $100 million limit on the liability of any
air carrier to third parties with respect to acts of terrorism committed on or to such air
carrier during the 180 day period following enactment of the Stabilization Act; and (v)
the extension of the due date for the payment by air carriers of certain payroll and excise
taxes until November 15, 2001 and January 15, 2002, respectively. During the fiscal year
ended March 31, 2002, we recognized $12,703,000 of the federal grant as a result of the
Stabilization Act to offset direct and incremental losses we experienced as a result of the
terrorist attacks on September 11, 2001. We had received a total of $17,538,000; the
remaining $4,835,000 represents amounts received in excess of estimated allowable direct
and incremental losses incurred from September 11, 2001 to December 31, 2001. During the
six months ended September 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 as of
September 30, 2002. We repaid the remaining $835,000 in October 2002. Our final Form 330
filing is still subject to audit under the Stabilization Act.
Results of Operations
We incurred a net loss of $6,923,000 or 23(cent)per common share for the six months
ended September 30, 2002 as compared to net income of $15,018,000 or 50(cent)per diluted share
for the six months ended September 30, 2001. We incurred a net loss of $3,988,000 or 13(cent)
per common share for the three months ended September 30, 2002 as compared to net income of
$7,279,000 or 24(cent)per diluted share for the three months ended September 30, 2001. During
the six months ended September 30, 2002, as compared to the prior comparable period, we
experienced lower average fares as a result of the slowing economy, competitive pricing on
discount fares available inside 14 days of travel in our markets and low introductory fares
by new carriers serving the Denver market. Our average fare was $108 for the six months
ended September 30, 2002, compared to $133 for the six months ended September 30, 2001.
Additionally, we believe that passenger traffic was negatively impacted by the anniversary
of the terrorist attacks that occurred on September 11, 2001, and as a result, we canceled
42 scheduled flights on September 11, 2002 and experienced unusually low load factors
during the week of September 11th. For the six months ended September 30, 2001, our
passenger traffic was severely adversely impacted by the events of September 11th. On that
day, the Federal Aviation Administration ("FAA") temporarily suspended all commercial
airline flights as a result of the terrorist attacks on the United States. As a result of
this suspension, we cancelled 407 scheduled flights until we resumed operations on
September 14, 2001. After we resumed operations, we cancelled 303 additional scheduled
flights through September 30, 2001 as a result of diminished consumer demand. Due to high
fixed costs, we continued to incur substantially all of our normal operating expenses
during this period and generated substantial operating losses. As a result, during the
three months ended September 30, 2001, we recognized $8,802,000, of the federal cash grant
we received as a result of the Stabilization Act. Excluding the grant we recognized, our
net income for the three months ended September 30, 2001 would have been $1,843,000 or 6(cent)
per diluted share.
During the six months ended September 30, 2001, prior to the terrorist attacks on
September 11, 2001, we were experiencing the effects of the slowing economy that caused
lower fares and reduced business and leisure travel. During the six months ended September
30, 2001, we also cancelled approximately 120 flights as a result of unusual weather
conditions the Denver area experienced.
During the six months ended September 30, 2001, we took delivery of our first five
Airbus aircraft. As this was a new aircraft type for us, we were required by the FAA to
demonstrate that our crews were proficient in flying this type aircraft and that we were
capable of properly maintaining the aircraft and related maintenance records before we
placed these aircraft in scheduled passenger service. This process took longer than we
originally had anticipated and, as a result, we were required to cancel scheduled flights
that the first aircraft was scheduled to perform. Because of this delay in receiving
necessary FAA approvals, we believe that our passenger revenues and our cost per ASM
("CASM") were adversely affected during the six months ended September 30, 2001.
Our CASM for the six months ended September 30, 2002 and 2001 was 8.18(cent)and 9.62
(cent), respectively, a decrease of 1.44(cent)or 15.0%. CASM excluding fuel for the six months
ended September 30, 2002 and 2001 was 6.86(cent)and 8.13(cent), respectively, a decrease of
1.27(cent)or 15.6%. Our CASM for the three months ended September 30, 2002 and 2001 was 7.95
(cent)and 9.50(cent), respectively, a decrease of 1.55(cent)or 16.3%. CASM excluding fuel for
the three months ended September 30, 2002 and 2001 was 6.58(cent)and 8.04(cent), respectively,
a decrease of 1.46(cent)or 18.2%. CASM decreased during the six months ended September 30,
2002 as a result of a significantly reduced level of Airbus transition expenses, an increase
in the average number of owned aircraft from 1.1 to 4.7, 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 period, and economies of scale associated with the 24.7% increase
in ASMs over the prior comparable period. These reductions were partially offset by an
increase of .10(cent)per ASM as a result of an increase in war risk and hull and liability
insurance premiums after the events of September 11. During the six months ended September
30, 2001, our expenses were impacted by the terrorist attacks and unusual weather conditions
including an unusual spring blizzard and a hail storm that caused damage to five of our
aircraft during the six months ended September 30, 2001, or approximately 20% of our fleet.
We incurred short-term lease expenses 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. During April 2001,
the Denver area also experienced an unusual blizzard, which caused flight cancellations as well
as expenses associated with deicing our aircraft. We estimate that the total adverse impact
on our CASM associated with these unusual weather conditions was .08(cent), or approximately
$1,893,000. Additionally, due to the flight cancellations as a result of the September 11
terrorist attacks and these weather conditions, our ASMs were less than we had planned,
which caused our fixed costs to be spread over fewer ASMs and, we believe, distorted our
cost per ASM for the period. During the six months ended September 30, 2001, we incurred
approximately $3,643,000 in transition expenses associated with the induction of the Airbus
aircraft that had an adverse effect on our CASM of approximately .16(cent)per ASM. These
include crew salaries; travel, training and induction team expenses; and depreciation
expense. This compared to $1,580,000 in Airbus transition expenses during the six months
ended September 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 six months ended September 30, 2002, our break-even
load factor was 64.0% compared to our achieved passenger load factor of 60.8%. For the six
months ended September 30, 2001, our break-even load factor was 57.8% compared to our
achieved passenger load factor of 64.2%. 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 six months ended September 30, 2002 from $133 during the six months ended
September 30, 2001, offset by a decrease in our CASM to 8.18(cent)for the six months ended
September 30, 2002 from 9.62(cent)for the six months ended September 30, 2001.
Small fluctuations in our yield per available seat mile ("RASM") or in our CASM can
significantly affect operating results because we, like other airlines, have high fixed
costs in relation to revenues. Airline operations are highly sensitive to various factors,
including the actions of competing airlines and general economic factors, which can
adversely affect our liquidity, cash flows and results of operations.
As a result of the September 11 terrorist attacks, transition costs associated with
our fleet replacement plan during the three and six months ended September 2002 and the
slowing economy, we do not believe our results of operations for the three and six months
ended September 30, 2002 are indicative of future operating results or comparable to the
three and six months ended September 30, 2001.
The following table provides certain of our financial and operating data for the
three month and six month periods ended September 30, 2002 and 2001.
Three Months Ended Sept. 30, Six Months Ended Sept. 30,
2002 2001 2002 2001
Selected Operating Data:
Passenger revenue (000s) (2) $ 116,710 $ 113,744 $ 226,002 $ 234,472
Revenue passengers carried (000s) 987 802 1,916 1,648
Revenue passenger miles(RPMs)(000s)(3) 922,817 732,531 1,782,421 1,509,295
Available seat miles (ASMs) (000s) (4) 1,559,879 1,200,608 2,929,278 2,349,154
Passenger load factor (5) 59.2% 61.0% 60.8% 64.2%
Break-even load factor (1) (6) 62.8% 55.1% 64.0% 57.8%
Block hours (7) 30,875 23,769 58,554 46,428
Departures 13,583 10,730 25,767 20,920
Average aircraft stage length 870 848 861 851
Average passenger length of haul 935 913 930 916
Average daily fleet block hour
utilization (8) 9.9 9.5 9.9 9.7
Yield per RPM (cents) (9) 12.57 15.51 12.64 15.53
Yield per ASM (cents) (10) 7.44 9.46 7.69 9.98
Total yield per ASM (cents) (11) 7.65 9.66 7.89 10.19
Cost per ASM (cents) 7.95 9.50 8.18 9.62
Cost per ASM excluding fuel (cents) 6.58 8.04 6.86 8.13
Average fare (12) $ 109 $ 132 $ 108 $ 133
Average aircraft in fleet 33.8 27.3 32.2 26.2
Aircraft in fleet at end of period 35.0 29.0 35.0 29.0
Average age of aircraft at end of period 9.3 10.1 9.3 10.1
EBITDAR (000s) (13) $ 16,873 $ 29,496 $ 33,638 $ 59,389
EBITDAR as a % of revenue 14.1% 25.4% 14.6% 24.8%
(1) The Stabilization Act compensation of $8,802,000, which occurred during the three
and six months ended September 30, 2001, has been excluded from the calculation of the
break-even load factor, cost per ASM and cost 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, 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) "Yield per ASM" is determined by dividing passenger revenues (excluding charter
revenue) by available seat miles.
(11) "Total yield per ASM" is determined by dividing passenger revenues by available seat
miles.
(12) "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.
(13) "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 three
month and six month periods ended September 30, 2002 and 2001.
Three Months Ended September 30, Six Months Ended September 30,
2002 2001 2002 2001
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 7.48 97.8% 9.47 98.1% 7.72 97.8% 9.98 98.0%
Cargo 0.09 1.1% 0.13 1.4% 0.10 1.3% 0.15 1.5%
Other 0.08 1.1% 0.06 0.6% 0.08 1.0% 0.06 0.5%
Total revenues 7.65 100.0% 9.66 100.0% 7.89 100.0% 10.19 100.0%
==============================================================================
Operating expenses:
Flight operations 3.82 49.9% 4.24 43.9% 3.89 49.3% 4.29 42.1%
Aircraft and
traffic servicing 1.36 17.8% 1.50 15.5% 1.39 17.6% 1.52 15.0%
Maintenance 1.21 15.9% 1.67 17.3% 1.23 15.6% 1.63 16.0%
Promotion and sales 0.87 11.3% 1.36 14.1% 0.96 12.2% 1.40 13.8%
General and
administrative 0.42 5.5% 0.50 5.1% 0.43 5.5% 0.56 5.5%
Depreciation and
amortization 0.26 3.5% 0.23 2.4% 0.27 3.4% 0.22 2.1%
Total operating expenses 7.95 103.9% 9.50 98.3% 8.18 103.7% 9.62 94.5%
==============================================================================
Revenues
Our revenues are highly sensitive to changes in fare levels. Competitive fare
pricing policies have a significant impact on our revenues. Because of the elasticity of
passenger demand, we believe that increases in fares may at certain levels result in a
decrease in passenger demand in many markets. We cannot predict future fare levels, which
depend to a substantial degree on actions of competitors and the economy. When sale prices
or other price changes are initiated by competitors in our markets, we believe that we
must, in most cases, match those competitive fares in order to maintain our market share.
Passenger revenues are seasonal depending on the markets' locations.
Our average fare for the six months ended September 30, 2002 and 2001 was $108 and
$133, respectively, a decrease of 18.8%. We believe that the decrease in the average fare
during the six months ended September 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 $226,002,000 for the six months
ended September 30, 2002 compared to $234,472,000 for the six months ended September 30,
2001, or a decrease of 3.6%, on increased capacity of 580,124,000 or 24.7%. Passenger
revenues totaled $116,710,000 for the three months ended September 30, 2001 compared to
$113,744,000 for the three months ended September 30, 2001, or an increase of 2.6%, on
increased capacity of 359,271,000 or 29.9%. Passenger revenues include 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 1,916,000 revenue passengers
during the six months ended September 30, 2002 compared to 1,648,000 during the six months
ended September 30, 2001, an increase of 16.3%. We had an average of 32.4 aircraft in our
fleet during the six months ended September 30, 2002 compared to an average of 26.3
aircraft during the six months ended September 30, 2001, an increase of 23.2%. RPMs for
the six months ended September 30, 2002 were 1,782,421,000 compared to 1,509,295,000 for
the six months ended September 30, 2001, an increase of 18.1%. Our load factor decreased
to 60.8% for the six months ended September 30, 2002 from 64.2% for the prior comparable
period. During the six months ended September 30, 2001, we cancelled approximately 830
flights as a result of the September 11, 2001 terrorist attacks, and weather conditions and
weather related aircraft repairs in the Denver area earlier in the year. We believe that
this had an adverse effect on our revenue during the period.
Cargo revenues, consisting of revenues from freight and mail service, totaled
$2,946,000 and $3,538,000 for the six months ended September 30, 2002 and 2001,
respectively, representing 1.3% and 1.5%, respectively, of total operating revenues, a
decrease of 16.7%. 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, and totaled $2,219,000 and $1,312,000, or 1.0% and .5% of total
operating revenues for the six months ended September 30, 2002 and 2001, respectively, an
increase of 69.1%. Other revenue increased over the prior comparable period as a result of
an increase in interline handling fees primarily due to the Mesa codeshare agreement and an
increase in ground handling for Mesa and other airlines.
Operating Expenses
Operating expenses include those related to flight operations, aircraft and traffic
servicing, maintenance, promotion and sales, general and administrative and depreciation
and amortization. Total operating expenses were $239,624,000 and $226,047,000 for the six
months ended September 30, 2002 and 2001 and represented 103.7% and 94.5% of revenue,
respectively. Total operating expenses for the three months ended September 30, 2002 and
2001 were $123,998,000 and $114,036,000 and represented 103.9% and 98.3% of revenue,
respectively. Operating expenses increased as a percentage of revenue during the six
months ended September 30, 2002 as a result of the 18.8% decrease in the average fare
during the six months ended September 30, 2002 from the six months ended September 30,
2001.
Flight Operations. Flight operations expenses of $114,048,000 and $100,696,000 were
49.3% and 42.1% of total revenue for the six months ended September 30, 2002 and 2001,
respectively. Flight operations expenses of $59,569,000 and $50,959,000 were 49.9% and
43.9% of total revenue for the three months ended September 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. Included in flight operations expenses during
the six months ended September 30, 2002 and 2001 is approximately $1,300,000 and $1,743,000
for Airbus training and related travel expenses, respectively.
Aircraft fuel expenses include both the direct cost of fuel, including taxes, as
well as the cost of delivering fuel into the aircraft. Aircraft fuel expense of
$38,728,000 for 44,028,000 gallons used and $35,136,000 for 36,894,000 gallons used
resulted in an average fuel cost of 88.0(cent)and 95.2(cent)per gallon, for the six months ended
September 30, 2002 and 2001, respectively. Aircraft fuel expense represented 16.8% and
14.7% of total revenue for the six months ended September 30, 2002 and 2001, respectively.
Aircraft fuel expense of $21,332,000 for 23,170,000 gallons used and $17,502,000 for
18,687,000 gallons used resulted in an average fuel expense 92.1(cent)and 93.7(cent)per gallon
for the three months ended September 30, 2002 and 2001, respectively. Aircraft fuel expenses
represented 17.9% and 15.1% of total revenue for the three months ended September 30, 2002
and 2001, respectively. Fuel prices were subject to change weekly as we did not purchase
supplies in advance for inventory during these periods. Fuel consumption for the six
months ended September 30, 2002 and 2001 averaged 752 and 795 gallons per block hour,
respectively. Fuel consumption for the three months ended September 30, 2002 and 2001
averaged 750 and 786 gallons per block hour, respectively, a decrease of 4.6%. Fuel
consumption decreased from the prior comparable periods because of a decrease in our load
factors, the more fuel-efficient Airbus aircraft added to our fleet and a fuel conservation
program implemented in August 2001.
Aircraft lease expenses totaled $34,601,000 (15.0% of total revenue) and $32,442,000
(13.6% of total revenue) for the six months ended September 30, 2002 and 2001,
respectively, an increase of 6.6%. Aircraft lease expenses totaled $17,671,000 (14.8% of
total revenue) and $16,124,000 (13.9% of total revenue) for the three months ended
September 30, 2002 and 2001, respectively, an increase of 9.6%. The increase is largely
due to an increase in the average number of leased aircraft to 27.7 from 25.5, an increase
of 8.6%. During the six months ended September 30, 2001, to minimize the number of flight
cancellations while our hail-damaged aircraft were being repaired, we incurred short-term
lease expenses of $541,000 for replacement aircraft.
Aircraft insurance expenses totaled $5,166,000 (2.2% of total revenue) for the six
months ended September 30, 2002. Aircraft insurance expenses for the six months ended
September 30, 2001 were $1,845,000 (.8% of total revenue). Aircraft insurance expenses were
..29(cent)and .12(cent)per RPM for the six months ended September 30, 2002 and 2001, respectively.
Aircraft insurance expenses totaled $2,548,000 (2.1% of total revenue) for the three months
ended September 30, 2002. Aircraft insurance expenses for the three months ended September
30, 2001 were $985,000 (.9% of total revenue). Aircraft insurance expenses were .28(cent)and
..13(cent)per RPM for the three months ended September 30, 2002 and 2001, respectively. Aircraft
insurance expenses increased during the six months ended September 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 December 15, 2002, unless renewed by
Congress. We do not know whether the government will extend the coverage, and if it does,
how long the extension will last. We expect that if the government stops providing
excess war risk coverage to the airline industry, the premiums charged by aviation insurers
for this coverage will be substantially higher than the premiums currently charged by
the government or the coverage will simply not be available from reputable underwriters.
Pilot and flight attendant salaries before payroll taxes and benefits totaled
$20,434,000 and $16,185,000 or 9.0% and 6.9% of passenger revenue for the six months ended
September 30, 2002 and 2001, an increase of 26.3%. Pilot and flight attendant salaries
before payroll taxes and benefits totaled $10,575,000 and $8,407,000 or 9.1% and 7.4% of
passenger revenue for the three months ended September 30, 2002 and 2001, an increase of
25.8%. Pilot and flight attendant compensation also increased as a result of a 23.2%
increase in the average number of aircraft in service, an increase of 26.1% in block hours,
a general wage increase in flight attendant and pilot salaries and additional crew required
to replace those who were attending training on the Airbus equipment. In order to maintain
competitive pay for pilots, a revised pilot pay schedule was negotiated with the Frontier
Airline Pilots Association for an approximate 2.5% increase in salaries. The union members
accepted this proposal, which was made effective August 1, 2002. We pay pilot and flight
attendant salaries for training, consisting of approximately six and three weeks,
respectively, prior to scheduled increases in service, which can cause the compensation
expense during such periods to appear high in relationship to the average number of
aircraft in service. We expect these costs to continue to increase as we place more
aircraft into service.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were
$40,623,000 and $35,801,000 (an increase of 13.5%) for the six months ended September 30,
2002 and 2001, respectively, and represented 17.6% and 15.0% of total revenue. Aircraft and
traffic servicing expenses were $21,274,000 and $17,955,000 (an increase of 18.5%) for the
three months ended September 30, 2002 and 2001, respectively, and represented 17.8% and
15.5% 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 reaccomodate
passengers as well as hotel, meal and other incidental expenses. During the six months
ended September 30, 2002, our departures increased to 25,719 from 20,920 for the six months
ended September 30, 2001, or 22.9%. Aircraft and traffic servicing expenses were $1,580
per departure for the six months ended September 30, 2002 as compared to $1,711 per
departure for the six months ended September 30, 2001, or a decrease of $132 per departure.
During the three months ended September 30, 2002, our departures increased to 13,544 from
10,730 or 26.2%. Aircraft and traffic servicing expenses were $1,571 per departure for the
three months ended September 30, 2002 as compared to $1,673 per departure for the three
months ended September 30, 2001, or a decrease of $102 per departure. Aircraft and
traffic servicing expenses during the six ended September 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 as well as the September 11 terrorist attacks, we had fewer departures than we
had planned, which we believe distorted our expenses per departure for the three and six
months ended September 30, 2001.
Maintenance. Maintenance expenses of $36,099,000 and $38,364,000 were 15.6% and
16.0% of total revenue for the six months ended September 30, 2002 and 2001, respectively,
a decrease of 5.9%. Maintenance expenses of $18,942,000 and $20,017,000 were 15.9% and
17.3% of total revenue for the three months ended September 30, 2002 and 2001,
respectively, a decrease of 5.4%. These include all labor, parts and supplies expenses
related to the maintenance of the aircraft. Routine maintenance is charged to maintenance
expense as incurred while major engine overhauls and heavy maintenance check expense are
accrued monthly with variances from accruals recognized at the time of the check.
Maintenance cost per block hour for the six months ended September 30, 2002 and 2001 were
$614 and $826, 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 six months ended September 30, 2001, we had hail damage to five of our aircraft,
estimated at $491,000 ($11 per block hour). During the six months ended September 30,
2001, we incurred approximately $881,000 for Airbus training or $19 per block hour.
Additionally, the number of flight cancellations as a result of these weather conditions as
well as the September 11 terrorist attacks reduced the number of block hours and caused
our fixed costs to be spread over fewer block hours.
In July 2001, our mechanics voted to be represented by International Brotherhood of
Teamsters. The first bargaining agreement for the mechanics, which has a 3-year term, was
ratified and made effective in July 2002. The effect of this agreement increased
mechanics' salaries by approximately 12% over the term of the agreement. Salary increases
for the first year of the agreement are approximately 5%.
Promotion and Sales. Promotion and sales expenses totaled $28,224,000 and $32,911,000
and were 12.2% and 13.8% of total revenue for the six months ended September 30, 2002 and
2001, respectively, a decrease of 14.3%. Promotion and sales expenses totaled $13,505,000
and $16,386,000 and were 11.3% and 14.1% of total revenue for the three months ended
September 30, 2002 and 2001, respectively, a decrease of 17.6%. These include advertising
expenses, telecommunications expenses, wages and benefits for reservationists and as well
as marketing management and sales personnel, credit card fees, travel agency commissions
and computer reservations costs. During the six months ended September 30, 2002, promotion
and sales expenses per passenger decreased to $14.73 compared to $19.97 for the six months
ended September 30, 2001. Promotion and sales expenses per passenger decreased as a result
of variable expenses in relation to lower average fares, an overall elimination of travel
agency commissions effective on tickets sold on or after June 1, 2002 and a decrease in
advertising expenses. During the six months ended September 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 six months
ended September 30, 2002 and 2001 totaled $12,697,000 and $13,209,000 and were 5.5% of
total revenue for each of the six months ended September 30, 2002 and 2001, respectively, a
decrease of 3.9%. General and administrative expenses for the three months ended September
30, 2002 and 2001 totaled $6,575,000 and $5,974,000 and were 5.5% and 5.2% of total
revenue, respectively, an increase of 10.1%. During the six months ended September 30,
2001, we accrued for employee performance bonuses totaling $1,559,000 or .7% of total
revenue. Bonuses are based on profitability. As a result of our pre-tax loss for the six
months ended September 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
September 2001 to approximately 2,950 in September 2002, an increase of 18.0%. Because of
the increase in personnel, our health insurance benefit expenses and an overall increase in
health insurance costs, workers compensation, and accrued vacation expense increased
accordingly. During the six months ended September 30, 2002, we brought revenue accounting
in-house. We previously had outsourced this function. We have realized a reduction in
expenses associated with revenue accounting.
Depreciation and Amortization. Depreciation and amortization expenses of $7,932,000
and $5,066,000 were approximately 3.4% and 2.1% of total revenue for the six months ended
September 30, 2002 and 2001, respectively, an increase of 56.6%. These expenses include
depreciation of aircraft and aircraft components, office equipment, ground station
equipment and other fixed assets. Depreciation expense increased over the prior year due
to an increase in the number of Airbus A319 aircraft owned from three at September 30, 2001
to six at September 30, 2002.
Nonoperating Income (Expense). Net nonoperating expense totaled $2,399,000 for the
six months ended September 30, 2002 compared to net nonoperating income totaling
$10,326,000 for the six months ended September 30, 2001. Interest income decreased to
$1,195,000 from $2,647,000 during the six months ended September 30, 2002 from the prior
period due a decrease in interest rates and invested cash balances. Interest expense
increased to $3,155,000 for the six months ended September 30, 2002 from $926,000 as a
result of interest expense associated with owning three additional Airbus A319 aircraft
since the prior comparable period.
During the three months ended September 30, 2001, we recognized $8,802,000 of a
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 received a total of
$10,118,000 in September 2001; of that amount, $1,316,000 represents amounts received in
excess of allowable direct and incremental losses incurred from September 11, 2001 to
September 30, 2001 and is included as a deferred liability in our balance sheet as of
September 30, 2001.
Income Tax Expense. We accrued an income tax benefit of $3,932,000 during the six
months ended September 30, 2002 at a 36.2% effective tax rate, compared to an income tax
expense accrual of $9,024,000 for the six months ended September 30, 2001, at a 38.25%
effective tax rate, prior to a $440,000 credit that resulted from a revision of the
effective tax rate for the year ended March 31, 2000 as a result of amended returns filed.
Liquidity and Capital Resources
Our liquidity depends to a large extent on the number of passengers who fly with us, our
operating and capital expenditures, the fares that we charge, and financing activities. Also,
we depend on lease or mortgage financing to acquire all of our aircraft, including 20 additional
Airbus aircraft as of October 31, 2002 scheduled for delivery by the end of 2004. We have
incurred $169,200,000 in debt to finance seven Airbus aircraft we have purchased through October
31, 2002. We seek to control our operating costs, but our airline, like other airlines, has
many fixed costs that cannot be reduced in the short-term.
We had cash and cash equivalents and short-term investments of $44,566,000 and
$89,555,000 at September 30, 2002 and March 31, 2002, respectively. At September 30, 2002,
total current assets were $153,663,000 as compared to $148,277,000 of total current
liabilities, resulting in working capital of $5,386,000. 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 a net increase in pre-delivery payments totaling $9,162,000 for additional
aircraft purchases. Pre-delivery payments previously made for purchased aircraft that were
delivered to us during the six months ended September 30, 2002 were applied as down
payments toward the mortgage financing of three additional Airbus A319 aircraft.
Cash used by operating activities for the six months ended September 30, 2002 was
$6,583,000. This is attributable to the net loss for the period, increases in restricted
investments, receivables, security, maintenance and other deposits, decreases in accounts
payable, air traffic liability, other accrued expenses, and deferred Stabilization Act
compensation, offset by a decrease in prepaid expenses and increases in accrued maintenance
expense and deferred lease and other expenses. Included in cash used by operating
activities is a $4,000,000 repayment of the excess amounts received under the Stabilization
Act. Cash provided by operating activities for the six months ended September 30, 2001 was
$17,383,000. This is attributable to our net income for the period, decreases in trade
receivables, increases in depreciation and amortization, and accrued maintenance expense,
offset by increases in restricted investments, security, maintenance and other deposits,
and decreases in accounts payable, air traffic liability and other accrued expenses. The
decrease in other accrued expenses was offset as a result of the deferral of payment
permitted by the Stabilization Act of excise and payroll taxes totaling $1,980,000 and
$847,000, respectively, as of September 30, 2001.
Cash used by investing activities for the six months ended September 30, 2002 was
$108,580,000. We used $98,755,000 for the purchase of three additional Airbus aircraft and
to purchase rotable aircraft components, leasehold improvements and other general equipment
purchases. Net aircraft lease and purchase deposits increased by $10,236,000 this period.
During the six months ended September 30, 2002, we took delivery of three purchased Airbus
aircraft and applied their respective pre-delivery payments to the purchase of those
aircraft. Cash used by investing activities for the six months ended September 30, 2001
was $110,046,000. Net aircraft lease and purchase deposits decreased by $4,132,000 as
pre-delivery payments were applied to the purchase of our first three Airbus aircraft,
reducing the amount of pre-delivery payments as of September 30, 2001. During the six
months ended September 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, which required deposits of $9,203,000. We also used
$115,110,000 for the purchase of our first three Airbus aircraft and to purchase rotable
aircraft components to support the Airbus fleet, as well as a spare engine for the Boeing
fleet, leasehold improvements for the new reservations center, computer software for the
new maintenance and accounting systems, and other general equipment purchases.
Cash provided by financing activities for the six months ended September 30, 2002
and 2001 was $70,173,000 and $72,110,000, respectively. During the six months ended
September 30, 2002 and 2001, we borrowed $73,200,000 and $72,000,000, respectively, to
finance the purchase of Airbus aircraft, of which $2,542,000 and $400,000 were repaid as
principal payments during the respective periods. During the six months ended September
30, 2002 and 2001, we received $571,000 for each of these periods from the exercise of
common stock options.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30, 2002:
Less than 1-3 4-5 After
1 year years years 5 years Total
Long-term debt (1 $ 7,065,704 $ 15,108,946 $ 16,905,505 $ 101,635,077 $ 140,715,231
Capital lease obligations 137,230 137,230
Operating leases (2) 80,210,361 156,937,808 103,427,183 351,647,651 692,223,003
Unconditional purchase
obligations (3) 206,300,000 97,100,000 303,400,000
Total contractual
cash obligations $ 293,713,295 $ 269,146,754 $ 120,332,688 $ 453,282,728 $ 1,136,475,464
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(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 September 30, 2002, we had $68,480,000 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 obtained 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 interest rate at September 30,
2002 was 3.125%. The loan matures in May 2014, at which time a balloon payment of
$7,560,000 is due. As of September 30, 2002, we had $24,946,000 of debt outstanding
secured by this aircraft.
In June 2002, we obtained 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. 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 interest rates at September 30, 2002 were 3.5288
and 3.575%. The loans mature in June 2014 and July 2014, at which time balloon
payments totaling $4,800,000 per aircraft are due. As of September 30, 2002, we had
$47,288,000 of debt outstanding secured by these aircraft.
In April 2002, we obtained a $72,000,000 loan facility for the purchase of three
Airbus aircraft, one of which was delivered in October 2002. Each aircraft loan will
have a term of 12 years and will be payable in semi-annual installments, including
interest, payable in arrears, with a floating interest rate adjusted semi-annually
based on LIBOR plus a margin of 1.25%. The loans are secured by the aircraft. At the
end of the term, there is a balloon payment for each aircraft loan that is not to
exceed $7,000,000. As of October 31, 2002, we have borrowed $24,000,000 for the
purchase of the first Airbus aircraft. The loan matures in October 2014, at which
time a balloon payment totaling $7,000,000 is due. As of September 30, 2002, we had
no borrowings under this facility and payments associated with this facility are not
included in the table above.
As of October 31, 2002, we have executed financing commitments for seven future
purchases of Airbus A319 aircraft. We have $48,000,000 remaining on an existing loan
facility for the purchase of two of our firm Airbus A319 aircraft deliveries. 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. We have an additional six firm purchased
Airbus aircraft deliveries, including one Airbus A319 and five Airbus A318 aircraft
that currently have no committed long-term financing.
(2) As of September 30, 2002, we leased five Airbus 319 type aircraft and 24 Boeing 737
type aircraft under operating leases with expiration dates ranging from 2003 to 2014.
We expect to return two of the leased Boeing 737 aircraft to the aircraft lessor in
November 2002. Under these leases, we have made cash security deposits or arranged for
letters of credit representing approximately two months of lease payments per aircraft.
At September 30, 2002, we had made cash security deposits and had arranged for issuance
of letters of credit totaling $5,717,000 and $6,606,000, respectively. Accordingly,
our restricted cash balance includes $6,606,000 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 table above. At September 30, 2002, we had remaining unused maintenance deposits
of $51,055,000 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, as subsequently amended, to lease 16 new Airbus aircraft for a term of 12
years. Five of these aircraft have been delivered to us as of September 30, 2002 and
one of these aircraft will not be able to be delivered by the lessor. As of September
30, 2002, we have made cash security deposits on the remaining 10 aircraft we agreed
to lease and have made cash security deposits and arranged for issuance of letters of
credit totaling $400,000 and $2,059,000, respectively, to secure these leases.
Accordingly, our restricted cash balance includes $2,059,000 that collateralizes the
outstanding letters of credit.
We also lease office and hangar space, spare engines and office equipment for our
headquarters and airport facilities, and certain other equipment with expiration dates
ranging from 2002 to 2014. In addition, we lease certain airport gate facilities on a
month-to-month basis. Amounts for leases that are on a month-to-month basis are not
included as an obligation in the table above.
DIA, our primary hub for operations, is planning a significant expansion of Concourse
A, where our aircraft gates are located. The expansion will add as many as 10 gates
for full-size commercial jet aircraft and several more gates for smaller regional
jets. We have expressed preliminary interest in entering into a long-term lease
arrangement with the airport authority for the use of additional aircraft gates in
connection with our overall expansion plans. The amount we would be charged under
this lease will depend on the ultimate cost of the project, the amount of space to
which we commit, the financing structure and interest cost and the final method by
which the airport authority allocates the construction costs among the airlines.
Currently, construction on the concourse expansion is anticipated to start in the
spring of 2003 with completion targeted for the late summer or early fall of 2004. The
current state of the industry and uncertainties involving United Airlines, DIA's
dominant carrier may result in delays or changes to the expansion plans.
(3) We have adopted a fleet replacement plan to phase out our Boeing 737 aircraft and
replace them with a combination of Airbus A319 and A318 aircraft. In March 2000, we
entered into an agreement, as subsequently amended, to purchase up to 31 new Airbus
aircraft. As of October 1, 2002, we did not exercise purchase options as they became
due on two Airbus aircraft. We are currently discussing with Airbus the possibility of
obtaining an extension on these options. Included in the purchase commitment are
amounts for spare aircraft components to support the aircraft. We are not under any
contractual obligations with respect to spare parts. We have agreed to firm purchases
of 17 of these aircraft, and have options to purchase up to an additional 12
aircraft. As of September 30, 2002, we had 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 September 30, 2002, we had made pre-delivery payments on
future deliveries totaling $54,071,000 to secure these aircraft and option aircraft.
We expect to be operating 32 purchased and leased Airbus aircraft by the fourth
calendar quarter of 2004.
Commercial Commitments
As we enter new markets, increase the amount of space leased, or add leased
aircraft, we are often required to provide the lessor with a letter of credit, bond or cash
security deposits. These generally approximate two months of rent and fees. As of
September 30, 2002, we had outstanding letters of credit, bonds, and cash security deposits
totaling $13,230,000, $2,622,000, and $7,198,000, respectively. In order to meet these
requirements, we have a credit agreement with a financial institution for up to $1,500,000,
which expires August 31, 2003, and another credit agreement with a second financial
institution for up to $20,000,000, which expires 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 September 30, 2002, we have drawn
$13,230,000 under these credit agreements for standby letters of credit that collateralize
certain leases. In the event that these credit agreements are not renewed beyond their
present expiration dates, the certificates of deposit would be redeemed and paid to the
various lessors as cash security deposits in lieu of standby letters of credit. As a
result there would be no impact on our liquidity if these agreements were not renewed. In
the event that the surety companies determined that issuing bonds on our behalf were a risk
they were no longer willing to underwrite, we would be required to collateralize certain of
these lease obligations with either cash security deposits or standby letters of credit,
which would decrease our liquidity.
We use the Airline Reporting Corporation ("ARC") to provide reporting and settlement
services for travel agency sales and other related transactions. In order to maintain the
minimum bond (or irrevocable letter of credit) coverage of $100,000, ARC requires
participating carriers to meet, on a quarterly basis, certain financial tests such as, but
not limited to, net profit margin percentage, working capital ratio, and percent of debt to
debt plus equity. As of September 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 November 1, 2002,
the coverage would be increased to $4,200,000 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.
Our agreement with our Visa and MasterCard processor requires us to provide
collateral for Visa and MasterCard sales transactions equal to 50% of our air traffic
liability associated with these transactions. As of September 30, 2002, we had established
collateral for these transactions totaling $18,946,000. If we are unable to meet the
collateral requirements or if it is determined that we have experienced a material adverse
change in our financial position, we may be subject to a 100% holdback of cash from Visa
and MasterCard transactions until the passenger is flown, or potentially, termination of
the contract.
As part of the Stabilization Act, the U.S. government has provided excess war risk
coverage to the airline industry with a third party liability policy to cover losses to
persons other than employees or passengers generally for renewable 60-day periods,
currently in effect until December 15, 2002. The premium for this supplemental coverage is
$7.50 per flight departure. We do not know whether the government will extend the
coverage, and if it does, how long the extension will last. We expect that if the government
stops providing excess war risk coverage to the airline industry, the premiums charged
by aviation insurers for this coverage will be substantially higher than the premiums
currently charged by the government or the coverage will simply not be available from
reputable underwriters.
In 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. The two aircraft are
scheduled to be returned to the lessor in November 2002 and January 2003.
On November 5, 2002 we received conditional approval from the Air Transportation
Stabilization Board (ATSB) for a $63 million federal loan guarantee of a $70 million
commercial loan facility. Completion of this transaction is subject to satisfaction of the
conditions imposed by the ATSB, including negotiation of additional fees and warrants
requested by the ATSB, obtaining the necessary internal approvals, and completion
of documentation. There can be no assurance that we will be able to complete this
transaction. We plan to use the proceeds to enhance our liquidity.
We have signed a letter of intent with an aircraft lessor for the sale/leaseback of
one of our owned Airbus A319 aircraft and for the scheduled delivery in March 2003 of
another Airbus A319 aircraft. This transaction would generate proceeds of approximately
$11,500,000. We expect to finalize this transaction by December 31, 2002. There can be no
assurances that the sale/leaseback will occur.
We have been assessing our liquidity position in light of our aircraft purchase
commitments and other capital needs, the economy, our competition, the events of September
11, and other uncertainties surrounding the airline industry. We believe it may be
appropriate to enhance our liquidity, and have been actively pursuing several financing
alternatives, including the aircraft financing and lease transactions, federal loan
guarantee and the sale/leaseback transaction described above. We also filed a shelf
registration with the Securities and Exchange Commission in April 2002 that would allow us
to sell equity or debt securities from time to time as market conditions permit.
Subsequent to this shelf registration filing, our financial performance along with
bankruptcies and the threat of bankruptcies of other airlines have significantly adversely
affected our access to the capital markets. Although the federal loan guarantee and
sale/leaseback transaction will improve our liquidity if they are completed, we will
need to continue to explore avenues to sustain our liquidity in the current economic
and operating environment. We intend to continue to pursue domestic or foreign bank
financing, private debt financing and aircraft sale/leaseback and other transactions
as necessary to support our capital and operating needs.
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.
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.
Passenger, cargo, and other revenues are recognized when the transportation is
provided or after the tickets expire, one year after date of issuance, and are net of
excise taxes, passenger facility charges and security fees. Proceeds from the sale of
tickets that have been deferred are included in the accompanying balance sheet as air
traffic liability.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The risk inherent in our market risk sensitive position is the potential loss
arising from an adverse change in the price of fuel as described below. The sensitivity
analysis presented does not consider either the effect that such an adverse change may have
on overall economic activity or additional action management may take to mitigate our
exposure to such a change, including the fuel hedging program discussed below. Actual
results may differ from the amounts disclosed.
Our earnings are affected by changes in the price and availability of aircraft
fuel. Market risk is estimated as a hypothetical 10 percent increase in the average cost
per gallon of fuel for the year ended March 31, 2002. Based on fiscal year 2002 actual
fuel usage, such an increase would have resulted in an increase to aircraft fuel expense of
approximately $6,482,000 in fiscal year 2002. Comparatively, based on projected fiscal
year 2003 fuel usage, such an increase would result in an increase to aircraft fuel expense
of approximately $7,958,000 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 six months ended September 30, 2002
decreased 7.6% from the average cost for the six months ended September 30, 2001. See
"Management's Discussion and Analysis of Financial Condition and results of Operations -
Operating Expenses."
In November 2002, our Board of Directors authorized us to implement a fuel hedging
program that is intended to manage the risk and effect of fluctuating jet fuel prices on
our business. Our hedging program is intended to offset increases in jet fuel costs by
using derivative instruments such as barrels of crude oil or heating oil, which is highly
correlated to the price of jet fuel delivered on the East and Gulf coasts. When
implemented, we do not expect our hedging program to fully protect us against increasing
jet fuel costs because our hedging program will not cover all of our fuel volumes. Our
hedging program will create certain cash risks that will be subject to, including but not
limited to, the largely unpredictable prices of jet fuel, crude oil, and heating oil prices
and the effectiveness of our fuel hedges and overall fuel hedging strategy. The
effectiveness of our fuel hedging program may also be negatively impacted by a commencement
of hostilities against Iraq and terrorist activity.
We will be susceptible to market risk associated with changes in interest rates on
expected future long-term debt obligations to fund the purchases of our Airbus aircraft.
Interest expense on four of our owned Airbus A319 aircraft is subject to interest rate
adjustments every three to six months depending upon changes in the applicable LIBOR rate.
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under the Exchange
Act is recorded, processed, summarized and completely and accurately reported within the
time periods specified in the Securities and Exchange Commission's rules and forms.
To our knowledge, there have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
Our annual meeting of shareholders was held on September 5, 2002, at which a quorum
for the transaction of business was present. One matter was voted upon, as described below.
Members of the Board of Directors elected at the meeting were Samuel D. Addoms, D.
Dale Browning, Paul S. Dempsey, Jeff S. Potter, William B. McNamara, B. Larae Orullian, and
James B. Upchurch. The votes cast with respect to each nominee were as follows:
24,433,216 "For" Mr. Addoms; 52,067 "Withheld"
24,418,509 "For" Mr. Browning; 66,773 "Withheld"
24,417,892 "For" Mr. Dempsey; 67,390 "Withheld"
24,414,368 "For" Mr. Potter 70,915 "Withheld"
24,416,657 "For" Mr. McNamara; 68,625 "Withheld"
24,436,256 "For" Ms. Orullian; 49,026 "Withheld"
24,407,170 "For" Mr. Upchurch; 78,113 "Withheld"
Shareholder Proposals
Shareholders are entitled to submit proposals on matters appropriate for shareholder
action consistent with regulations of the Securities and Exchange Commission and our
bylaws. If a shareholder wishes to have a proposal appear in our proxy statement for next
year's annual meeting, under the regulations of the Securities and Exchange Commission it
must be received by our Corporate Secretary at 7001 Tower Road, Denver, Colorado 80249-7312
on or before March 18, 2003.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Numbers
10.75 Secured Credit Agreement dated as of October 10, 2002 among Frontier Air-
lines, Inc., the Lenders listed on the signature page, and Credit Agricole
Indosuez, as Agent. Portions of this exhibit have been excluded from
the publicly available document and an order granting confidential treatment
of the material has been requested. (1)
10.76 Aircraft Mortgage and Security Agreement dated as of October 10, 2002
between Frontier Airlines, Inc., as Mortgager, and Credit Agricole
Indosuez, as Agent and Mortgagee. (1)
99.1 Certification of President and Chief Executive Officer, Jeff S. Potter. (1)
99.2 Certification of Chief Financial Officer, Paul H. Tate. (1)
(1) Filed herewith.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRONTIER AIRLINES, INC.
Date: November 12, 2002 By: /s/ Paul H. Tate
Paul H. Tate, Vice President and
Chief Financial Officer
Date: November 12, 2002 By: /s/ Elissa A. Potucek
Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer
Certification
I, Jeff S. Potter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontier Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 12, 2002
By: /s/ Jeff S. Potter
Jeff S. Potter
President and Chief Executive Officer
Certification
I, Paul Tate, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontier Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 12, 2002
By: /s/ Paul H. Tate
Paul H. Tate
Chief Financial Officer