Frontier Airlines 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 September 30, 2001.
[ ] 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 9,
2001 was 28,505,590.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
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Item 1. Financial Information
Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited) September 30, March 31,
2001 2001
---------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 88,698,346 $ 109,251,426
Short-term investments 2,000,000 2,000,000
Restricted investments 12,400,000 9,100,000
Trade receivables, net of allowance for doubtful accounts of $372,000
and $368,000 at September 30 and March 31, 2001, respectively 16,811,143 32,380,943
Maintenance deposits 34,419,481 30,588,195
Prepaid expenses and other assets 8,947,078 10,849,080
Inventories 5,599,728 4,072,335
Deferred tax assets 1,908,587 1,506,218
Deferred lease and other expenses 73,630 45,621
---------------------------------
Total current assets 170,857,993 199,793,818
Security, maintenance and other deposits 43,236,379 45,680,373
Property and equipment, net 148,143,588 38,100,126
Restricted investments 11,276,860 11,683,660
Deferred lease and other costs 548,735 58,621
---------------------------------
$ 374,063,555 $ 295,316,598
=================================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 14,833,762 $ 21,623,067
Air traffic liability 50,105,147 62,663,237
Other accrued expenses 16,727,154 18,236,479
Deferred federal grant (note 2) 1,316,239 -
Accrued maintenance expense 38,370,527 33,510,531
Current portion of long-term debt (note 3) 3,119,157 -
Income taxes payable 239,540 -
Current portion of obligations under capital leases 131,454 125,552
---------------------------------
Total current liabilities 124,842,980 136,158,866
Long-term debt (note 3) 68,480,465 -
Accrued maintenance expense 12,994,579 12,175,225
Deferred tax liability 4,116,186 1,999,553
Deferred rent 1,579,592 -
Obligations under capital leases, excluding current portion 137,230 203,863
---------------------------------
Total liabilities 212,151,032 150,537,507
---------------------------------
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 and 40,000,000 shares at September 30, 2001 and
March 31, 2001, respectively; 28,392,352 and 28,194,602 shares
issued and outstanding at September 30, 2001 and March 31, 2001,
respectively 28,392 28,195
Additional paid-in capital 78,613,849 77,606,918
Unearned ESOP shares (553,963) (1,662,087)
Retained earnings 83,824,245 68,806,065
---------------------------------
Total stockholders' equity 161,912,523 144,779,091
---------------------------------
$ 374,063,555 $ 295,316,598
=================================
FRONTIER AIRLINES, INC.
Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---------------- -------------------------------------------------
Revenues:
Passenger $ 113,743,975 $ 128,403,974 $ 234,471,814 $ 239,371,369
Cargo 1,572,891 2,046,754 3,538,464 3,272,248
Other 689,345 632,150 1,312,290 1,248,005
---------------- -------------------------------------------------
Total revenues 116,006,211 131,082,878 239,322,568 243,891,622
---------------- -------------------------------------------------
Operating expenses:
Flight operations 50,959,339 44,455,749 100,695,793 84,086,836
Aircraft and traffic servicing 17,954,683 14,840,730 35,800,653 28,488,515
Maintenance 20,016,709 18,199,777 38,363,899 32,590,660
Promotion and sales 16,386,217 15,359,093 32,910,980 27,820,866
General and administrative 5,974,368 6,415,869 13,208,920 12,645,487
Depreciation and amortization 2,744,541 1,218,440 5,066,409 2,292,782
---------------- -------------------------------------------------
Total operating expenses 114,035,857 100,489,658 226,046,654 187,925,146
---------------- -------------------------------------------------
Operating income 1,970,354 30,593,220 13,275,914 55,966,476
---------------- -------------------------------------------------
Nonoperating income (expense):
Interest income 1,116,222 2,148,164 2,646,980 3,772,598
Interest expense (673,552) (17,491) (926,426) (34,950)
Federal grant (note 2) 8,802,235 - 8,802,235 -
Other, net (147,125) (21,301) (196,808) (37,201)
---------------- -------------------------------------------------
Total nonoperating income, net 9,097,780 2,109,372 10,325,981 3,700,447
---------------- -------------------------------------------------
Income before income tax expense 11,068,134 32,702,592 23,601,895 59,666,923
Income tax expense 3,789,551 12,509,016 8,583,715 23,025,105
---------------- -------------------------------------------------
Net income $ 7,278,583 $ 20,193,576 $ 15,018,180 $ 36,641,818
================ =================================================
Earnings per share:
Basic $0.26 $0.75 $0.53 $1.37
================ =================================================
Diluted $0.24 $0.69 $0.50 $1.27
================ =================================================
Weighted average shares of
common stock outstanding
Basic 28,360,534 26,871,656 28,324,778 26,742,822
================ =================================================
Diluted 29,807,169 29,231,432 29,807,470 28,947,344
================ =================================================
FRONTIER AIRLINES, INC.
Statements of Cash Flows
For the Six Months Ended September 30, 2001 and 2000
(Unaudited)
2001 2000
---------------------------------
Cash flows from operating activities:
Net income $ 15,018,180 $ 36,641,818
Adjustments to reconcile net income to net cash
provided by operating activities:
Employee stock option plan compensation expense 1,108,124 571,876
Depreciation and amortization 5,113,021 2,374,546
Deferred tax expense 1,714,264 39,658
Changes in operating assets and liabilities:
Restricted investments (3,825,000) (400,000)
Trade receivables 15,569,800 (6,265,237)
Security, maintenance and other deposits (5,519,404) (6,779,311)
Prepaid expenses and other assets 1,337,267 (1,388,439)
Inventories (1,527,393) (681,207)
Accounts payable (6,789,305) (2,239,490)
Air traffic liability (12,558,090) 11,136,768
Other accrued expenses (1,509,325) 6,506,238
Deferred federal grant 1,316,239 -
Income taxes payable 675,559 4,374,123
Accrued maintenance expense 5,679,350 7,372,599
Deferred rent 1,579,592 -
------------------------------
Net cash provided by operating activities 17,382,879 51,263,942
---------------------------------
Cash flows from investing activities:
Decrease in short-term investments - 13,760,000
Aircraft lease and purchase deposits, net 4,132,112 (5,687,799)
Decrease (increase) in restricted investments 931,800 (2,930,500)
Capital expenditures (115,109,871) (7,120,701)
---------------------------------
Net cash used by investing activities (110,045,959) (1,979,000)
---------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 571,109 1,809,915
Proceeds from long-term borrowings 72,000,000 -
Principal payments on long-term borrowings (400,378) -
Principal payments on obligations under capital leases (60,731) (54,687)
---------------------------------
Net cash provided by financing activities 72,110,000 1,755,228
---------------------------------
Net (decrease) increase in cash and cash equivalents (20,553,080) 51,040,170
Cash and cash equivalents, beginning of period 109,251,426 67,850,933
---------------------------------
Cash and cash equivalents, end of period $ 88,698,346 $118,891,103
=================================
FRONTIER AIRLINES, INC.
Notes to Financial Statements
September 30, 2001
(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, 2001.
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, 2001 are not necessarily indicative of the results that
will be realized for the full year.
(2) Air Transportation Safety and Stabilization Act
As a result of the September 11, 2001 terrorist attacks on the United
States, on September 22, 2001 President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the "Act"). The 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 Act) for
increases in the cost of war risk insurance over the premium in effect
for the period September 4, 2001 to September 10, 2001; (iv) at the
discretion of the Secretary of Transportation, a $100 million limit on
the liability of any air carrier to third parties with respect to acts of
terrorism committed on or to such air carrier during the 180 day period
following enactment of the Act; and (v) the extension of the due date
for the payment by air carriers of certain payroll and excise taxes until
November 15, 2001 and January 15, 2002, respectively.
The Company anticipates receiving up to approximately $20,200,000 from
the $5 billion in authorized grants, of which $10,118,000 was received in
September 2001. The Company recognized $8,802,000 of the grant during
the quarter ended September 30, 2001 which is included in nonoperating
income and expenses; the remaining $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 the balance sheet. The Company's entitlement to
receive the entire amount of the maximum grant payable to it will depend
on its operating results for the period September 11, 2001 through
December 31, 2001, compared to those it expected just prior to September
11, 2001 to achieve for the same period. To date the Company has deferred
the payment of $847,000 and $1,980,000 in payroll and excise taxes,
until November 15, 2001 and January 15, 2002, respectively, as permitted by
the Act.
(3) Long-Term Debt
In May 2001, the Company entered into a credit agreement to borrow up to
$72,000,000 for the purchase of three Airbus aircraft with a maximum
borrowing of $24,000,000 per aircraft. Each aircraft loan has a term of
120 months and is payable in equal monthly installments, including
interest, payable in arrears. The loans are secured by the aircraft. As
of September 30, 2001, the Company had borrowed $72,000,000 for the
purchase of three Airbus aircraft. Each loan provides for monthly
principal and interest payments ranging from $205,579 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,
and has a balloon payment of $10,200,000 at the expiration of the loan
term.
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; increased federal scrutiny of low-fare
carriers generally that may increase our operating costs or otherwise
adversely affect us; actions of competing airlines, such as increasing
capacity and pricing actions of United Airlines and other competitors; the
availability of suitable aircraft, which may inhibit our ability to achieve
operating economies and implement our business strategy; the unavailability
of, or inability to secure upon acceptable terms, financing necessary to
purchase aircraft which we have ordered; issues relating to our transition to
an Airbus aircraft fleet; uncertainties regarding aviation fuel 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, 2001
as they may be modified by the disclosures contained in this report.
Additional information regarding these and other factors may be contained in
the Company's Form 10-K for its fiscal year ended March 31, 2001; the
Company's Form 8-K filed May 7, 2001 and the Company's Form 8-K filed Jan. 22,
2001, as amended by the Company's Form 8-K/A filed July 11, 2001, and the
Company's Form 10-Q for its fiscal quarter ended June 30, 2001.
Share, per share and common stock information contained in this report has
been retroactively adjusted or "restated" to reflect a fifty percent common
stock dividend to shareholders of record on February 19, 2001, which we paid
on March 5, 2001.
General
We are a scheduled airline based in Denver, Colorado. 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 26 leased
jets and three purchased Airbus A319 aircraft, comprised of seven Boeing
737-200s, 17 Boeing 737-300s, and five 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 first quarter of calendar year 2005, assuming
early lease returns of five of our Boeing aircraft. We have advanced the
return of a leased Boeing 737-300 aircraft to its owner from April 2002 to
September 2001.
As of October 31, 2001, we operate routes linking our Denver hub to 24
cities in 18 states spanning the nation from coast to coast. We added
Houston, Texas to our route system on May 16, 2001. We commenced service
between Denver and Reno/Lake Tahoe, Nevada and Austin, Texas, on October 1,
2001, each with two daily nonstop round-trip flights. Effective July 9, 2001,
we began a codeshare agreement with Great Lakes Aviation, Ltd. ("Great Lakes")
by which Great Lakes provides daily service to seven regional markets from our
Denver hub. The codeshare agreement initially included Casper, Cody,
Gillette, and Cheyenne, Wyoming, Amarillo, Texas, Santa Fe, New Mexico, and
Hayden, Colorado. The codeshare agreement was expanded to include
29additional Great Lakes cities including Laramie, Riverton, Rock Springs,
Sheridan, and Worland, Wyoming, Cortez and Telluride, Colorado, Scottsbluff,
Nebraska, and Farmington, New Mexico effective November 15, 2001, with the
exception of Sheridan, Wyoming, where the codeshare commenced on October 31,
2001. Effective December 14, 2001 the remaining 20 cities will be added which
include 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.We expect this
agreement may expand our service, in the future, into additional small to
mid-size markets currently served by Great Lakes in Colorado, Wyoming,
Nebraska, South Dakota, North Dakota, Kansas, New Mexico, Utah, Arizona and
Texas.
In September 2001, we entered into a codeshare agreement with Mesa
Airlines, Inc. ("Mesa"). Under the terms of the agreement, we will market and
sell flights operated by Mesa as Frontier JetExpress. The codeshare is
anticipated to begin during the first calendar quarter of 2002 and initially
will include the operation by Mesa of at least five 50-passenger Bombardier
CRJ-200 regional jets, which will provide service to new destinations as well
as offer additional frequency to our current route system.
We currently use up to nine gates at our hub, Denver International
Airport ("DIA"), where we operate approximately 103 daily system flight
departures and arrivals. Prior to the September 11, 2001 terrorist attacks,
we operated approximately 126 daily system flight departures and arrivals. On
November 15, 2001, we plan to add an additional 8 daily system flight
departures and arrivals to our schedule. We plan to restore service to Ronald
Reagan Washington National Airport on December 12, 2001 with one daily
round-trip. We intend to continue to monitor passenger demand and other
competitive factors and adjust the number of flights we operate accordingly.
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.
As a result of the September 11 terrorist attacks, expansion of our
operations and transition costs associated with our fleet replacement plan
during the six months ended September 30, 2001, the slowing economy, as well
as hail storms that damaged five of our aircraft earlier in the year, we do
not believe our results of operations for the six months ended September 30,
2001 are indicative of future operating results or comparable to the six
months ended September 30, 2000.
Results of Operations
We had net income of $15,018,000 or 50(cent)per diluted share for the six
months ended September 30, 2001 as compared to net income of $36,642,000 or
$1.27 per diluted share for the six months ended September 30, 2000. We had
net income of $7,279,000 or 24(cent)per diluted share for the three months
ended September 30, 2001 as compared to net income of $20,194,000 or 69(cent)
per diluted share for the three months ended September 30, 2000. On
September 11, 2001, the Federal Aviation Administration ("FAA") temporarily
suspended 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, we recognized $8,802,000 of the federal cash grant we received as a
result of the Air Transportation Safety and Stabilization Act ("Act"), which
compensates for direct and incremental losses incurred by air carriers from
September 11, 2001 through the end of calendar year 2001. 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.
Prior to the terrorist attacks on September 11, 2001, we were
experiencing the effects of the slowing economy which had 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
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 were adversely effected during the six months ended September
30, 2001.
Our cost per ASM for the six months ended September 30, 2001 and 2000
were 9.62(cent)and 8.99(cent), respectively, an increase of .63(cent)or 7.0%.
Cost per ASM excluding fuel for the six months ended September 30, 2001 and 2000
were 8.13(cent)and 7.42(cent), respectively, an increase of .71(cent)or 9.6%.
Our cost per ASM for the three months ended September 30, 2001 and 2000 were
9.50(cent) and 9.36(cent), respectively, an increase of .14(cent)or 1.5%. Cost
per ASM excluding fuel for the three months ended September 30, 2001 and 2000
were 8.04(cent)and 7.67(cent), respectively, an increase of .37(cent)or 4.8%.
Our cost per ASM increased during the six months ended September 30, 2001
because of an increase in flight operations expenses (including fuel) which
accounted for .27(cent)per ASM, an increase in aircraft and traffic servicing
expenses of .16(cent), and an increase in maintenance expenses of .07(cent)per
ASM. These expenses were impacted by the terrorist attacks and the hail 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 cost per ASM 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 which 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. We also experienced an increase in promotion and sales expenses to
stimulate traffic in a weak economy of .07(cent)per ASM. An increase in pilots'
salaries effective in May 2001 also contributed to the increase in cost per
ASM during the six months ended September 30, 2001.
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, 2001, our break-even load factor was 57.8% compared to our
achieved passenger load factor of 64.2%. For the six months ended September
30, 2000, our break-even load factor was 51.2% compared to our achieved
passenger load factor of 68.3%. Our break-even load factor increased from the
prior comparable period largely as a result of a decrease in our average fare
to $133 during the six months ended September 30, 2001 from $149 during the
six months ended September 30, 2000, compounded by an increase in our expense
per ASM to 9.62(cent)for the six months ended September 30, 2001 from 8.99
(cent for) the six months ended September 30, 2000.
The following table provides certain of our financial and operating
data for the period July 1, 2001 through September 10, 2001 and the three
month and six month periods ended September 30, 2001 and 2000.
July 1, 2001
Through Three Months Ended Sept. 30, Six Months Ended Sept. 30,
Sept. 10, 2001 2001 2000 2001 2000
---------------------------------------------------------------------------
Selected Operating Data:
Passenger revenue (000s) (1) 101,456 113,744 128,404 234,472 239,371
Revenue passengers carried (000s) 714 802 826 1,648 1,538
Revenue passenger miles (RPMs) (000s) (2) 653,695 732,531 760,845 1,509,295 1,427,600
Available seat miles (ASMs) (000s) (3) 1,005,570 1,200,608 1,073,703 2,349,154 2,091,258
Passenger load factor (4) 65.0% 61.0% 70.9% 64.2% 68.3%
Break-even load factor (5) 57.3% 55.1% 52.8% 57.8% 51.2%
Block hours (6) 19,855 23,769 20,823 46,428 40,848
Departures 8,945 10,730 9,772 20,920 18,901
Average aircraft stage length 852 848 839 851 845
Average passenger length of haul 916 913 921 916 928
Average daily fleet block hour utilization(7) 10.1 9.4 9.2 9.6 9.3
Yield per RPM (cents) (8) 15.52 15.53 16.88 15.54 16.77
Total yield per RPM (cents) (9) 15.83 15.84 17.23 15.86 17.08
Total yield per ASM (cents) (10) 10.29 9.66 12.21 10.19 11.66
Expense per ASM (cents) 9.14 9.50 9.36 9.62 8.99
Expense per ASM excluding fuel (cents) 7.69 8.04 7.67 8.13 7.42
Average fare (11) $ 132 $ 132 $ 149 $ 133 $ 149
Average aircraft in fleet 27.4 27.4 24.5 26.3 24.0
Aircraft in fleet at end of period 27.0 29.0 25.0 29.0 25.0
Average age of aircraft at end of period 10.8 10.1 10.9 10.1 10.9
EBITDAR (000s) (12) 26,164 29,496 46,925 59,389 88,125
EBITDAR as a % of revenue 25.3% 25.4% 35.8% 24.8% 36.1%
(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 passenger 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 six month periods ended
September 30, 2001 and 2000.
Three Months Ended September 30, Six Months Ended September 30,
---------------------------------------------------------------------------------------
2001 2000 2001 2000
---------------------------------------------------------------------------------------
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- ------- --- -------
Revenues:
Passenger 9.47 98.0% 11.96 97.9% 9.98 98.0% 11.45 98.2%
Cargo 0.13 1.4% 0.19 1.6% 0.15 1.5% 0.15 1.3%
Other 0.06 0.6% 0.06 0.5% 0.06 0.5% 0.06 0.5%
---------------------------------------------------------------------------------------
Total revenues 9.66 100.0% 12.21 100.0% 10.19 100.0% 11.66 100.0%
=======================================================================================
Operating expenses:
Flight operations 4.24 43.9% 4.14 33.9% 4.29 42.1% 4.02 34.5%
Aircraft and traffic servicing 1.50 15.5% 1.38 11.3% 1.52 15.0% 1.36 11.7%
Maintenance 1.67 17.3% 1.70 14.0% 1.63 16.0% 1.56 13.4%
Promotion and sales 1.36 14.1% 1.43 11.7% 1.40 13.8% 1.33 11.4%
General and administrative 0.50 5.1% 0.60 4.9% 0.56 5.5% 0.61 5.2%
Depreciation and amortization 0.23 2.4% 0.11 0.9% 0.22 2.1% 0.11 0.9%
---------------------------------------------------------------------------------------
Total operating expenses 9.50 98.3% 9.36 76.7% 9.62 94.5% 8.99 77.1%
=======================================================================================
Total ASMs (000s) 1,200,608 1,073,703 2,349,154 2,091,258
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 in leisure travel markets
depending on the markets' locations and when they are most frequently
patronized.
Our average fare for the six months ended September 30, 2001 and 2000
was $133 and $149, respectively, a decrease of 10.7%. We believe that the
decrease in the average fare during the six months ended September 30, 2001
from the prior comparable period was a result of the slowing economy. During
the six months ended September 30, 2000, we experienced an increase in the
number of passengers that a major competitor directed to us because of delays
and cancellations that airline experienced. We estimate that the additional
passenger traffic received from that airline had the effect of increasing each
of our average fare and load factor by approximately 1%.
Passenger Revenues. Passenger revenues totaled $234,742,000 for the
six months ended September 30, 2001 compared to $239,371,000 for the six
months ended September 30, 2000, or a decrease of 1.9%, on increased capacity
of 257,896,000 or 12.3%. Passenger revenues totaled $113,744,000 for the
three months ended September 30, 2001 compared to $128,404,000 for the three
months ended September 30, 2000, or a decrease of 11.4%, on increased capacity
of 126,905,000 or 11.8%. Passenger revenue includes revenues for non-revenue
passengers, administrative fees, and revenue recognized for tickets that are
not used within one year from their issue dates. We carried 1,648,000 revenue
passengers during the six months ended September 30, 2001 compared to
1,538,000 in the six months ended September 30, 2000, an increase of 7.2%. We
had an average of 26.3 aircraft in our fleet during the six months ended
September 30, 2001 compared to an average of 24 aircraft during the six months
ended September 30, 2000, an increase of 9.6%. RPMs for the six months ended
September 30, 2001 were 1,509,295,000 compared to 1,427,600,000 for the six
months ended September 30, 2000, an increase of 5.7%. 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 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 $3,538,000 and $3,272,000 for the six months ended September 30, 2001
and 2000, respectively, representing 1.5% and 1.3%, respectively, of total
operating revenues, an increase of 8.1%. 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 prior comparable period, cargo revenue would have been $3,695,000 for the
six months ended September 30, 2000, and cargo revenue actually decreased from
the prior comparable period by 4.2%. We believe that our cargo revenues have
been impacted by the slowing economy as well as the flight cancellations as a
result of the terrorist attack and the limitations put on cargo service as a
result of that. 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 $1,312,000 and $1,248,000,
or .5% of total operating revenues for each of the six months ended September
30, 2001 and 2000, respectively, an increase of 5.1%
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 $226,047,000 and $187,925,000 for the six months ended September 30, 2001
and 2000 and represented 94.5% and 77.1% of revenue, respectively. Total
operating expenses for the three months ended September 30, 2001 and 2000 were
$114,036,000 and $100,490,000 and represented 98.3% and 76.7% of revenue,
respectively. Operating expenses increased as a percentage of revenue during
the three and six months ended September 30, 2001 as a result of the 11.4% and
1.9% decrease in passenger revenues, respectively, associated with the slowing
economy and the September 11 terrorist attacks. For a discussion of steps we
have taken to reduce our expenses as a result of the September 11, 2001
terrorist attacks, see Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.
Flight Operations. Flight operations expenses of $100,696,000 and
$84,087,000 were 42.1% and 34.5% of total revenue for the six months ended
September 30, 2001 and 2000, respectively. Flight operations expenses of
$50,959,000 and $44,456,000 were 43.9% and 33.9% of total revenue for the
three months ended September 30, 2001 and 2000, 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, 2001 is
approximately $1,743,000 for Airbus training and related travel 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 $35,136,000 for 36,894,000 gallons used and $32,727,000 for
32,695,000 gallons used resulted in an average fuel cost of 95.2(cent)and $1 per
gallon, for the six months ended September 30, 2001 and 2000, respectively.
Aircraft fuel expense represented 34.9% and 38.9% of total flight operations
expenses and 14.7% and 13.4% of total revenue for the six months ended
September 30, 2001 and 2000, respectively. Aircraft fuel expense of
$17,502,000 for 18,687,000 gallons used and $18,190,000 for 16,995,000 gallons
used resulted in an average fuel expense of 93.7(cent)and $1.07 per gallon for
the three months ended September 30, 2001 and 2000, respectively. Aircraft fuel
expenses represented 34.4% and 40.9% of total flight operations expenses for
the three months ended September 30, 2001 and 2000, and 15.1% and 13.9% of
total revenue, respectively. Fuel prices are subject to change weekly as we do
not purchase supplies in advance for inventory. Fuel consumption for the six
months ended September 30, 2001 and 2000 averaged 795 and 800 gallons per
block hour, respectively. Fuel consumption for the three months ended
September 30, 2001 and 2000 averaged 786 and 816 gallons per block hour,
respectively. 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 newly developed fuel conservation program
implemented in August 2001. During the six months ended September 30, 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.
Aircraft lease expenses totaled $32,442,000 (13.6% of total revenue)
and $29,903,000 (12.3% of total revenue) for the six months ended September
30, 2001 and 2000, respectively, an increase of 8.5%. Aircraft lease expenses
totaled $16,124,000 (13.9% of total revenue) and $15,135,000 (11.6% of total
revenue) for the three months ended September 30, 2001 and 2000, respectively,
an increase of 6.5%. The increase is largely due to an increase in the
average number of aircraft to 26.3 from 24, or 9.6%, during the six month
period ended September 30, 2001 compared to the same period in 2000. During
the six months ended September 30, 2001, to minimize the number of flight
cancellations while our aircraft were being repaired following hail damage, we
incurred short-term lease expenses of $630,000 for aircraft to partially
replace the damaged. During the six months ended September 30, 2001 we also
added our first three purchased Airbus aircraft to our fleet. These aircraft
do not have lease expenses associated with them.
Aircraft insurance expenses totaled $1,845,000 (.8% of total revenue) for
the six months ended September 30, 2001. Aircraft insurance expenses for the six
months ended September 30, 2000 were $1,616,000 (.7% of total revenue).
Aircraft insurance expenses were .12(cent) and .11(cent)per RPM for the six
months ended September 30, 2001 and 2000, respectively. Aircraft insurance
expenses totaled $985,000 (.9% of total revenue)for the three months ended
September 30, 2001. Aircraft insurance expenses for the three months ended
September 30, 2000 were $814,000 (.6% of total revenue). Aircraft insurance
expenses were .13(cent)and .11(cent)per RPM for the three months ended
September 30, 2001 and 2000, respectively. Aircraft insurance expenses during
the three and six month periods ended September 30, 2001 have not been fully
impacted by the increases to hull and liability insurance as a result of the
terrorist attacks on September 11, 2001. These expenses will show a significant
increase beginning in the quarter ending December 31, 2001. The Act allows the
Secretary of Transportation to reimburse airlines for a period of up to 180
days after enactment of the Act for the incremental increases in insurance
premiums as a result of the September 11, 2001 terrorist attacks.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $16,185,000 and $10,320,000 or 6.9% and 4.3% of passenger revenue for
the six months ended September 30, 2001 and 2000, an increase of 56.8%. Pilot
and flight attendant salaries before payroll taxes and benefits totaled
$8,407,000 and $5,399,000 or 7.4% and 4.2% of passenger revenue for the three
months ended September 30, 2001 and 2000, an increase of 55.7%. 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. In May
2001, we agreed to reconsider the current rates of pay under our collective
bargaining agreement with our pilots. During the past year, several pilot
unions at other air carriers received wage increases which caused our pilot
salaries to be substantially below those paid by certain of our competitors.
We submitted a revised pilot pay proposal to the Frontier Airline Pilots
Association, and its members accepted this proposal and was made effective May
2001. Pilot and flight attendant compensation also increased as a result of a
9.6% increase in the average number of aircraft in service, an increase of
13.7% in block hours, a general wage increase in flight attendant salaries,
and additional crew required to replace those who were attending training on
the Airbus equipment.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $35,801,000 and $28,489,000 (an increase of 25.7%) for the six months
ended September 30, 2001 and 2000, respectively, and represented 15% and 11.7%
of total revenue. Aircraft and traffic servicing expenses were $17,955,000 and
$14,841,000 (an increase of 21%) for the three months ended September 30, 2001
and 2000, respectively, and represented 15.5% and 11.3% 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, 2001, our
departures increased to 20,920 from 18,901 for the six months ended September
30, 2000, or 10.7%. Aircraft and traffic servicing expenses were $1,711 per
departure for the six months ended September 30, 2001 as compared to $1,507
per departure for the six months ended September 30, 2000, or an increase of
$204 per departure. During the three months ended September 30, 2001, our
departures increased to 10,730 from 9,772 or 9.8%. Aircraft and traffic
servicing expenses were $1,673 per departure for the three months ended
September 30, 2001 as compared to $1,519 per departure for the three months
ended September 30, 2000, or an increase of $154 per departure. Aircraft and
traffic servicing expenses increased as a result of expenses associated with
deicing in April 2001 as a result of an unusual spring blizzard, a general
wage rate increase, 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, the number of departures were less than we had planned,
which caused our fixed costs to be spread over fewer departures and, we
believe, distorted our expenses per departure for the three and six months
ended September 30, 2001.
Maintenance. Maintenance expenses of $38,364,000 and $32,591,000 were
16% and 13.4% of total revenue for the six months ended September 30, 2001 and
2000, respectively. Maintenance expenses of $20,017,000 and $18,200,000 were
17.3% and 14% of total revenue for the three months ended September 30, 2001
and 2000, respectively. These include all labor, parts and supplies expenses
related to the maintenance of the aircraft. Routine maintenance is charged to
maintenance expense as incurred while major 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
six months ended September 30, 2001 and 2000 were $826 and $798, respectively.
Maintenance costs per block hour increased as a result of hail damage to five
of our aircraft during the six months ended September 30, 2001, estimated at
$491,000 ($11 per block hour), excluding in house labor, and a general wage
rate increase effective April 2001. During the six months ended September 30,
2001, we incurred approximately $881,000 for Airbus training or $19 per block
hour. Additionally, due to the number of flight cancellations as a result of
these weather conditions as well as the September 11 terrorist attacks, the
number of block hours were less than we had planned, which caused our fixed
costs to be spread over fewer block hours and, we believe, distorted our cost
per block hour for the quarter. During the six months ended September 30,
2000, we performed heavy maintenance checks on two of our leased aircraft for
which we were reimbursed by the aircraft owner, thereby reducing our labor
costs by $601,000, or $15 per block hour. We did not perform any heavy
maintenance checks on our aircraft during the six months ended September 30,
2001. 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 transition.
Promotion and Sales. Promotion and sales expenses totaled $32,911,000
and $27,821,000 and were 13.8% and 11.4% of total revenue for the six months
ended September 30, 2001 and 2000, respectively. Promotion and sales expenses
totaled $16,386,000 and $15,359,000 and were 14.1% and 11.7% of total revenue
for the three months ended September 30, 2001 and 2000, respectively. These
include advertising expenses, telecommunications expenses, wages and benefits
for reservationists and reservations supervision as well as marketing management
and sales personnel, credit card fees, travel agency commissions and computer
reservations costs. During the six months ended September 30, 2001, promotion
and sales expenses per passenger increased to $19.97 compared to $18.09 for
the six months ended September 30, 2000. Promotion and sales expenses
increased largely as a result of an increase in advertising expenses to
stimulate traffic in a slowing economy. Additionally, we have 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, 2001 and 2000 totaled $13,209,000 and
$12,645,000 and were 5.5% and 5.2% of total revenue, respectively, an increase
of 4.5%. General and administrative expenses for the three months ended
September 30, 2001 and 2000 totaled $5,974,000 and $6,416,000 and were 5.2%
and 4.9% of total revenue, respectively, a decrease of 6.9%. During the six
months ended September 30, 2001 and 2000, we accrued for employee performance
bonuses totaling $1,559,000 and $4,293,000, respectively, which were .7% and
1.8% of total revenue, a decrease of 63.7%. 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 2,275 in September 2000 to approximately 2,500 in
September 2001, an increase of 9.9%. Because of the increase in personnel, our
health insurance benefit expenses and accrued vacation expense increased
accordingly.
Depreciation and Amortization. Depreciation and amortization expenses
of $5,066,000 and $2,293,000 were approximately 2.1% and .9% of total revenue
for the six months ended September 30, 2001 and 2000, an increase of 121%.
These expenses include depreciation of aircraft and aircraft components,
office equipment, ground station equipment and other fixed assets.
Amortization of start-up and route development costs are not included as these
expenses have been expensed as incurred. Depreciation expense increased over
the prior year as a result of depreciation expense associated with our first
three purchased aircraft, an increase in our spare parts inventory including
spare engines and parts for the Airbus fleet, ground handling equipment, and
computers to support new employees as well as replacement computers for those
with outdated technology.
Nonoperating Income (Expense). Net nonoperating income totaled
$10,326,000 for the six months ended September 30, 2001 compared to $3,700,000
for the six months ended September 30, 2000. Interest income decreased to
$2,647,000 from $3,773,000 during the six months ended September 30, 2001 from
the prior period due to a decrease in cash balances as a result of cash used
for pre-delivery payments for future purchases of aircraft, spare parts
inventories largely for the new Airbus fleet and a decrease in interest rates.
Interest expense increased to $926,000 for the six months ended September 30,
2001 from $35,000 as a result of interest expense associated with the
financing of the first three purchased Airbus aircraft received in May, August
and September 2001.
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; the
remaining $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.
Income Tax Expense. We accrued income taxes of $9,028,000 and
$23,025,000 at 38.25% and 39% of taxable income during the six months ended
September 30, 2001 and 2000, respectively. During the three months ended
September 30, 2001, we recorded a $444,000 reduction to income tax expense as
a result of a review and revision of state tax apportionment factors used in
filing our amended state tax returns for 2000.
Liquidity and Capital Resources
Our balance sheet reflected cash and cash equivalents and short-term
investments of $90,698,000 and $111,251,000 at September 30, 2001 and March
31, 2001, respectively. At September 30, 2001, total current assets were
$170,858,000 as compared to $124,843,000 of total current liabilities,
resulting in working capital of $46,015,000. At March 31, 2001, total current
assets were $199,794,000 as compared to $136,159,000 of total current
liabilities, resulting in working capital of $63,635,000. The decrease in our
cash and working capital is largely a result of cash flows used by investing
activities, principally the purchase of our first three Airbus aircraft and
spare parts for the new Airbus fleet. 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 Act of excise and payroll
taxes totaling $1,980,000 and $847,000, respectively, as of September 30, 2001.
Cash provided by operating activities for the six months ended
September 30, 2000 was $51,264,000. This is attributable to our net income
for the period, increases in air traffic liability, other accrued expenses,
income taxes payable, and accrued maintenance expense, offset by increases in
trade receivables, security, maintenance and other deposits, prepaid expenses
and inventories, and a decrease in accounts payable.
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. During the six months ended
September 30, 2000, we used $7,121,000 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 provided by financing activities for the six months ended
September 30, 2001 and 2000 was $72,110,000 and $1,755,000, respectively.
During the six months ended September 30, 2001 and 2000, we received $571,000
and $1,810,000, respectively, from the exercise of common stock options and
warrants. During the six months ended September 30, 2001, we borrowed
$72,000,000 to finance the purchase of our first three Airbus aircraft.
As of October 31, 2001, we lease two Airbus 319 type aircraft and 24
Boeing 737 type aircraft under operating leases with expiration dates ranging
from 2002 to 2013. Under these leases, we are required to make cash security
deposits or issue letters of credit to secure our lease obligations. At
September 30, 2001, we had made cash security deposits and had arranged for
issuance of letters of credit totaling $4,881,000 and $9,283,000,
respectively. Accordingly, our restricted cash balance includes $9,283,000
that collateralize the outstanding letters of credit. Additionally, we make
deposits for maintenance of these aircraft. At September 30 and March 31,
2001, we had made maintenance deposits of $48,980,000 and $42,255,000,
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 14 of these aircraft, and have options to purchase up to an
additional 15 aircraft. During the six months ended September 30, 2001, we
took delivery of the first three purchased 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, 2001, we had made pre-delivery payments on
future deliveries totaling $23,455,000 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, two of which had been
delivered to us as of September 30, 2001. As of September 30, 2001, we had
made cash security deposits on the remaining 14 aircraft we agreed to lease
and had arranged for issuance of letters of credit totaling $1,224,000 and
$2,677,000, respectively, to secure these leases. 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 $331,300,000 as of September 30, 2001. We expect to
be operating up to 37 purchased and leased Airbus aircraft by the first
quarter of calendar 2005. As discussed below, we have secured a financing
commitment for the first three purchased Airbus A319 aircraft. To complete
the purchase of the remaining aircraft we must secure additional aircraft
financing. We are exploring 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. The
additional 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. While we believe that such financing will
be available to us, there can be no assurance, particularly in view of the
September 11 terrorist attacks, 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.
Additionally, in order to maximize the efficiency of our fleet
replacement plan, we will continue to endeavor to return certain leased B737
aircraft to their owners on dates other than the currently scheduled lease
expiration dates for these aircraft. We returned one Boeing aircraft during
the six months ended September 30, 2001. If we are unable to negotiate such
different return dates with the aircraft owners, or sublease these aircraft to
third parties, we may incur additional expense, which may have a material
adverse effect on us.
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 120 months and
is payable in equal monthly installments, including interest, payable in
arrears. The loans are secured by the aircraft. As of September 30, 2001, we
had borrowed $72,000,000 for purchase of the three Airbus aircraft. Each loan
provides for monthly principal and interest payments ranging from $205,579 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, and has a balloon payment of $10,200,000 at the expiration of
the loan term.
Air Transportation Safety and Stabilization Act
As a result of the September 11, 2001 terrorist attacks on the United
States, on September 22, 2001 President Bush signed the Act into law. The 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 Act) for increases in the cost of war risk insurance over the premium
in effect for the period September 4, 2001 to September 10, 2001; (iv) at the
discretion of the Secretary of Transportation, a $100 million limit on the
liability of any air carrier to third parties with respect to acts of
terrorism committed on or to such air carrier during the 180 day period
following enactment of the Act; and (v) the extension of the due date for the
payment by air carriers of certain payroll and excise taxes until November 15, 2001
and January 15, 2002, respectively.
The Company anticipates receiving up to approximately $20,200,000 from
the $5 billion in authorized grants, of which $10,118,000 was received in
September 2001. The Company recognized $8,802,000 of the grant during the
quarter ended September 30, 2001 which is included in nonoperating income and
expenses; the remaining $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 the balance
sheet. The Company's entitlement to receive the entire amount of the maximum
grant payable to it will depend on its operating results for the period
September 11, 2001 through December 31, 2001, compared to those it expected
just prior to September 11, 2001 to achieve for the same period. To date the
Company has deferred the payment of $847,000 and $1,980,000 in payroll and excise
taxes until November 15, 2001 and January 15, 2002, respectively, as permitted
by the Act.
We plan to apply under the Act for a guaranteed loan. We have not
determined the nature or amount of our application. A newly created Air
Transportation Stabilization Board will have authority to set all terms and
conditions, including determining the amounts and recipients of the loans.
The Act also allows the government to take an equity stake in the airlines
receiving federal loan guarantees as collateral. We may also be required to
obtain concessions from our key constituents, including aircraft lessors,
vendors and other creditors. There can be no assurance that our application
will be successful; however, we believe that our inability to secure a
guaranteed loan under the provision of the Act would not have a material
adverse effect on our business or operations.
Impact of the September 11, 2001 Terrorist Attacks, Our Response, and Third
and Fourth Quarter Outlook
Among the effects experienced by us from the September 11, 2001
terrorist attacks have been significant flight disruption costs caused the
FAA's temporary grounding of the U.S. airline industry's fleet, significantly
increased security and other costs, significantly higher ticket refunds and
significantly reduced load factors. Further terrorist attacks using
commercial aircraft in flight could result in another grounding of our fleet,
and could result in additional reductions in load factor and yields, along
with increased ticket refund, security and other costs. In addition,
terrorist attacks not involving commercial aircraft, or the general increase
in hostilities relating to reprisals against terrorist organizations or
otherwise, and the public's reaction to the crash of an American Airlines
A-300 aircraft in New York City on November 12, 2001, could result in
decreased load factors and yields for airlines, including us, and increased
costs.
Immediately following the terrorist attacks on September 11, 2001, we
took several steps to reduce our operating expenses. We reduced our capacity
by approximately 20%. However, current capacity is still approximately 9.7%
greater than capacity for the comparable period last year. We also reduced
our costs by offering voluntary leaves of absences and early retirements, and
by furloughs, totaling approximately 390 employees; by reducing salaries for
company officers by 20 to 40%, and reducing the salaries of 650 other
employees by three to 15%; by eliminating food service provided on our
flights; and by deferring nonessential capital spending and significantly
reducing all nonessential operating expenses. We have also been experiencing
lower fuel prices since the end of September 2001. These cost savings are
expected to be offset by increased security costs and higher insurance
premiums. As of November 9, 2001, we have recalled approximately 150
employees as a result of the increase of approximately 5.8% in capacity
scheduled to begin November 15, 2001, additional personnel requirements for
enhanced security measures, and maintenance personnel to provide heavy
maintenance checks on the additional aircraft that will fly the increased
schedule. We have not altered the Airbus delivery schedule and our intent is
to continue with the fleet transition plan in place prior to September 11,
2001.
After the events of September 11, many domestic airlines began working
with the FAA in order to increase the security of aircraft flight decks. A
variety of security enhancements were introduced, ranging from Level 1 through
Level 4, with Level 4 being the most comprehensive of enhancements. We also
began exploring additional security measures and, working with our aircraft
manufacturers and the FAA, developed enhanced flight deck door security
measures that are consistent with Level 2. Seventeen of our Boeing aircraft
are currently Level 1 compliant, and we anticipate that all 24 of our Boeing
aircraft will be Level 2 compliant by approximately November 26, 2001. Our
five Airbus aircraft will be Level 4 compliant by approximately December 31,
2001. In addition, the federal government has established a fund by which the
participating airlines would be reimbursed for the additional flight deck
security enhancements. We intend to participate in that reimbursement program.
After September 11, 2001, and with the subsequent decline in the flying
public's confidence in air travel safety and security, we implemented several
marketing programs designed to assist in restoring consumer confidence in air
travel. These initiatives have helped us experience a slow but steady
increase in load factors and booking levels. Some of these initiatives were
as follows:
o Marketing programs that used direct mail, Internet fare sales, travel
agent promotions and enhanced frequent flyer program benefits;
o A community relations outreach program called Seats for Sharing that
offered complimentary seats to eligible non-profit organizations,
including schools and religious organizations;
o Communication programs that included letters to various school
administrators and employee-led visits to local schools, as well as
increased unpaid media efforts designed to educate and inform the
public on increased security;
o An employee campaign that increased employee reduced rate "buddy"
passes, designed to enable employees to encourage their friends and
family members to fly again.
The impact of the terrorist attacks of September 11, 2001 and their
aftermath on us and the sufficiency of our financial resources to absorb that
impact will depend on a number of factors, including: (i) the magnitude and
duration of the adverse impact of the terrorist attacks on the economy in
general, and the airline industry in particular; (ii) our ability to reduce
our operating costs and conserve our financial resources, taking into account
the increased costs we will incur as a consequence of the attacks, (iii) the
higher costs associated with new airline security directives and any other
increased regulation of air carriers; (iv) the significantly higher costs of
aircraft insurance coverage for future claims caused by acts of war,
terrorism, sabotage, hijacking and other similar perils, and the extent to
which such insurance will continue to be available; (v) our ability to raise
additional financing; (vi) the price and availability of jet fuel, in light of
current industry conditions; and (vii) the extent of the benefits received by
us under the Act, taking into account any challenges to and interpretations or
amendments of the Act or regulations issued pursuant thereto.
During the month of October 2001, our load factor was 47.5 %, a 15.8
point decrease from 63.3% for the same period last year. Our yield is
estimated to be 16.74(cent)during the month of October 2001, a 2.2% increase
over the same period last year when the yield was 16.38 cents. At present, we
have been able to maintain our yield as a result of close-in bookings and
limited fare sales since the September 11, 2001 terrorist attacks. On
October 24, 2001, we had a system-wide fare sale that ended on November 6, 2001,
which may lower our yield.
As of November 9, 2001, advance booking levels are down 12.4, 8.6, and
3.4 points in November, December, and January, respectively, compared to the
same date and for the same periods last year. Yields may decline in the third
and fourth fiscal quarters if our competitors continue to discount their fares
or we offer lower fares to boost traffic.
At this point, due in part to the lack of predictability of future
traffic and yields, we are unable to fully estimate the impact on us of the
events of September 11, 2001 and their consequences and the sufficiency of our
financial resources to absorb that impact.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
which requires the use of the purchase method and eliminates the option of
using the pooling-of-interests method of accounting for all business
combinations. The provisions in this statement apply to all business
combinations initiated after June 30, 2001, and all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) which
requires that all intangible assets acquired, other than those acquired in a
business combination, be initially recognized and measured based on the
asset's fair value. We are required to adopt the provisions of SFAS 142
effective January 1, 2002. Goodwill and certain identifiable intangible
assets will not be amortized under SFAS 142, but instead will be reviewed for
impairment at least annually in accordance with the provisions of this
statement. This accounting pronouncement presently has no impact on us as we
do not have any intangible assets on our balance sheet.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations,
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The standard applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the
carrying amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, we will recognize
a gain or loss on settlement. We do not expect the impact of adopting SFAS
143 to be significant.
In October 2001, the FASB issued Statement of Financial Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
addressed financial accounting and reporting for the impairment or disposal of
long-lived assets. While Statement No. 144 supersedes Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of, it retains many of the fundamental provisions of that
Statement. Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of A Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. We do not expect the impact of
adopting SFAS No. 144 to be significant.
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, 2001.
Based on fiscal year 2001 actual fuel usage, such an increase would have
resulted in an increase to aircraft fuel expense of approximately $7,104,000
in fiscal year 2001. Comparatively, based on projected fiscal year 2002 fuel
usage, such an increase would result in an increase to aircraft fuel expense
of approximately $8,608,000 in fiscal year 2002. The increase in exposure to
fuel price fluctuations in fiscal year 2002 is due to the increase of our
average aircraft fleet size during the year ended March 31, 2001, projected
increases to our fleet during the year ended March 31, 2002 and related
gallons purchased.
Our average cost per gallon of fuel for the six months ended September
30, 2001 decreased 4.9% from the average cost for the six months ended
September 30, 2000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Operating Expenses."
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
Our annual meeting of shareholders was held on September 6, 2001,
at which a quorum for the transaction of business was present.
Two matters were 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:
23,537,003 "For" Mr. Addoms; 1,273,586 "Withheld"
24,614,121 "For" Mr. Browning; 196,468 "Withheld"
24,614,220 "For" Mr. Dempsey; 196,369 "Withheld"
24,613,140 "For" Mr. Potter 197,449 "Withheld"
24,614,584 "For" Mr. McNamara; 196,005 "Withheld"
24,614,590 "For" Ms. Orullian; 195,999 "Withheld"
24,614,115 "For" Mr. Upchurch; 196,474 "Withheld"
The shareholders of the Company approved an amendment to our
Articles of Incorporation increasing the number of authorized
shares of our common stock, no par value per share, from
40,000,000 shares to 100,000,000 shares as follows:
20,388,815 "For" 4,365,401 "Against" 56,373 "Abstain"
Item 6: Exhibits and Reports on Form 8-K
Exhibit
Numbers
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(a) Exhibits
3.1 Amended and Restated Articles of Incorporation. (1)
10.61 Codeshare Agreement between Mesa Airlines, Inc. and Frontier
Airlines, Inc. (1)
(1) Filed herewith.
(b) Reports on Form 8-K
We filed a report on Form 8-K/A on July 11, 2001 that updated
disclosure of our fleet transition plan.
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 14, 2001 By: /s/ Paul H. Tate
------------------------
Paul H. Tate, Vice
President and
Chief Financial Officer
Date: November 14, 2001 By: /s/ Elissa A. Potucek
------------------------
Elissa A. Potucek, Vice
President, Controller,
Treasurer and Principal
Accounting Officer