Frontier Airlines, Inc. Quarterly Report
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
--------------------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporated or organization) (I.R.S. Employer Identification No.)
7001 Tower Road, Denver, CO 80249
-------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (720) 374-4200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- -----
The number of shares of the Company's Common Stock outstanding as of February 6, 2001 was 18,674,310.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Information
Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3: Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited)
December 31, March 31,
2000 2000
---------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 104,275,276 $ 67,850,933
Short-term investments 2,000,000 15,760,000
Restricted investments 5,000,000 4,000,000
Trade receivables, net of allowance for doubtful accounts of $342,951
and $170,819 at December 31 and March 31, 2000, respectively 18,392,271 22,190,835
Maintenance deposits 27,591,167 19,637,128
Prepaid expenses and other assets 7,214,043 7,386,851
Inventories 3,368,112 2,235,183
Deferred tax assets 1,583,812 1,136,194
Deferred lease expense 82,214 163,527
---------------------------------
Total current assets 169,506,895 140,360,651
Security, maintenance and other deposits 38,222,409 17,613,122
Property and equipment, net 28,590,293 21,654,262
Deferred lease and other expenses 62,910 104,243
Restricted investments 12,026,660 7,813,760
---------------------------------
$ 248,409,167 $ 187,546,038
=================================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 10,435,331 $ 14,407,913
Air traffic liability 39,716,040 44,518,837
Other accrued expenses 15,815,475 12,058,755
Income taxes payable 8,248,063 5,483,264
Accrued maintenance expense 31,018,751 21,893,316
Current portion of obligations under capital leases 122,274 113,029
---------------------------------
Total current liabilities 105,355,934 98,475,114
Accrued maintenance expense 10,418,179 7,214,167
Deferred tax liability 447,049 483,514
Obligations under capital leases, excluding current portion 236,333 328,702
---------------------------------
Total liabilities 116,457,495 106,501,497
---------------------------------
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 40,000,000 shares; 18,208,381 and 17,732,273 shares
issued and outstanding at December 31 and March 31, 2000, respectively 18,208 17,732
Additional paid-in capital 73,284,951 67,946,230
Unearned ESOP shares (2,216,250) (857,713)
Retained earnings 60,864,763 13,938,292
---------------------------------
Total stockholders' equity 131,951,672 81,044,541
---------------------------------
$ 248,409,167 $ 187,546,038
=================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
---------------- -------------------------------------------------
Revenues:
Passenger $ 111,318,875 $ 71,663,224 $ 350,690,244 $ 231,050,921
Cargo 2,102,347 1,767,542 5,374,595 4,686,118
Other 790,814 543,143 2,038,819 1,576,332
---------------- -------------------------------------------------
Total revenues 114,212,036 73,973,909 358,103,658 237,313,371
---------------- -------------------------------------------------
Operating expenses:
Flight operations 48,003,293 32,338,722 132,090,129 88,599,352
Aircraft and traffic servicing 15,279,898 12,438,953 43,768,413 35,309,736
Maintenance 15,926,512 10,836,699 48,517,172 36,883,441
Promotion and sales 13,220,744 9,991,341 41,041,610 34,218,130
General and administrative 5,738,402 3,577,780 18,383,889 11,436,318
Depreciation and amortization 1,380,767 780,732 3,673,549 1,988,384
---------------- -------------------------------------------------
Total operating expenses 99,549,616 69,964,227 287,474,762 208,435,361
---------------- -------------------------------------------------
Operating income 14,662,420 4,009,682 70,628,896 28,878,010
---------------- -------------------------------------------------
Nonoperating income (expense):
Interest income 2,229,031 1,172,868 6,001,629 3,119,990
Interest expense (20,856) (46,599) (55,806) (94,615)
Other, net (10,508) (70,435) (47,709) (55,414)
---------------- -------------------------------------------------
Total nonoperating income, net 2,197,667 1,055,834 5,898,114 2,969,961
---------------- -------------------------------------------------
Income before income tax expense and
cumulative effect of change in method
of accounting for maintenance checks 16,860,087 5,065,516 76,527,010 31,847,971
Income tax expense 6,575,434 1,970,135 29,600,539 12,271,504
---------------- -------------------------------------------------
Income before cumulative effect of
change in accounting principle 10,284,653 3,095,381 46,926,471 19,576,467
Cumulative effect of change in method of
accounting for maintenance checks - - - 549,009
---------------- -------------------------------------------------
Net income $ 10,284,653$ 3,095,381$ 46,926,471$ 20,125,476
================ =================================================
(continued)
FRONTIER AIRLINES, INC.
Statements of Income, continued
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
---------------- -------------------------------------------------
Earnings per share:
Basic:
Income before cumulative effect of a $ 0.57 $ 0.18 $ 2.62 $ 1.14
change in accounting principle
Cumulative effect of change in method
of accounting for maintenance checks - - - 0.03
---------------- ---------------- --------------- ----------------
Net income $ 0.57 $ 0.18 $ 2.62 $ 1.17
================ ================ =============== ================
Diluted:
Income before cumulative effect of a
change in accounting principle $ 0.52 $ 0.16 $ 2.41 $ 1.04
Cumulative effect of change in method
of accounting for maintenance checks - - - 0.03
---------------- -------------------------------------------------
Net income $ 0.52 $ 0.16 $ 2.41 $ 1.07
================ =================================================
Weighted average shares of
common stock outstanding
Basic 18,124,114 17,585,736 17,929,482 17,195,012
================ =================================================
Diluted 19,845,386 19,053,879 19,434,445 18,778,260
================ =================================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Stockholders' Equity
For the Year Ended March 31, 2000 and the
Nine Months Ended December 31, 2000
Common Stock Retained
--------------------- Additional Unearned earnings Total
Stated paid-in ESOP (accumulated stockholders'
Shares value capital shares deficit) equity
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Balances,
March 31, 1999 16,141,172 $ 16,141 $58,054,844 $ (609,375) $(13,070,961) $ 44,390,649
Exercise of common stock
warrants 1,147,726 1,148 4,758,969 4,760,117
Exercise of common stock
options 343,375 343 563,712 564,055
Tax benefit from exercises of
common stock options and
warrants 3,425,055 3,425,055
Contribution of common stock
to employees stock
ownership plan 100,000 100 1,143,650 (1,143,750) -
Amortization of employee stock
compensation 895,412 895,412
Net income 27,009,253 27,009,253
-------------------------------------------------------------------------------
Balances,
March 31, 2000 17,732,273 $ 17,732 $67,946,230 $ (857,713) $ 13,938,292 $ 81,044,541
Exercise of common stock
warrants 21,755 22 75,147 75,169
Exercise of common stock
options 454,353 364 934,831 935,195
Tax benefit from exercises of
common stock options and
warrants 2,112,583 2,112,583
Contribution of common stock
to employees stock
ownership plan 90 2,216,160 (2,216,250) -
Amortization of employee stock
compensation 857,713 857,713
Net income 46,926,471 46,926,471
Balances, -------------------------------------------------------------------------------
December 31, 2000 18,208,381 $ 18,208 $73,284,951 $(2,216,250) $ 60,864,763 $ 131,951,672
===============================================================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Cash Flows
For the Nine Months Ended December 31, 2000 and 1999
(Unaudited)
2000 1999
---------------------------------
Cash flows from operating activities:
Net income $ 46,926,471 $ 20,125,476
Adjustments to reconcile net income to net cash
provided by operating activities:
Employee stock option plan compensation expense 857,713 609,375
Depreciation and amortization 3,796,195 2,210,930
Deferred tax (benefit) expense (484,083) 6,310,948
Changes in operating assets and liabilities:
Restricted investments (1,632,400) 500,000
Trade receivables 3,798,564 4,781,956
Security, maintenance and other deposits (12,131,674) (4,867,552)
Prepaid expenses and other assets 172,808 (1,136,084) 172,808 (1,136,084)
Inventories (1,132,929) (944,428)
Accounts payable (3,972,582) (2,709,716)
Air traffic liability (4,802,797) (1,354,597)
Other accrued expenses 3,756,720 202,079
Income taxes payable 4,877,382 3,043,930
Accrued maintenance 12,329,447 4,709,028
--------------------------------
Net cash provided by operating activities 52,358,835 31,481,345
--------------------------------
Cash flows from investing activities:
Decrease (increase) in short-term investments 13,760,000 (18,260,000)
Aircraft lease and purchase deposits, net (16,431,652) 59,039)
Increase in restricted investments (3,580,500) (2,284,000)
Capital expenditures (10,609,580) (12,207,973)
---------------------------------
Net cash used by investing activities (16,861,732) (33,011,012)
---------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,010,364 5,163,328
Principal payments on obligations under capital leases (83,124) (73,734)
---------------------------------
Net cash provided by financing activities 927,240 5,089,594
---------------------------------
Net increase in cash and cash equivalents 36,424,343 3,559,927
Cash and cash equivalents, beginning of
period 67,850,933 47,289,072
---------------------------------
Cash and cash equivalents, end of period $ 104,275,276 $ 50,848,999
=================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Financial Statements
December 31, 2000
(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, 2000. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have
been included. The results of operations for the three and nine months ended December 31, 2000 are not necessarily indicative of
the results that will be realized for the full year.
(2) Common Stock Transactions
In April 1998, the Company issued a warrant to purchase 716,929 shares of the Company's Common Stock at a purchase price of $3.75
per share. In January 2001, the warrant holder purchased 366,929 shares of Common Stock under this warrant, resulting in net
proceeds to the Company of $1,375,984.
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," "expect," "plan" 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 such as our commencement of passenger service and ground handling
operations at several airports and assumption of maintenance and ground handling operations at Denver International Airport ("DIA")
with our own employees; general economic factors and behavior of the fare-paying public; increased federal scrutiny of low-fare
carriers generally that may increase our operating costs or otherwise adversely affect us and the impact of current and future laws
and governmental regulations affecting the airline and travel industries and our operations; actions of competing airlines, such as
increasing capacity and pricing actions of United Airlines and other competitors; the availability of suitable aircraft, which may
inhibit our ability to achieve operating economies and implement our business strategy; the unavailability of, or inability to secure
upon acceptable terms, financing necessary to purchase aircraft which we have ordered; costs associated with, and issues arising in
connection with, our transition from a Boeing 737 fleet to an Airbus fleet; our relationship with employees and the terms of future
collective bargaining agreements; and uncertainties regarding aviation fuel prices. 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 revenue passenger
mile ("RPM") or expense per available seat mile ("ASM") can significantly affect operating results. See "Risk Factors" in our Form
10-K for the year ended March 31, 2000 as they may be modified by the disclosures contained in this report.
General
We are a scheduled airline based in Denver, Colorado. In February 2001, we relocated our principal executive offices to 7001
Tower Road, Denver, Colorado 80249.
As of January 31, 2001, we operate routes linking our Denver hub to 22 cities in 18 states spanning the nation from coast to
coast. We added Kansas City, Missouri to our route system on June 15, 2000, and one daily nonstop flight to and from Washington,
D.C.'s Ronald Reagan International Airport on September 7, 2000. On December 14, 2000, we added an additional daily round trip flight
to both Orlando, Florida and San Diego, California.
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 25 leased jets, including seven Boeing 737-200s and 18 larger Boeing 737-300s. We currently use up to
nine gates at our hub, Denver International Airport ("DIA"), where we operate approximately 114 daily system flight departures.
We are commencing a fleet replacement plan to phase out our Boeing 737 aircraft and replace them with a combination of new
Airbus A319 and A318 aircraft. The decision to change fleet types was made for many reasons, including the availability of
updated technology, operational advantages and cabin comfort (wider cabin, wider seats with added amenities, more legroom). We
have agreed to firm purchases of 12 of these aircraft, and have options to purchase up to an additional 17 aircraft. We also have
agreed to lease 16 new Airbus aircraft. We expect to take delivery of our first purchased Airbus aircraft in May 2001 and our first
leased Airbus aircraft in June 2001, and we expect that both aircraft will enter scheduled service in June 2001. We plan to complete
our fleet transition by the end of 2004. Upon completion of our fleet transition, we expect our owned and leased fleet to be
comprised of approximately two-thirds A319 aircraft and one-third A318 aircraft. The A319 and A318 aircraft will be configured with
132 and 114 passenger seats, respectively, with a 33-inch seat pitch. We expect to incur significant costs, as well as realize
certain cost savings, in connection with our transition from a Boeing to an Airbus aircraft fleet. Reference is made to Exhibit 99.1
filed with this report on Form 10-Q for a discussion of these costs and savings.
In January 2001, we announced EarlyReturns, our own frequent flyer program that commenced February 1, 2001. We believe our new
frequent flyer program offers some of the most generous benefits in the industry, including a free round trip at only 15,000
accumulated miles. Members earn one mile for every mile flown on Frontier plus additional mileage with program partners that
presently include Continental Airlines, Midwest Express Airlines and Virgin Atlantic Airways as well as Alamo, Hertz, National and
Payless car rentals, Kimpton Group Hotels and Citicorp Diners Club. Members who earn 25,000 or more annual credited flight miles
attain EarlyReturns Summit Level, which include a 25% mileage bonus on every paid Frontier flight, priority check-in and boarding,
complimentary on-board alcoholic beverages, extra allowance on checked baggage and priority baggage handling, guaranteed reservations
on any Frontier flight when purchasing an unrestricted Y-class ticket at least 72 hours prior to departure, and an exclusive Summit
customer service toll-free phone number. To apply for the program, customers can visit our Web site at www.frontierairlines.com,
pick up an EarlyReturns enrollment form at any of our airport counters or call our EarlyReturns Service Center toll-free hotline at
866-26-EARLY or reservations at 800-4321-FLY.
Small fluctuations in our yield per revenue passenger mile ("RPM") or expense per available seat mile ("ASM") can significantly
affect operating results because we, like other airlines, have high fixed costs in relation to revenues. Airline operations are
highly sensitive to various factors, including the actions of competing airlines and general economic factors, which can adversely
affect our liquidity, cash flows and results of operations.
Results of Operations
We had net income of $46,926,000 or $2.42 per diluted share for the nine months ended December 31, 2000 as compared to net
income of $20,125,000 or $1.07 per diluted share for the nine months ended December 31, 1999. We had net income of $10,285,000 or 52(cent)
per diluted share for the three months ended December 31, 2000 as compared to net income of $3,095,000 or 16(cent)per diluted share for
the three months ended December 31, 1999. During the nine months ended December 31, 2000, as compared to the prior comparable period,
we experienced higher average fares and load factors as a result of increases in the number of business travelers, a general increase
in fare levels including increases intended to offset increased fuel costs, and an increase in the number of passengers that a major
competitor directed to us because of an increase in the number of delays and cancellations that airline experienced. We believe that
our passenger traffic and related revenues during the nine months ended December 31, 1999 were adversely affected by late deliveries
of aircraft and consumer concerns over the Year 2000 issue.
Our cost per ASM for the nine months ended December 31, 2000 and 1999 were 9.09(cent)and 7.97(cent), respectively, an increase of 1.12(cent)
or 14.1%. Cost per ASM excluding fuel for the nine months ended December 31, 2000 and 1999 were 7.40(cent)and 6.82(cent), respectively, an
increase of .58(cent)or 9%. Our cost per ASM increased during the nine months ended December 31, 2000 principally because of increases in
the cost of fuel which accounted for .54(cent)per ASM, aircraft rentals for newer and larger aircraft of .12(cent)per ASM, maintenance
expense of .11(cent)per ASM, and general and administrative expenses primarily due to accrued bonuses for all employees resulting from
increased profitability, and a higher level of employee benefits of .14(cent)per ASM. A general wage rate increase effective in January
2000 and an increase in pilots' salaries effective in May 2000 also contributed to the increase in cost per ASM during the nine
months ended December 31, 2000. During the nine months ended December 31, 2000, two of our aircraft experienced unusually extensive
maintenance checks upon the first occasions we were required to perform annual maintenance checks on these aircraft since they
entered our fleet. During the nine months ended December 31, 2000, we also performed "D" checks on two of our aircraft for which
maintenance reserves paid to the lessor for reimbursement of these events did not entirely cover the associated expenses.
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 nine months ended December 31, 2000, our
break-even load factor was 52.2% compared to our achieved passenger load factor of 66.8%. For the nine months ended December 31,
1999, our break-even load factor was 51.1% compared to our achieved passenger load factor of 59.3%. Our break-even load factor
increased over the prior comparable period largely as a result of an increase in our expense per ASM to 9.09(cent)for the nine months
ended December 31, 2000 from 7.97(cent)for the nine months ended December 31, 1999, offset by an increase in our average fare to $147
during the nine months ended December 31, 2000 from $132 during the nine months ended December 31, 1999, and an increase in our total
yield per RPM from 15.29(cent)for the nine months ended December 31, 1999 to 16.95(cent)for the nine months ended December 31, 2000.
During the nine months ended December 31, 2000 our average daily block hour utilization decreased to 9.3 from 10.1 for the nine
months ended December 31, 1999. The calculation of our block hour utilization includes all aircraft that are on our certificate,
which encompass scheduled aircraft as well as operational and maintenance spares. In August 2000 we took delivery of our 25th
aircraft on a power by the hour agreement until December 2000 when we placed this aircraft into scheduled service. Therefore,
aircraft utilization decreased due to the schedule block hours being diluted by an additional aircraft on our certificate.
The following table provides certain of our financial and operating data for the three month and nine month periods ended
December 31, 2000 and 1999.
Selected Financial and Operating Data
Three Months Ended December 31, Nine Months Ended December 31,
2000 1999 2000 1999
------------------------------------ ------------------------------------
Passenger revenue (000s) (1) $111,319 $71,663 $350,690 $231,051
Revenue passengers carried (000s) 750 509 2,289 1,679
Revenue passenger miles (RPMs) (000s) (2) 685,507 470,484 2,113,107 1,552,207
Available seat miles (ASMs) (000s) (3) 1,071,714 900,328 3,162,972 2,616,813
Passenger load factor (4) 64.0% 52.3% 66.8% 59.3%
Break-even load factor (5) 54.3% 48.6% 52.2% 51.1%
Block hours (6) 21,068 17,660 61,916 52,432
Departures 9,755 8,234 28,656 24,618
Average seats per departure 131 130 131 128
Average stage length 839 841 843 830
Average length of haul 914 924 923 924
Aircraft miles (000s) 8,181 6,926 24,145 20,444
Average daily block hour utilization (7) 9.2 9.7 9.3 10.1
Yield per RPM (cents) (8) 16.24 15.23 16.60 14.89
Total yield per RPM (cents) (9) 16.66 15.72 16.95 15.29
Total yield per ASM (cents) (10) 10.66 8.22 11.32 9.07
Expense per ASM (cents) 9.29 7.77 9.09 7.97
Expense per ASM excluding fuel (cents) 7.37 6.50 7.40 6.82
Average fuel cost per gallon $1.22 $0.85 $1.07 $0.73
Passenger revenue per block hour $5,284 $4,058 $5,664 $4,407
Average fare (11) $142 $135 $146 $132
Average aircraft in fleet 25.0 19.7 24.3 18.9
Aircraft in fleet at end of period 25.0 20.0 25.0 20.0
Average age of aircraft at end of period 11.1 11.0 11.0 11.0
Average full-time equivalent employees 2,029 1,596 1,894 1,506
EBITDAR (000s) (12) 31,603 17,263 119,728 65,921
EBITDAR as a % of revenue 27.7% 23.3% 33.4% 27.8%
(1) "Passenger revenue" includes revenues for non-revenue passengers, administrative fees, and revenue recognized for unused tickets
that are greater than one year from issuance date.
(2) "Revenue passenger miles," or RPMs, are determined by multiplying the number of fare-paying passengers carried by the distance
flown.
(3) "Available seat miles," or ASMs, are determined by multiplying the number of seats available for passengers by the number of
miles flown.
(4) "Passenger load factor" is determined by dividing revenue passenger miles by available seat miles.
(5) "Break-even load factor" is the passenger load factor that will result in operating revenues being equal to operating expenses,
assuming constant revenue per passenger mile and expenses
(6) "Block hours" represent the time between aircraft gate departure and aircraft gate arrival.
(7) "Average daily block hour utilization" represents the total block hours divided by the weighted average number of aircraft days
in service.
(8) "Yield per RPM" is determined by dividing passenger revenues by revenue passenger miles.
(9) "Total Yield per RPM" is determined by dividing total revenues by revenue passenger miles.
(10) "Total Yield per ASM" is determined by dividing total revenues by available seat miles.
(11) "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.
(12) "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.
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 nine month periods ended December 31, 2000 and 1999.
Three Months Ended December 31, Nine Months Ended December 31,
------------------------------------------- -------------------------------------------
2000 1999 2000 1999
------------------------------------------- -------------------------------------------
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- ------- --- -------
Revenues:
Passenger 10.39 97.5% 7.96 96.9% 11.09 97.9% 8.83 97.4%
Cargo 0.20 1.8% 0.20 2.4% 0.17 1.5% 0.18 2.0%
Other 0.07 0.7% 0.06 0.7% 0.06 0.6% 0.06 0.7%
------------------------------------------- -------------------------------------------
Total revenues 10.66 100.0% 8.22 100.0% 11.32 100.0% 9.07 100.0%
=========================================== ===========================================
Operating expenses:
Flight operations 4.48 42.0% 3.59 43.7% 4.18 36.9% 3.39 37.3%
Aircraft and traffic 1.43 13.4% 1.38 16.8% 1.38 12.2% 1.35 14.9%
servicing
Maintenance 1.49 13.9% 1.20 14.6% 1.53 13.5% 1.41 15.5%
Promotion and sales 1.23 11.6% 1.11 13.5% 1.30 11.5% 1.31 14.4%
General and
administrative 0.54 5.0% 0.40 4.8% 0.58 5.1% 0.44 4.8%
Depreciation and
amortization 0.13 1.2% 0.09 1.1% 0.12 1.0% 0.08 0.8%
------------------------------------------- -------------------------------------------
Total operating expenses 9.29 87.2% 7.77 94.6% 9.09 80.3% 7.97 87.8%
=========================================== ===========================================
Total ASMs (000s) 1,071,714 900,328 3,162,972 2,616,813
Our revenues are highly sensitive to changes in fare levels. 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. When sale prices or other price changes are initiated by competitors in our markets, we believe that we must, in most
cases, match those competitive fares in order to maintain our market share. Passenger revenues are seasonal in leisure travel markets
depending on the markets' locations and when they are most frequently patronized.
Our average fare for the nine months ended December 31, 2000 and 1999 was $147 and $132, respectively. We believe that the
increase in the average fare during the nine months ended December 31, 2000 over the prior comparable period was a result of
increases in the number of business travelers, a general increase in fare levels including increases intended to offset increased
fuel costs, and an increase in the number of passengers that a major competitor directed to us because of an increase in the number
of delays and cancellations that airline experienced. We estimate that the additional passenger traffic received from that airline
had the effect of increasing our average fare and load factor for the nine months ended December 31, 2000 by approximately .7 load
factor points and .2%, respectively.
Passenger Revenues. Passenger revenues totaled $350,690,000 for the nine months ended December 31, 2000 compared to
$231,051,000 for the nine months ended December 31, 1999, or an increase of 51.8%, which exceeded the 20.9% increase in ASMs of
546,159,000. The number of revenue passengers carried was 2,289,000 for the nine months ended December 31, 2000 compared to 1,679,000
for the nine months ended December 31, 1999 or an increase of 36.3%. We had an average of 24.3 aircraft in our fleet during the nine
months ended December 31, 2000 compared to an average of 18.9 aircraft during the nine months ended December 31, 1999, an increase of
28.6%. RPMs for the nine months ended December 31, 2000 were 2,113,107,000 compared to 1,552,207,000 for the nine months ended
December 31, 1999, an increase of 36.1%.
Cargo Revenues. Cargo revenues, consisting of revenues from freight and mail service, totaled $5,375,000 and $4,686,000, an
increase of 14.7%, for the nine months ended December 31, 2000 and 1999, respectively, representing 1.5% and 2.0%, respectively, of
total operating revenues. Cargo revenues totaled $2,102,000 and $1,768,000 for the three months ended December 31, 2000 and 1999,
representing 1.8% and 2.4% of total operating revenues, respectively, an increase of 18.9%. During July 2000 an audit was performed
on our contract cargo sales and services provider. The audit disclosed that for a 15 month period between January 1, 1999 and March
31, 2000 both cash and credit card sales were remitted to us by our services provider, even though we had collected for the cash
sales directly from our customer. We therefore adjusted cargo revenue downward $423,000 during the three months ended June 30, 2000.
Excluding the effect of this adjustment, on the current and prior comparable period, cargo revenue would have been $5,798,000 and
$4,429,000 for the nine months ended December 31, 2000 and 1999, respectively, an increase of 30.9%. 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. Other revenues, comprised principally of interline handling fees, liquor sales and excess baggage fees,
totaled $2,039,000 and $1,576,000, or .6% and .7%, respectively, of total operating revenues for the nine months ended December 31,
2000 and 1999, an increase of 29.4%.
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 $287,475,000 and $208,435,000 for
the nine months ended December 31, 2000 and 1999 and represented 80.3% and 88% of revenue, respectively. Total operating expenses
for the three months ended December 31, 2000 and 1999 were $99,550,000 and $69,964,000 and represented 87.2% and 94.6% of revenue,
respectively. Operating expenses decreased as a percentage of revenue during the three and nine months ended December 31, 2000 as a
result of the 51.8% increase in passenger revenues attributable primarily to a 36.3% increase in passengers and a 11.4% increase in
the average fare offset by a 46.6% increase in the average cost per gallon of fuel, a general wage rate increase that became
effective in January 2000, an increase in pilots' salaries effective in May 2000, and an increase in accrued bonuses based on
increased profitability.
Flight Operations. Flight operations expenses of $132,090,000 and $88,599,000 were 36.9% and 37.3% of total revenue for the
nine months ended December 31, 2000 and 1999, respectively. Flight operations expenses of $48,003,000 and $32,339,000 were 42% and
43.7% of total revenue for the three months ended December 31, 2000 and 1999, respectively. Flight operations expenses include all
expenses related directly to the operation of the aircraft including fuel, lease and insurance expenses, pilot and flight attendant
compensation, in-flight catering, crew overnight expenses, flight dispatch and flight operations administrative expenses.
Aircraft fuel expenses include both the direct cost of fuel, including taxes, as well as the cost of delivering fuel into the
aircraft. Aircraft fuel expense of $53,278,000 for 49,595,000 gallons used and $29,990,000 for 40,928,000 gallons used resulted in
an average fuel cost of $1.07 and 73.3(cent)per gallon, for the nine months ended December 31, 2000 and 1999, respectively. Aircraft
fuel expense represented 40.3% and 33.8% of total flight operations expenses or 14.9% and 12.6% of total revenue for the nine months
ended December 31, 2000 and 1999, respectively. Aircraft fuel expense of $20,550,000 for 16,900,000 gallons used and $11,478,000 for
13,524,000 gallons used resulted in an average fuel expense of $1.22 and .85(cent)per gallon for the three months ended December 31, 2000
and 1999, respectively. Aircraft fuel costs represented 42.8% and 35.5% of total flight operations expenses for the three months
ended December 31, 2000 and 1999, respectively, or 18% and 15.5% of total revenue. Fuel prices are subject to change weekly as we do
not purchase supplies in advance for inventory. Fuel consumption for the nine months ended December 31, 2000 and 1999 averaged 801
and 781 gallons per block hour, respectively. Fuel consumption increased over the prior comparable period because of an increase in
our load factor from 59.3% to 66.8%. During the nine months ended December 31, 2000, a major competitor directed passengers to us
because of an increase in the number of delays and cancellations that airline experienced. Because of this we increased the speeds
we flew our aircraft to mitigate flight delays, which increased our fuel burn rate. Additionally, we returned five aircraft to the
lessor during the year ended March 31, 2000 and replaced them with four aircraft that are larger and have a higher fuel burn rate.
Aircraft lease expenses totaled $45,472,000 (12.7% of total revenue) and $34,661,000 (14.6% of total revenue) for the nine
months ended December 31, 2000 and 1999, respectively, an increase of 31.2%. Aircraft lease expenses totaled $15,570,000 (13.6% of
total revenue) and $12,543,000 (17% of total revenue) for the three months ended December 31, 2000 and 1999, respectively, an
increase of 24.1%. The increase is largely due to an increase in the average number of aircraft to 24.3 from 18.9, or 28.6%, during
the nine month period ended December 31, 2000 compared to the same period in 1999..
Aircraft insurance expenses totaled $2,448,000 (.7% of total revenue) for the nine months ended December 31, 2000. Aircraft insurance expenses
for the nine months ended December 31, 1999 were $1,963,000 (.8% of total revenue). Aircraft insurance expenses were .12(cent)and .13(cent)
per RPM for the nine months ended December 31, 2000 and 1999, respectively. Aircraft insurance expenses totaled $831,000 (.7% of
total revenue) for the three months ended December 31, 2000. Aircraft insurance expenses for the three months ended December 31,
1999 were $647,000 (.9% of total revenue). Aircraft insurance expenses were .12(cent)and .14(cent)per RPM for the three months ended December
31, 2000 and 1999, respectively.
Pilot and flight attendant salaries before payroll taxes and benefits totaled $16,126,000 and $11,142,000, or 4.6% and 4.8% of
passenger revenue for the nine months ended December 31, 2000 and 1999, an increase of 44.7%. Pilot and flight attendant salaries
before payroll taxes and benefits totaled $5,804,000 and $3,912,000 or 5.2% and 5.5% of passenger revenue for each of the three
months ended December 31, 2000 and 1999, an increase of 48.4%. In November 1998, our pilots voted to be represented by an
independent union, the Frontier Airline Pilots Association. The first bargaining agreement for the pilots, which has a 5-year term,
was ratified and made effective in May 2000. Pilot and flight attendant compensation increased principally as a result of a 28.6%
increase in the average number of aircraft in service, general wage rate increases, and an increase of 18.1% in aircraft block hours.
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. When we are not in the process of adding aircraft to our system, we expect pilot and flight
attendant expense per aircraft to normalize. With a scheduled passenger operation, and with salaried rather than hourly crew
compensation, our expenses for flight operations are largely fixed, with fuel expenses and flight catering the principal exception.
We expect pilot and flight attendant salary expense to increase over approximately the next two years as a result of the Airbus
transition and related training required for that transition.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $43,768,000 and $35,310,000 (an increase of 23.4%)
for the nine months ended December 31, 2000 and 1999, respectively, and represented 12.2% and 14.9% of total revenue. Aircraft and
traffic servicing expenses were $15,280,000 and $12,439,000 (an increase of 22.8%) for the three months ended December 31, 2000 and
1999, respectively, and represented 13.4% and 16.8% of total revenue. Aircraft and traffic servicing expenses include all expenses
incurred at airports including landing fees, facilities rental, station labor, ground handling expenses, and interrupted trip
expenses associated with delayed or cancelled flights. Interrupted trip expenses are amounts paid to other airlines to reaccommodate
passengers as well as hotel, meal and other incidental expenses. Aircraft and traffic servicing expenses increased with the addition
of new cities and departures to our route system. During the nine months ended December 31, 2000, we served 23 cities compared to 20
during the nine months ended December 31, 1999, or an increase of 15%. During the nine months ended December 31, 2000, our
departures increased to 28,656 from 24,618 or 16.4%. Aircraft and traffic servicing expenses were $1,527 per departure for the nine
months ended December 31, 2000 as compared to $1,434 per departure for the nine months ended December 31, 2000, or an increase of $93
per departure. During the three months ended December 31, 2000, our departures increased to 9,764 from 8,234 or 18.6%. Aircraft and
traffic servicing expenses were $1,565 per departure for the three months ended December 31, 2000 as compared to $1,511 per departure
for the three months ended December 31, 1999, or an increase of $54 per departure. During the three months ended December 31, 2000,
we accrued $800,000 ($82 per departure), representing our estimate of the anticipated DIA revenue credit to be distributed to lease
signatory carriers for DIA's fiscal year ended December 31, 2000. We did not have sufficient information during the three and nine
months ended December 31, 1999 to provide an accrual for the DIA revenue credit. After adjusting the cost per departure for this
credit for the three months ended December 31, 2000, the cost per departure would have been $1,648 and the cost per departure for the
three months ended December 31, 2000 would have been a $137 increase over the prior comparable period. Aircraft and traffic servicing
expenses increased as a result of a general wage rate increase effective in January 2000, contract ground handling services in
certain of the cities we serve as a result of increased frequencies in existing markets and introduction of service to new cities,
and increased per passenger charges as a result of the greater number of passengers we carried. These increases were offset by a
decrease in interrupted trip expenses as a result of an improvement in our completion factor from 98.5% for the nine months ended
December 31, 1999 to 99.4% for the nine months ended December 31, 2000.
Maintenance. Maintenance expenses of $48,517,000 and $36,883,000 were 13.5% and 15.5% of total revenue for the nine months
ended December 31, 2000 and 1999, respectively, an increase of 31.5%. Maintenance expenses of $15,927,000 and $10,837,000 were 14%
and 14.7% of total revenue for the three months ended December 31, 2000 and 1999, respectively, an increase of 42.8%. 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 is accrued monthly with variances from accruals
recognized at the time of the check. Maintenance cost per block hour for the nine months ended December 31, 2000 and 1999 were $784
and $703, respectively. Maintenance cost per block hour for the three months ended December 31, 2000 and 1999 were $756 and $614,
respectively. During the three months ended December 31, 1999, a previous accrual recorded during the three months ended June 30,
1999 totaling $1,340,000 for an engine repair expense estimate as a result of a premature failure was reversed as the engine
manufacturer agreed to repair the engine at no cost to us. Maintenance cost per block hour for the three months ended December 31,
1999 would have been $690 without this adjustment. Maintenance cost per block hour increased as a result of increased facilities
rentals to satisfy additional space requirements for the increase in aircraft coupled with an increase in the number of aircraft
simultaneously out of service for heavy maintenance, and a general wage rate increase effective January 2000. Because of the increase
in the number of aircraft out of service for heavy maintenance, our average daily block hour utilization decreased from 10.1 for the
nine months ended December 31, 1999 to 9.3 for the nine months ended December 31, 2000. During the nine months ended December 31,
2000, two of our aircraft experienced unusually extensive maintenance checks. During the nine months ended December 31, 2000, we
also performed "D" checks on two of our aircraft for which maintenance reserves paid to the lessor for reimbursement of these events
did not cover the associated expense. These were the first occasions we were required to perform annual maintenance checks on these
aircraft since they entered our fleet. Additionally, during the nine months ended December 31, 2000, we accrued an additional
$787,000 ($13 per block hour) for engine reserves based on revised cost estimates and a revised schedule of engine overhauls. We
also incurred increased costs in personnel, training and information technology expenses for implementation of new maintenance and
engineering software and in preparation for the Airbus aircraft transition. In January 2001, a lease for spare aircraft parts
expired and we purchased these parts for $2,500,000. During the nine months ended December 31, 2000 we incurred $1,241,000 of lease
expenses associated with this lease included in maintenance expenses or $20 per block hour.
Promotion and Sales. Promotion and sales expenses totaled $41,042,000 and $34,218,000 and were 11.5% and 14.4% of total revenue
for the nine months ended December 31, 2000 and 1999, respectively. Promotion and sales expenses totaled $13,221,000 and $9,991,000
and were 11.6% and 13.5% of total revenue for the three months ended December 31, 2000 and 1999, respectively. These include
advertising expenses, telecommunications expenses, wages and benefits for reservationists and reservations supervision as well as
marketing management and sales personnel, credit card fees, travel agency commissions and computer reservations costs. Promotion and
sales expenses decreased as a percentage of revenue for the nine months ended December 31, 2000 over the prior comparable period
largely as a result of the increase in revenue and a decrease in travel agency commissions.
During the nine months ended December 31, 2000, promotion and sales expenses per passenger decreased to $17.93 compared to
$20.38 for the nine months ended December 31, 1999. Promotion and sales expenses decreased largely as a result of a decrease in
travel agency commissions from 8% to 5% effective in November 1999, matching a decrease instituted by our competitors. Travel agency
commissions and interline service charges and handling fees, as a percentage of passenger revenue, before non-revenue passengers,
administrative fees and breakage (revenue from expired tickets), decreased to 3.5% for the nine months ended December 31, 2000
compared to 4.8% for the nine months ended December 31, 1999. The decrease in travel agency commissions was offset by increased
commission expense associated with the increase in our average fare as we do not cap commissions. With increased activity on our web
site, our calls per passenger have decreased. Because of the increase in web site activity, as well as a decrease in long distance
rates, we experienced a decrease in communications expense. In July 2000, we opened an additional reservation facility in Las
Cruces, New Mexico and terminated an outsourcing agreement, which reduced our cost of reservations. These cost savings were offset
by an increase in credit card fees associated with the increase in our average fare from $132 for the nine months ended December 31,
1999 to $147 for the nine months ended December 31, 2000.
General and Administrative. General and administrative expenses for the nine months ended December 31, 2000 and 1999 totaled
$18,384,000 and $11,436,000 and were 5.1% and 4.8% of total revenue, respectively, an increase of 60.8%. General and administrative
expenses for the three months ended December 31, 2000 and 1999 totaled $5,738,000 and $3,578,000 and were 5% and 4.8% of total
revenue, respectively, an increase of 60.4%. During the nine months ended December 31, 2000 and 1999, we accrued for employee
performance bonuses totaling $5,615,000 and $2,183,000, respectively, which were 1.6% and .9% of total revenue, an increase of
157.2%. Employee performance bonuses increased over the prior comparable period as a result of our increased profitability and an
enhancement to the bonus program. 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 chargebacks 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 1,950 in December
1999 to approximately 2,300 in December 2000, an increase of 18%. We also experienced personnel increases in the area of aircraft
procurement as a result of the purchase and lease agreements for Airbus aircraft. Because of the increase in personnel, our health
insurance benefit expenses and accrued vacation expense increased accordingly. During the nine months ended December 31, 2000, our
accrued vacation expense increased as a result of the increase in pilot salaries and vacation benefits due to a collective bargaining
agreement concluded with the pilots' union effective in May 2000. During the three months ended December 31, 2000, we reduced our
health insurance liability by $507,000 because our benefit claim payments have been less than actuarially developed expected costs.
During the three months ended December 31, 2000, we reduced the accrual rate for credit card chargebacks and reduced our allowance
for doubtful accounts by $372,000. During the nine months ended December 31, 2000, we implemented new procedures associated with
certain sales transactions which reduced the volume of chargebacks we had previously experienced.
Depreciation and Amortization. Depreciation and amortization expenses of $3,674,000 and $1,988,000 were 1% and .8% of total
revenue, respectively, for the nine months ended December 31, 2000 and 1999, an increase of 84.8%. These expenses include
depreciation of office equipment, ground station equipment, spare parts, aircraft leasehold improvements, and other fixed assets.
Amortization of start-up and route development costs are not included as these expenses have been expensed as incurred. Depreciation
and amortization expenses increased over the prior year as a result of an increase in our spare parts inventory including a spare
engine, leasehold improvements associated with 14 aircraft (eight additional and six replacement) added to our fleet during the past
21 months, ground handling equipment, and computers to support new employees as well as replacement computers.
Nonoperating Income (Expense). Net nonoperating income totaled $5,898,000 for the nine months ended December 31, 2000 compared
to $2,970,000 for the nine months ended December 31, 1999. Interest income increased from $3,120,000 to $6,002,000 during the nine
months ended December 31, 2000 from the prior period due to an increase in cash balances as a result of an increase in cash provided
by operating activities and proceeds from stock option and warrant exercises.
Income Tax Expense. We accrued income taxes of $29,601,000 and $12,272,000 at 39% and 38.25% of taxable income during the nine
months ended December 31, 2000 and 1999, respectively.
Liquidity and Capital Resources
Our balance sheet reflected cash and cash equivalents and short-term investments of $106,275,000 and $83,611,000 at December
31, 2000 and March 31, 2000, respectively. At December 31, 2000, total current assets were $169,507,000 as compared to $105,356,000
of total current liabilities, resulting in working capital of $64,151,000. At March 31, 2000, total current assets were $140,361,000
as compared to $98,475,000 of total current liabilities, resulting in working capital of $41,886,000. The increase in our working
capital is largely a result of cash flows provided by operating activities and proceeds from exercises of Common Stock options and
warrants during the nine months ended December 31, 2000. We believe that our existing cash balances, combined with improved
operating results, are and will be adequate to fund our operations for the foreseeable future. However, as discussed below, we will
require financing in order to fund our intended purchase of Airbus A319 and A318 aircraft.
Cash provided by operating activities for the nine months ended December 31, 2000 was $52,359,000. This is attributable to our
net income for the period, decreases in receivables and increases in accrued expenses, income taxes payable and accrued maintenance
expense, offset by increases in restricted investments, security, maintenance and other deposits, and inventories and decreases in
accounts payable and air traffic liability. Cash provided by operating activities for the nine months ended December 31, 1999 was
$31,481,000. This is attributable to our net income for the period and a decrease in receivables and increases in income taxes
payable and accrued maintenance expenses, offset by increases in security, maintenance and other deposits, prepaid expenses and other
assets, and inventories, and decreases in accounts payable and air traffic liability.
Cash used by investing activities for the nine months ended December 31, 2000 was $16,862,000. We had maturities of
$13,760,000 in short-term investments, net of purchases, comprised of certificates of deposit and government-backed agencies with
maturities of one year or less. During the nine months ended December 31, 2000, we made cash security deposits and aircraft
pre-delivery payments totaling $16,432,000 and an increase in restricted investments totaling $3,581,000 associated with two leased
Boeing 737-300 aircraft delivered during the nine months ended December 31, 2000, the 16 Airbus aircraft we have agreed to lease with
delivery dates beginning in June 2001, and the 12 Airbus aircraft we have agreed to purchase with delivery dates beginning in May
2001. During the nine months ended December 31, 2000, we used $10,610,000 for capital expenditures for rotable aircraft components,
maintenance equipment and tools, aircraft leasehold costs and improvements, computer equipment and software for enhancements to our
internet booking site, our reservation system and a replacement maintenance system. Cash used by investing activities for the nine
months ended December 31, 1999 was $33,011,000. We invested $18,260,000 in short-term investments, net of maturities, comprised of
government-backed agencies and commercial paper with maturities of one year or less. During the nine months ended December 31, 1999,
cash security deposits for aircraft totaling $2,491,000 were returned to us or replaced with letters of credit. During the nine
months ended December 31, 1999, we made cash security deposits totaling $200,000 in connection with a letter of intent on an Airbus
lease and $2,550,000 in down payments associated with a letter of intent to purchase Airbus aircraft. We had issued to certain of
our aircraft lessors warrants to purchase 395,000 shares of our Common Stock at an aggregate purchase price of $2,391,600. During
May 1999 and June 1999, the aircraft lessors exercised all of these warrants and we received $2,391,600. To the extent that the
aircraft lessors were able to realize certain profit margins on their subsequent sale of our Common Stock, they were required to
refund a portion of the cash security deposits they were holding. As a result of their sales of our Common Stock, the aircraft
lessors returned to us $1,024,000 in cash security deposits during the nine months ended December 31, 2000. Other cash security
deposits were replaced with letters of credit and these deposits were returned to us. We also received $625,000 in cash security
deposits for aircraft delivered during the nine months ended December 31, 2000. Additionally, we secured five aircraft delivered
during the nine months ended December 31, 1999 with letters of credit totaling $2,284,000 and restricted investments increased by
this amount to collateralize the letters of credit. We used $12,208,000 for capital expenditures for rotable aircraft components
including a spare CFM engine, maintenance equipment and tools, aircraft leasehold costs and improvements, and computer equipment
during the nine months ended December 31, 1999.
Cash provided by financing activities for the nine months ended December 31, 2000 and 1999 was $927,000 and $5,090,000,
respectively, from the exercise of Common Stock options and warrants, offset by principal payments on obligations under capital
leases. In April 1998, we issued a warrant to purchase 716,929 shares of the our Common Stock at a purchase price of $3.75 per
share. In January 2001, the warrant holder purchased 366,929 shares of our Common Stock under this warrant resulting in net proceeds
to us of $1,376,000.
As of January 31, 2000, we lease 25 Boeing 737 type aircraft under operating leases with expiration dates ranging from 2002 to
2006. Under these leases, we were required to make cash security deposits or issue letters of credit to secure our lease
obligations. At December 31, 2000, we had made cash security deposits and had arranged for issuance of letters of credit totaling
$3,658,000 and $7,126,000, respectively. Accordingly, our restricted cash balance includes $7,126,000 that collateralize the
outstanding letters of credit. Additionally, we make deposits for maintenance of these aircraft. At December 31 and March 31, 2000,
we had made maintenance deposits of $38,029,300 and $26,912,000, respectively.
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 29 new Airbus
aircraft. We have agreed to firm purchases of 12 of these aircraft, and have options to purchase up to an additional 17 aircraft.
Under the terms of the purchase agreement, we are required to make scheduled pre-delivery payments. These payments are non-refundable
with certain exceptions. As of December 31, 2000, we have made pre-delivery payments totaling $22,232,000 to secure these aircraft
and option aircraft. As a complement to this purchase, in April and May 2000 we signed two agreements to lease 16 new Airbus
aircraft. As of December 31, 2000, we have made cash security deposits and had arranged for issuance of letters of credit totaling
$200,000 and $3,089,000, respectively, to secure these aircraft. The aggregate additional amounts due under this purchase commitment
and estimated amounts for buyer-furnished equipment and spare parts for both the purchased and leased aircraft was approximately
$380,000,000 as of January 2001. We expect to take delivery of our first purchased Airbus aircraft in May 2001 and our first leased
Airbus aircraft in June 2001, and plan to complete our fleet transition by the end of 2004. In order to complete the purchase of
these aircraft we must secure acceptable aircraft financing. The amount of financing required will depend on the number of aircraft
purchase options we exercise and the amount of cash generated by operations prior to delivery of the aircraft. We continue to
explore various financing alternatives, including but not limited to domestic and foreign bank financing, public debt financing such
as enhanced equipment trust certificates, and leveraged lease arrangements. While we believe that such financing will be available to
us, there can be no assurance that financing will be available when required, or on acceptable terms. The inability to secure such
financing could result in delays in or our inability to take delivery of Airbus aircraft we have agreed to purchase, which would have
a material adverse effect on us.
We expect to incur significant costs, as well as realize certain cost savings, in connection with our transition from a Boeing
to an Airbus aircraft fleet. Reference is made to Exhibit 99.1 filed with this report on Form 10-Q for a discussion of these costs
and savings.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The risk inherent in our market risk sensitive position is the potential loss arising from an adverse change in the price of
fuel as described below. The sensitivity analysis presented does not consider either the effect that such an adverse change may have
on overall economic activity or additional action management may take to mitigate our exposure to such a change. Actual results may
differ from the amounts disclosed. At the present time, we do not utilize fuel price hedging instruments to reduce our exposure to
fluctuations in fuel prices.
Our earnings are affected by changes in the price and availability of aircraft fuel. Market risk is estimated as a
hypothetical 10 percent increase in the average cost per gallon of fuel for the year ended March 31, 2000. Based on fiscal year 2000
actual fuel usage, such an increase would have resulted in an increase to aircraft fuel expense of approximately $4,442,000 in that
fiscal year. Comparatively, based on projected fiscal year 2001 fuel usage, such an increase would result in an increase to aircraft
fuel expense of approximately $5,351,000 in fiscal year 2001. The increase in exposure to fuel price fluctuations in fiscal year
2001 is due to the increase of our average aircraft fleet size during the year ended March 31, 2000, projected increases to our fleet
during the year ended March 31, 2001 and related gallons purchased.
The price of fuel has recently increased substantially more than the foregoing hypothetical example. Our average cost per
gallon of fuel for the nine months ended December 31, 2000 increased 45.9% over our average cost for fuel during the same period
ended December 31, 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating
Expenses."
PART II. OTHER INFORMATION
Item 5: Other Information
See Exhibit 99.1, Frontier Airlines Fleet Transition Discussion.
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
Exhibit
Numbers
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(a) Exhibits
10.51 (b) Amendment No. 2 to Airbus A318/A319 Purchase Agreement dated as of March 10, 2000 between AVSA, S.A.R.L.,
Seller, and Frontier Airlines, Inc., Buyer. Portions of this exhibit have been excluded from the publicly
available document and an application for an order granting confidential treatment of the excluded material
has been made (1).
10.61 Lease Agreement dated as of December 15, 2000 between Gateway Office four, LLC, Lessor, and Frontier
Airlines, Inc., Lessee (1).
99.1 Frontier Airlines Fleet Transition Discussion (1).
(1) Filed herewith.
(b) Reports on Form 8-K
Report on Form 8-K filed with the Commission on January 22, 2001, Commission File No. 0-24126.
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FRONTIER AIRLINES, INC.
Date: February 7, 2001 By: /s/ Steve B. Warnecke
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Steve B. Warnecke, Vice President and
Chief Financial Officer
Date: February 7, 2001 By: /s/ Elissa A. Potucek
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Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer