frontier10q.htm
United
States
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the quarterly period ended June 30,
2007
|
[ ]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
Commission
file number: 000-51890
FRONTIER
AIRLINES HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
20-4191157
|
(State
or other jurisdiction of incorporated or organization)
|
(I.R.S.
Employer Identification No.)
|
7001 Tower Road, Denver,
CO
|
80249
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Issuer’s
telephone number, including area code: (720) 374-4200
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
X No ___
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer or large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one): Large accelerated
filer ___ Accelerated filer
X Non-accelerated filer
___
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ___ No
X
The
number of shares of the Company’s Common Stock outstanding as of July 26, 2007
was 36,641,744.
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
Page
Item
1.
|
Financial
Information
|
|
Consolidated
Balance Sheets (unaudited) at June 30, 2007 and March 31,
2007
|
1
|
|
Consolidated
Statements of Operations (unaudited) for the three months
ended
|
|
|
June
30, 2007 and 2006
|
2
|
|
Consolidated
Statements of Cash Flows (unaudited) for the three months
ended
|
|
|
June
30, 2007 and 2006
|
3
|
|
Notes
to the Consolidated Financial Statements (unaudited)
|
4
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition
and
|
|
|
Results
of Operations
|
12
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
34
|
|
|
|
Item
4.
|
Controls
and Procedures
|
35
|
PART
II. OTHER INFORMATION
Item
2.
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
35
|
|
|
|
Item
6.
|
Exhibits
|
36
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements (unaudited)
FRONTIER
AIRLINES HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
Consolidated
Balance Sheets (Unaudited)
|
|
|
|
|
|
|
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
March
31,
|
|
|
|
|
2007
|
|
2007
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
$ 215,431
|
|
$ 202,981
|
Restricted
investments
|
|
|
|
58,635
|
|
42,844
|
Receivables,
net of allowance for doubtful accounts of $668
|
|
|
|
|
and
$632 at June 30, 2007 and March 31, 2007, respectively
|
|
59,784
|
|
50,691
|
Prepaid
expenses and other assets
|
|
|
|
27,894
|
|
26,163
|
Inventories,
net of allowance of $334 and $329
|
|
|
|
|
|
|
at
June 30, 2007 and March 31, 2007, respectively
|
|
|
|
12,287
|
|
15,685
|
Assets
held for sale
|
|
|
|
1,834
|
|
2,041
|
Total
current assets
|
|
|
|
375,865
|
|
340,405
|
Property
and equipment, net (note 4)
|
|
|
|
695,490
|
|
605,131
|
Security
and other deposits
|
|
|
|
20,258
|
|
20,850
|
Aircraft
pre-delivery payments
|
|
|
|
40,473
|
|
52,453
|
Restricted
investments
|
|
|
|
2,845
|
|
2,845
|
Deferred
loan fees and other assets
|
|
|
|
17,623
|
|
21,184
|
Total
Assets
|
|
|
|
$ 1,152,554
|
|
$ 1,042,868
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
$ 63,301
|
|
$ 52,001
|
Air
traffic liability
|
|
|
|
214,614
|
|
183,754
|
Other
accrued expenses (note 6)
|
|
|
|
84,140
|
|
80,324
|
Current
portion of long-term debt (note 7)
|
|
|
|
30,409
|
|
26,847
|
Deferred
revenue and other current liabilities (note 5)
|
|
|
|
16,296
|
|
16,400
|
Total
current liabilities
|
|
|
|
408,760
|
|
359,326
|
Long-term
debt related to aircraft notes (note 7)
|
|
|
|
418,852
|
|
359,908
|
Convertible
notes
|
|
|
|
92,000
|
|
92,000
|
Deferred
revenue and other liabilities (note 5)
|
|
|
|
25,723
|
|
22,138
|
Total
Liabilities
|
|
|
|
$ 945,335
|
|
$ 833,372
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
Preferred
stock, no par value, authorized 1,000,000 shares; none
issued
|
|
–
|
|
–
|
Common
stock, no par value, stated value of $.001 per share,
authorized
|
|
|
|
|
100,000,000
shares; 36,641,744 and 36,627,455 shares issued and
|
|
|
|
|
outstanding
at June 30, 2007 and March 31, 2007, respectively
|
|
37
|
|
37
|
Treasury
stock, stated at cost
|
|
|
|
–
|
|
(1,838)
|
Additional
paid-in capital
|
|
|
|
194,230
|
|
193,943
|
Unearned
ESOP shares
|
|
|
|
(919)
|
|
–
|
Accumulated
other comprehensive loss, net of tax (note 8)
|
|
|
|
(22)
|
|
(22)
|
Retained
earnings
|
|
|
|
13,893
|
|
17,376
|
|
|
|
|
207,219
|
|
209,496
|
|
|
|
|
$ 1,152,554
|
|
$ 1,042,868
|
See
accompanying notes to consolidated financial
statements.
FRONTIER
AIRLINES HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited)
|
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2007
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
Passenger
- mainline
|
|
|
|
$ 303,680
|
|
$ 268,365
|
Passenger-
regional partners
|
|
|
|
28,822
|
|
27,329
|
Cargo
|
|
|
|
1,510
|
|
1,618
|
Other
|
|
|
|
10,758
|
|
7,496
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
|
344,770
|
|
304,808
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Flight
operations
|
|
|
|
46,323
|
|
39,836
|
Aircraft
fuel
|
|
|
|
104,713
|
|
90,415
|
Aircraft
lease
|
|
|
|
28,330
|
|
25,882
|
Aircraft
and traffic servicing
|
|
|
|
44,638
|
|
37,988
|
Maintenance
|
|
|
|
24,798
|
|
20,596
|
Promotion
and sales
|
|
|
|
34,297
|
|
29,422
|
General
and administrative
|
|
|
|
15,332
|
|
13,294
|
Operating
expenses - regional partners
|
|
|
|
34,357
|
|
29,483
|
Aircraft
lease and facility exit costs
|
|
|
|
–
|
|
(14)
|
Gains
on sales of assets, net
|
|
|
|
(22)
|
|
(307)
|
Depreciation
|
|
|
|
10,401
|
|
7,532
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
343,167
|
|
294,127
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
1,603
|
|
10,681
|
|
|
|
|
|
|
|
Nonoperating
income (expense):
|
|
|
|
|
|
|
Interest
income
|
|
|
|
3,547
|
|
3,954
|
Interest
expense
|
|
|
|
(8,467)
|
|
(6,832)
|
Other,
net
|
|
|
|
(166)
|
|
45
|
|
|
|
|
|
|
|
Total
nonoperating expense, net
|
|
|
|
(5,086)
|
|
(2,833)
|
|
|
|
|
|
|
|
Income
(loss) before income tax expense
|
|
|
|
(3,483)
|
|
7,848
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
|
–
|
|
3,891
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
$ (3,483)
|
|
$ 3,957
|
|
|
|
|
|
|
|
Earnings
(loss) per share (note 10):
|
|
|
|
|
|
|
Basic
|
|
|
|
$ (0.10)
|
|
$ 0.11
|
Diluted
|
|
|
|
$ (0.10)
|
|
$ 0.10
|
|
|
|
|
|
|
|
Weighted
average shares of
|
|
|
|
|
|
|
common
stock outstanding:
|
|
|
|
|
|
|
Basic
|
|
|
|
36,635
|
|
36,590
|
Diluted
|
|
|
|
36,635
|
|
46,047
|
See
accompanying notes to consolidated financial
statements.
FRONTIER
AIRLINES HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
|
2007
|
|
2006
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
(3,483)
|
|
3,957
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
and
cash equivalents provided by operating activities:
|
|
|
|
|
|
|
|
Compensation
expense under long-term incentive plans and
|
|
|
|
|
|
employee
stock ownership plans
|
|
|
|
|
716
|
|
902
|
Depreciation
and amortization
|
|
|
|
|
10,781
|
|
7,885
|
Provisions
recorded on inventories and assets
|
|
|
|
|
|
|
|
beyond
economic repair
|
|
|
|
|
233
|
|
111
|
Gains
on disposal of equipment and other, net
|
|
|
(22)
|
|
(307)
|
Mark
to market derivative losses, net
|
|
|
|
|
3,743
|
|
185
|
Deferred
tax expenses
|
|
|
–
|
|
3,765
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Restricted
investments
|
|
|
|
|
(15,791)
|
|
(17,089)
|
Receivables
|
|
|
|
|
(9,093)
|
|
(2,351)
|
Security
and other deposits
|
|
|
|
|
(5)
|
|
(101)
|
Prepaid
expenses and other assets
|
|
|
|
|
(1,731)
|
|
(652)
|
Inventories
|
|
|
|
|
3,392
|
|
301
|
Other
assets
|
|
|
|
|
(115)
|
|
181
|
Accounts
payable
|
|
|
|
|
11,300
|
|
(79)
|
Air
traffic liability
|
|
|
|
|
30,860
|
|
23,149
|
Other
accrued expenses
|
|
|
|
|
4,275
|
|
(1,481)
|
Deferred
revenue and other liabilities
|
|
|
|
|
3,481
|
|
2,623
|
Net
cash provided by operating activities
|
|
|
|
|
38,541
|
|
20,999
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Aircraft
lease and purchase deposits made
|
|
|
|
|
(10,518)
|
|
(11,326)
|
Aircraft
lease and purchase deposits applied to aircraft
|
|
|
|
|
23,095
|
|
8,862
|
Proceeds
from the sale of property and equipment and assets held for
sale
|
|
|
249
|
|
36,493
|
Capital
expenditures
|
|
|
|
|
(101,078)
|
|
(44,851)
|
Net
cash used in investing activities
|
|
|
|
|
(88,252)
|
|
(10,822)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock and warrants
|
|
|
|
31
|
|
7
|
Payment
to bank for compensating balances
|
|
|
|
|
–
|
|
(750)
|
Proceeds
from long-term borrowings
|
|
|
|
|
69,665
|
|
–
|
Principal
payments on long-term borrowings
|
|
|
|
|
(7,160)
|
|
(5,753)
|
Payment
of financing fees
|
|
|
|
|
(375)
|
|
(55)
|
Net
cash provided (used) by financing activities
|
|
|
|
|
62,161
|
|
(6,551)
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
|
|
12,450
|
|
3,626
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
|
|
202,981
|
|
272,840
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
|
|
|
215,431
|
|
276,466
|
See
accompanying notes to consolidated financial statements.
FRONTIER
AIRLINES HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
June
30, 2007
1. Basis
of Presentation
The
accompanying unaudited consolidated financial statements of Frontier Airlines
Holdings, Inc., a Delaware corporation (“Frontier Holdings” or the “Company”),
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and the instructions to Form 10-Q and Article
10
of 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
Annual Report of the Company on Form 10-K for the year ended March 31,
2007. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included.
Certain
prior period amounts have been reclassed to conform to the current year
presentation. The marketing component of the sale of the Company’s
EarlyReturns miles, previously reported as a reduction of promotion and
sales expense in the amount of $2,745,000, has been reclassified as other
revenue for the three month period ended June 30, 2006.
The
consolidated financial statements include the accounts of Frontier Holdings,
Frontier Airlines, Inc. (“Frontier”), and Lynx Aviation, Inc. (“Lynx Aviation”).
At this time, Frontier and Lynx Aviation are the only two wholly owned
subsidiaries of Frontier Holdings. The financial performance of Frontier
Holdings is represented by the financial performance of Frontier and includes
only start-up costs for Lynx Aviation because Lynx Aviation has not yet
commenced operations. See Note 11 for operating segment
information.
Financial
results for the Company, and airlines in general, are seasonal in
nature. More recently, results for Frontier’s first and second fiscal
quarters have exceeded its third and fourth fiscal quarters. Results
of operations for the three months ended June 30, 2007 are not necessarily
indicative of the results that may be expected for the year ended March 31,
2008.
Lynx
Aviation
Lynx
Aviation assumed a purchase agreement between Frontier Holdings and Bombardier,
Inc. for ten Q400 turboprop aircraft, each with a seating capacity of 74, with
the option to purchase ten additional aircraft. The aircraft will be
purchased and operated by Lynx Aviation under a separate operating certificate.
Lynx Aviation is currently in the start-up phase of operations. Lynx
Aviation plans to commence revenue service in October 2007 with ten aircraft
in
service by the end of December 2008. Revenue service is subject to
obtaining an operating certificate from the Federal
Aviation Administration (“FAA”).
Frontier
Jet Express
In
January 2007, the Company entered into an agreement with Republic Airlines,
Inc.
(“Republic”), under which Republic will operate up to 17 76-seat Embraer 170
aircraft under the Frontier JetExpress brand. The contract is for an
11-year period from the in-service date of the last aircraft, which is scheduled
for December 2008. The service began on March 4, 2007 and replaces
the CRJ 700 aircraft operated by Horizon Air Industries, Inc.
(“Horizon”). The Company will control the routing, scheduling and
ticketing of this service. The Company compensates Republic for its
services based on Republic’s operating expenses plus a margin on certain of its
expenses. The agreement provides for financial incentives
and
penalties
based on the performance of Republic which are accrued for in the period
earned. In accordance with Emerging Issues Task Force No. 01-08,
“Determining Whether an Arrangement Contains a Lease” (“EITF 01-08”),
the Company has concluded that the Republic agreement contains a lease as the
agreement conveys the right to use a specific number and specific type of
aircraft over a stated period of time, and as such, has reported revenues and
expenses related to Republic on a gross basis. Frontier establishes
the scheduling, routes and pricing of the flights operated as “Frontier
JetExpress” under the agreement. Revenues are pro-rated to the
segment operated by the regional partner based on miles flown and are included
in passenger revenues – regional partners. Expenses directly related
to the flights flown by the regional partner are included in operating expenses
– regional partners. The Company allocates indirect expenses between
mainline and JetExpress operations by using regional partner departures,
available seat miles, or passengers as a percentage of system combined
departures, available seat miles or passengers.
In
September 2003, the Company signed an agreement with Horizon under which Horizon
operated up to nine 70-seat CRJ 700 aircraft under the Frontier JetExpress
brand. In September 2006, the Company amended the agreement with
Horizon to provide that all nine CRJ-700 aircraft would be returned to Horizon
during a one-year ramp down period which began in January 2007 and will be
completed in December 2007. The Company has recorded revenues and
expenses related to Horizon gross, as opposed to net, upon inception of service
in accordance with EITF 01-08.
2. New
Accounting Standards
New
Accounting Standards Not Yet Adopted
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value Measurements (“FAS 157”). FAS 157
defines fair value, establishes a framework for measuring fair value under
U.S.
generally accepted accounting principles and expands disclosures about fair
value measurements. FAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The Company has not yet determined the impact of adopting
FAS 157.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, The Fair Value Option for Financial Assets and Financial
Liabilities ("FAS 159"). This standard permits companies to choose to
measure many financial instruments and certain other items at fair value,
following the provisions of FAS 157. FAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company has not yet determined the impact
of adopting FAS 159.
New
Accounting Standards Adopted During the Quarter
|
The
Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
Statement No. 109, (“FIN 48”), on
April 1, 2007. The Company did not have any
unrecognized tax benefits and there was no effect on the Company’s
financial condition or results of operations as a result of implementing
FIN 48. |
|
|
|
The
Company files income tax returns in the U.S. federal jurisdiction and
various state and local jurisdictions. This Company is no longer subject
to U.S. federal tax examinations for tax years before 2003. State
jurisdictions remain subject to examination for tax years 2002 - 2006.
The
Company believes there will not be any material changes in unrecognized
tax positions over the next 12 months. |
|
|
|
The
Company’s policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As
of the
date of adoption of FIN 48, we did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor were any
interest expense recognized during the
quarter. |
3. Equity
Based Compensation Plans
For
the
three months ended June 30, 2007 and 2006, the Company recognized stock-based
compensation expense of $256,000 and $154,000, respectively, for stock options,
stock appreciation rights (“SARs”) and restricted stock units (“RSUs”).
Unrecognized stock-based compensation expense related to unvested options and
RSU awards outstanding as of June 30, 2007 was approximately $4,534,000, and
will be recorded over the remaining vesting periods of one to five
years. At June 30, 2007, the weighted average remaining recognition
period for options and RSU awards was 3.7 years and 3.9 years awards,
respectively.
During
the three months ended June 30, 2007, the Company granted SARs of 275,470 at
a
weighted average exercise price of $6.03 per share with a grant-date fair value
of $3.53. During the three months ended June 30, 2007, the Company
also granted 156,959 RSUs at a weighted average grant date market value of
$6.01.
The
following table shows the Company’s assumptions used to compute the stock-based
compensation expense for stock option and SAR grants issued during the three
months ended June 30, 2007 and 2006:
|
Three
months ended
June
30,
|
|
2007
|
|
2006
|
Assumptions:
|
|
|
|
Risk-free
interest rate
|
4.55%
|
|
4.85%
|
Dividend
yield
|
0%
|
|
0%
|
Volatility
|
65.19%
|
|
70.82%
|
Expected
life (years)
|
5
|
|
5
|
Exercise
prices for options and SARs outstanding as of June 30, 2007 ranged from $2.13
per share to $24.17 per share. The weighted-average remaining
contractual life of these equity awards is 5.2 years. The aggregate
intrinsic value of vested options and SARs was $266,000 as of June 30,
2007. As of June 30, 2007, the Company had 1,387,000 shares available
for future grants.
4.
|
Property
and Equipment, Net
|
|
As
of June 30, 2007 and March 31, 2007, property and equipment consisted
of
the following:
|
|
|
|
June
30,
|
|
March
31,
|
|
|
|
2007
|
|
2007
|
|
|
|
(In
thousands)
|
|
Aircraft,
spare aircraft parts, and improvements to
|
|
|
|
|
|
leased aircraft
|
|
$ 761,219
|
|
$ 667,364
|
|
Ground
property, equipment and leasehold improvements
|
|
46,149
|
|
42,301
|
|
Computer
software
|
|
11,216
|
|
10,234
|
|
Construction
in progress
|
|
6,853
|
|
5,191
|
|
|
|
825,437
|
|
725,090
|
|
Less
accumulated depreciation
|
|
(129,947)
|
|
(119,959)
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
$ 695,490
|
|
$ 605,131
|
|
Property
and equipment includes capitalized interest of $2,598,000 and $1,970,000
at June 30, 2007 and March 31, 2007,
respectively.
|
|
During
the three months ended June 30, 2007, the Company recorded additional
depreciation expense of $1,359,000 related to a change in estimate
of the
useful life of their aircraft seats due the implementation of a
program to replace the Airbus seats with new leather seats during
the next
two fiscal years.
|
5.
|
Deferred
Revenue and Other
Liabilities
|
|
At
June 30, 2007 and March 31, 2007, deferred revenue and other liabilities
consisted of the following:
|
|
|
June
30,
|
|
March
31,
|
|
|
2007
|
|
2007
|
|
|
(In
thousands)
|
|
Deferred
revenue primarily related to co-branded credit card
|
$ 22,991
|
|
$ 19,047
|
|
Deferred
rent
|
18,345
|
|
18,861
|
|
Other
|
683
|
|
630
|
|
|
|
|
|
|
Total
deferred revenue and other liabilities
|
42,019
|
|
38,538
|
|
Less
current portion
|
(16,296)
|
|
(16,400)
|
|
|
|
|
|
|
|
$ 25,723
|
|
$ 22,138
|
6.
Other
Accrued Expenses
At June 30, 2007 and March 31, 2007, other accrued expenses consisted of
the
following:
|
|
June
30,
|
|
March
31,
|
|
|
2007
|
|
2007
|
|
|
(In
thousands)
|
|
Accrued salaries and benefits
|
$ 38,276
|
|
$ 42,616
|
|
Federal excise and other passenger taxes payable
|
33,918
|
|
26,914
|
|
Property and income taxes payable
|
5,018
|
|
2,593
|
|
Other
|
6,928
|
|
8,201
|
|
|
|
|
|
|
|
$ 84,140
|
|
$ 80,324
|
7.
Long-Term Debt
During
the three months ended June 30, 2007, the Company borrowed $69,665,000 for
the
purchase of three Airbus A318 aircraft. These senior loans have terms
of 12 years and are payable monthly installments of $227,000, $227,000 and
$238,000 as of June 30, 2007, including interest, payable in arrears, with
a
floating interest rate adjusted quarterly based on LIBOR. These loans each
bear
interest at rates of 7.36% at June 30, 2007. At the end of the term,
there are balloon payments of $9,263,000, $9,291,000, and $9,312,000 for each
of
these loans. A security interest in the three purchased aircraft
secures the loans.
Revolving Facilities and Letters of credit
In
July
2005, the Company entered into an agreement with a financial institution for
a
$5,000,000 revolving line of credit that allows the Company to issue letters
of
credit up to $3,500,000. In June 2006, the revolving letter of credit
was increased to $5,750,000 and it now permits the Company to issue letters
of
credit up to $5,000,000 and matures in June 2008. As of June 30, 2007, the
Company has utilized the entire amount available for letters of credit under
this agreement for standby letters of credit which provide credit support for
certain facility leases. A cash compensating balance of $2,750,000
was required to be maintained and to secure the letters of credit, which have
been classified as restricted investments on the consolidated balance
sheets.
In
March
2005, the Company entered into a two-year revolving credit facility (“Credit
Facility”) to be used in support of letters of credit and for general corporate
purposes, which was renewed for another two-year period ending May
2009. Under this facility, the Company may borrow the lesser of
$20,000,000 (“maximum commitment amount”) or 60% of the current market value of
pledged eligible spare parts. The amount available for letters of
credit is equal to the maximum commitment amount under the facility less current
borrowings. Interest under the Credit Facility is based on the
Eurodollar rate plus a margin or prime plus a margin. In addition,
there is a quarterly commitment fee of 0.50% per annum of the unused portion
of
the facility based on the maximum commitment amount. The Credit
Facility contains a covenant that will not permit the Company to maintain an
unrestricted cash and cash equivalent position of less than $120,000,000, with
a
30-day cure period. The amount available for borrowings under the Credit
Facility based on the current market value of the pledged eligible spare parts
at June 30, 2007 was $18,563,000. The Company has reduced the amount
available for borrowings by letters of credit issued of
$11,300,000.
At June 30, 2007, the Company was in compliance with the covenants for all
debt
and lease agreements.
8. Equity
Treasury
Stock and Unearned ESOP shares
In
March
2007, the Company purchased 300,000 shares of its common stock for
$1,838,000. These shares were purchased to fund the Company’s 2007
contribution to the Employee Stock Ownership Plan (“ESOP”). These shares were
contributed to the ESOP in April 2007. Compensation expense for our
ESOP for three months ended June 30, 2007 was $459,000.
Comprehensive
Income (Loss)
A
summary
of the comprehensive income (loss) at June 30, 2007 and 2006 is as
follows:
|
June
30,
|
June
30,
|
|
2007
|
2006
|
|
(In
thousands)
|
Net
income (loss)
|
$ (3,483)
|
$ 3,957
|
Other
comprehensive income:
|
|
|
Unrealized
gain (loss) on derivative
|
|
|
instrument,
net of tax
|
–
|
10
|
Total
comprehensive income (loss)
|
$ (3,483)
|
$ 3,967
|
9.
Retirement Health Plan
Pursuant
to the Company’s collective bargaining agreement with its pilots, retired pilots
and their dependents may retain medical benefits under the terms and conditions
of the Health and Welfare Plan for Employees of Frontier Airlines, Inc. until
age 65. The costs of retiree medical benefits are continued under the
same contribution schedule as active employees.
Net
periodic benefit cost for the three months ended June 30, 2007 and 2006 include
the following components:
|
June
30,
|
|
June
30,
|
|
2007
|
|
2006
|
|
(In
thousands)
|
Service
cost
|
$ 260
|
|
$ 248
|
Interest
cost
|
87
|
|
79
|
Net
actuarial loss (gain)
|
–
|
|
3
|
Net
periodic benefit cost
|
$ 347
|
|
$ 330
|
10. Earnings
(Loss) Per Share
The
following table sets forth the computation of basic and diluted earnings (loss)
per share:
|
|
|
Three
months ended June 30, 2007
|
Three
months ended June 30, 2006
|
|
|
|
(In
thousands)
|
|
Numerator:
|
|
|
|
|
Net
income (loss) as reported
|
$ (3,483)
|
$ 3,957
|
|
|
Interest
on convertible notes, net of capitalized interest
|
–
|
498
|
|
|
|
|
|
|
Numerator
for diluted earnings (loss) per share
|
$ (3,483)
|
$ 4,455
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted
average shares outstanding, basic
|
36,635
|
36,590
|
|
|
Effects
of diluted securities:
|
|
|
|
|
Conversion
of convertible notes
|
–
|
8,900
|
|
|
Employee
stock awards
|
–
|
128
|
|
|
Warrants
|
–
|
429
|
|
|
|
|
|
|
Adjusted
weighted average shares outstanding, diluted
|
36,635
|
46,047
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share, basic
|
$ (0.10)
|
$ 0.11
|
|
Earnings
(loss) per share, diluted
|
$ (0.10)
|
$ 0.10
|
For
the
three months ended June 30, 2007, interest on convertible notes of $665,000
and
8,900,000 shares were excluded from the calculation of diluted earnings per
share because they were anti-dilutive. For the three months ended June 30,
2007,
the common stock equivalents of the weighted average options, SARS, RSUs and
warrants outstanding of 254,000 were excluded from the calculation of diluted
earnings per share because they were anti-dilutive. For the three months ended
June 30, 2007, the weighted average options, SARS and RSUs outstanding of
2,132,000 were excluded from the calculation of diluted earnings per share
because the exercise prices were greater than the average market price of the
common stock. For the three months ending June 30, 2006, the weighted
average options, SARS, RSUs and warrants outstanding of 2,278,000 were excluded
from the calculation of diluted earnings per share because the exercise price
of
the options, SARs, RSUs and warrants were greater than the average market price
of the common stock.
-
10
-
11. Operating
Segment Information
The
Company has three primary operating and reporting segments, consisting of
mainline operations, Frontier JetExpress, and Lynx Aviation. Mainline
operations include service operated by Frontier using Airbus
aircraft. Frontier JetExpress includes regional jet service operated
by Horizon and Republic. Lynx Aviation, a subsidiary of Frontier
Holdings, is currently in the start-up phase of operations and will operate
using Bombardier Q400 aircraft.
Financial
information for the three months ended June 30, 2007 and 2006 for the Company’s
operating segments is as follows:
|
|
June
30,
|
June
30,
|
|
|
2007
|
2006
|
|
|
(In
thousands)
|
|
Operating
revenues:
|
|
|
|
Mainline
|
$ 315,948
|
$ 277,479
|
|
Frontier
JetExpress
|
28,822
|
27,329
|
|
Consolidated
|
$ 344,770
|
$ 304,808
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
Mainline
|
$ 9,366
|
$ 12,835
|
|
Frontier
JetExpress
|
(5,535)
|
(2,154)
|
|
Lynx
Aviation
|
(2,228)
|
–
|
|
Consolidated
|
$ 1,603
|
$ 10,681
|
|
|
|
|
|
Total
assets at end of period:
|
|
|
|
Mainline
|
$ 1,122,112
|
$ 997,703
|
|
Frontier
JetExpress
|
537
|
744
|
|
Lynx
Aviation
|
29,905
|
–
|
|
Consolidated
|
$ 1,152,554
|
$ 998,447
|
In
July
2007, Lynx Aviation borrowed $15,837,000 for the purchase of one Bombardier
Q400
aircraft. The aircraft loan is a variable rate interest only loan
with a maturity date of September 30, 2007. Once an operating
certificate is granted to Lynx, the Company has secured long-term financing
for
this aircraft. A security interest in the aircraft secures the
loan and it is guaranteed by both Frontier and Frontier Holdings.
-
11
-
Item 2: Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
Special
Note About Forward-Looking Statements. This report contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 (the “Exchange Act”) that describe the business and
prospects of Frontier Airlines Holdings, Inc. and the expectations of our
company and management. All statements 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,” “intend,” “project,”
“believe” and similar expressions are intended to identify forward-looking
statements. Forward-looking statements are inherently subject to risks
and
uncertainties, many of which cannot be predicted with accuracy and some
of which
might not even be anticipated. These risks and uncertainties include,
but are not limited to: the timing of, and expense associated with,
expansion and modification of our operations in accordance with our business
strategy or in response to competitive pressures or other factors; failure
of
our new markets to perform as anticipated; the inability to achieve a level
of
revenue through fares sufficient to obtain profitability due to competition
from
other air carriers and excess capacity in the markets we serve; the inability
to
obtain sufficient gates at Denver International Airport (“DIA”) to accommodate
the expansion of our operations; the inability to successfully lease or
build a
new maintenance hanger prior to a potential lease termination of our primary
maintenance hanger located at DIA that is currently on a month-to-month
sublease
with Continental Airlines; general economic factors and behavior of the
fare-paying public and its potential impact on our liquidity; terrorist
attacks
or other incidents that could cause the public to question the safety and/or
efficiency of air travel; hurricanes and other natural forces and their
impact
on air transportation and oil production; operational disruptions, including
weather; industry consolidation; the impact of labor disputes; enhanced
security
requirements; changes in the government’s policy regarding relief or assistance
to the airline industry; the economic environment of the airline industry
generally; increased federal scrutiny of low-fare carriers generally that
may
increase our operating costs or otherwise adversely affect us; actions
of
airlines competing in our primary markets, such as increasing capacity
and
pricing actions of United Airlines, Southwest Airlines, and other competitors,
particularly in some of our Mexico destinations due to the increase in
the
number of domestic airlines authorized to serve Mexican markets from the
U.S.;
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, debt or operating lease financing
necessary to acquire aircraft which we have ordered; uncertainties regarding
aviation fuel price; inherent risks of entering into new business strategies,
such as the start-up of a new subsidiary using a different type of aircraft
and
in different markets and a new regional jet partner, and various risk factors
to
our business discussed elsewhere in this report. Forward-looking
statements include the statements in “Outlook” below. Because
our business, like that of the airline industry generally, is characterized
by
high fixed costs relative to revenues, small fluctuations in our revenue
per
available seat mile (“RASM”) or cost per available seat mile (“CASM”) can
significantly affect operating results. Additional information regarding
these
and other factors may be contained in our SEC filings, including without
limitation, our Form 10-K for the year ended March 31,
2007. These risks and factors are not exclusive, and we
undertake no obligation to publicly update or revise any forward-looking
statements to reflect events or circumstances that may arise after the
date of
this filing.
Our
Business
Now
in
our 14th year of operations, we are a low cost, affordable fare airline
operating primarily in a hub and spoke fashion connecting cities coast to coast
through our hub at Denver International Airport (“DIA”). In this
report, references to “us,” “we,” or the “company” refer to the consolidated
results of Frontier Holdings unless the context requires
otherwise. We are the second largest jet service carrier at DIA based
on departures and in January 2007, we became a major carrier as designated
by
the DOT. As of July 21, 2007, we, in conjunction with our Frontier
JetExpress brand operated by Horizon and Republic (“Frontier JetExpress”),
operate routes linking our Denver hub to 49 U.S. cities spanning the nation
from
coast to coast, seven cities in Mexico and two cities in Canada. We
also provide service to Mexico from 11 non-hub cities.
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 in
service to 60 jets as of July 21, 2007 (38 of which we lease and 22 of which
we
own), consisting of 49 Airbus A319s and 11 Airbus A318s. In April
2005, we
completed
our plan to replace our Boeing aircraft with new purchased and leased Airbus
jet
aircraft. During the quarters ended June 30, 2007 and 2006, we
increased year-over-year mainline capacity by 14.2% and 18.9%, respectively,
and
we increased year-over-year mainline passenger traffic by 13.4% and 24.2%,
respectively. We intend to continue our growth strategy and to expand to new
markets and add frequency to existing markets that we believe are underserved,
but at a lower growth rate than in the past two years.
On
January 11, 2007, we signed an agreement with Republic Airlines Inc.
(“Republic”) under which Republic will operate up to 17 Embraer 170 aircraft
with capacity of 76-seats under our Frontier JetExpress brand. The
contract is for an 11-year period from the in-service date of the last aircraft,
which is scheduled for December 2008. The service began on March 4,
2007 and replaces the CRJ 700 aircraft operated by Horizon Air Industries,
Inc.
(“Horizon”), which will expire on return of the last aircraft in December
2007. We control the routing, scheduling and ticketing of this
service. We compensate Republic for its services based on its
operating expenses plus a margin on certain of its expenses. The
agreement provides for financial incentives and penalties based on the
performance of Republic.
In
September 2006, we formed a new subsidiary, Lynx Aviation, Inc. (“Lynx
Aviation”). Lynx Aviation has assumed a purchase agreement between Frontier
Holdings and Bombardier, Inc. for ten Q400 turboprop aircraft, each with a
seating capacity of 74, with the option to purchase ten additional
aircraft. The aircraft will be purchased and operated by Lynx
Aviation under a separate operating certificate. Lynx Aviation is currently
in
the process of obtaining FAA authorization to provide scheduled air
transportation service. Lynx Aviation submitted its application to
the Department of Transportation, (“DOT”) in January 2007, and received
conditional DOT approval and is currently in the process of securing the
appropriate Federal Aviation Administration (“FAA”) approval. Lynx
Aviation expects it will receive its authorizations during the end of our second
fiscal quarter and commence revenue service operations in October 2007 with
ten aircraft in service by the end of December 2008.
Following
is a list of routes that we have started serving or have announced our intention
to serve from April 1, 2007 through July 21, 2007:
Destination
|
Commencement
Date
|
Operated
By
|
|
|
|
DIA
to Louisville, Kentucky
|
April
1, 2007
|
Frontier
JetExpress
|
DIA
to Vancouver, British Colombia, Canada
|
May
5, 2007
|
Frontier
Mainline service
|
DIA
to Memphis, Tennessee
|
May
12, 2007
|
Frontier
Mainline service
|
DIA
to Jacksonville, Florida
|
June
15, 2007
|
Frontier
Mainline service
|
DIA
to Baton Rouge, Louisiana
|
August
15, 2007
|
Frontier
JetExpress
|
DIA
to Wichita, Kansas
|
October
1, 2007
|
Lynx
Aviation**
|
DIA
to Sioux City, Iowa
|
October
1, 2007
|
Lynx
Aviation**
|
DIA
to Rapid City, South Dakota
|
October
5, 2007
|
Lynx
Aviation**
|
DIA
to Palm Beach International Airport (PBI)
|
November
15, 2007
|
Frontier
Mainline service
|
DIA
to San Jose, Costa Rica
|
November
30, 2007
|
Frontier
Mainline service
|
|
|
|
Memphis
to Las Vegas, Nevada
|
May
12, 2007
|
Frontier
Mainline service
|
Memphis
to Orlando, Florida
|
May
12, 2007
|
Frontier
Mainline service
|
Dallas/Fort
Worth, Texas to Mazatlan, Mexico
|
June
7, 2007
|
Frontier
Mainline service
|
** Lynx
Aviation service is contingent on FAA approval
We
began
service between San Francisco, California and Los Angeles, California with
five
daily frequencies on June 29, 2006 and service between San Francisco, California
and Las Vegas, Nevada on December 14, 2006 with one daily frequency and we
terminated these scheduled routes effective July 10, 2007. In July
2007, we announced that we will no longer provide service to Reno, Nevada
effective September 5, 2007.
We
have
applied for DOT approval to start seasonal once-a-week flights from San Diego
to
Mazatlan, Mexico, with Airbus A319 planes from December 15 to July 5
annually. We also have applied for permission to start seasonal
service from San Jose, California to Puerto Vallarta, Mexico and flights from
Sacramento, California to Puerto Vallarta Mexico. These routes are to be flown
under the Frontier JetExpress brand, operated by Republic, starting December
15,
2007. We have received DOT approval to start service from Milwaukee, Wisconsin
to Cancun, Mexico and Albuquerque, New Mexico to Puerto Vallarta,
Mexico.
As
of
July 21, 2007, Frontier JetExpress provided service to Billings, Montana; El
Paso, Texas; Little Rock, Arkansas; Louisville, Kentucky; Oklahoma City,
Oklahoma; Tulsa, Oklahoma, and Calgary, Alberta, Canada and supplements our
mainline service to Albuquerque, New Mexico; Boise, Idaho; Dayton, Ohio; Omaha,
Nebraska; Spokane, Washington; and Tucson, Arizona.
We
currently lease 22 gates on Concourse A at DIA on a preferential
basis. We use these 22 gates and share use of up to seven common use
regional jet parking positions to operate approximately 308 daily mainline
flight departures and arrivals and 64 Frontier JetExpress daily system flight
departures and arrivals. To support future growth, we took steps
necessary in June 2007 to obtain preferential lease rights for two additional
gates at DIA on Concourse C starting in September 2007. Final
approval of our preferential rights rest with the City and County of
Denver.
Our
filings with the Securities and Exchange Commission (the “SEC”) are available at
no cost on our website, www.frontierairlines.com, in the Investor
Relations folder contained in the section titled “About
Frontier”. These reports include our annual report on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K, Section 16
reports on Forms 3, 4 and 5, and any related amendments or other documents,
and
are made available as soon as reasonably practicable after we file the materials
with the SEC.
Our
corporate headquarters are located at 7001 Tower Road, Denver, Colorado
80249. Our administrative office telephone number is 720-374-4200 and
our reservations telephone number is 800-432-1359.
Overview
We
intend
to continue our focused growth strategy while keeping our operating costs
low. One of the key elements to keeping our costs low was the
completion of the mainline fleet transition from a Boeing fleet to an all Airbus
fleet in April 2005. This strategy produces cost savings because crew
training is standardized for aircraft of a common type, maintenance issues
are
simplified, spare parts inventory is reduced, and scheduling is more efficient.
We also keep our operating costs low by operating only two types of Airbus
aircraft with a single class of service in our mainline
fleet. Operating a single class of service simplifies our operations,
enhances productivity, increases our capacity and offers an operating cost
advantage.
As
of July 21, 2007, we had remaining firm purchase commitments for ten Airbus
320
aircraft from Airbus and nine Q400 aircraft from Bombardier. We intend to use
these additional aircraft to provide service to new markets and to add
frequencies to existing markets that we believe are underserved.
The
airline industry continues to operate in an intensely competitive
market. We expect competition will remain intense, as over-capacity
in the industry continues to exist. Business and leisure travelers continue
to
reevaluate their travel budgets and remain highly price
sensitive. Increased competition has prompted aggressive strategies
from competitors through discounted fares and sales
promotions. Additionally, the intense competition has created
financial hardship for some of our competitors that have been forced to reduce
capacity or have been forced into bankruptcy.
Highlights
from the Quarter
|
·
|
We
took delivery of three new Airbus A318 aircraft, two of which started
revenue service during the first
quarter.
|
|
·
|
We
announced a plan to replace the seats in our Airbus fleet with lighter
leather seats. The transition will begin in July and will continue
over a
period of 15 to 18 months to complete the retrofit of the entire
Airbus
fleet. We will be adding four additional seats to both types of
Airbus aircraft starting in our third fiscal quarter. The newly configured
A318 will have 118 seats and the new A319 will have 136
seats.
|
|
·
|
We
received DOT authority to provide service between Denver and San
Jose,
Costa Rica. Costa Rica will be the fourth country we
serve.
|
|
·
|
Our
EarlyReturns Frequent Flyer program was named the “Program of the
Year” at the InsideFlyer Magazine's Freddie
Awards. EarlyReturns also won “Best Award” and
placed in six other award
catagories.
|
Quarter
in Review
During
the quarter ended June 30, 2007, we had a consolidated net loss of $3,483,000
as
compared to net income of $3,957,000 during the same period last
year. Our average fuel cost per gallon, including hedging activities,
was $2.27 during the quarter ended June 30, 2007, compared to $2.28 during
the quarter ended June 30, 2006, a decrease of 0.4%. The
average cost of fuel for the quarter ended June 30, 2007 includes a non-cash
mark to market derivative loss of $3,743,000 or 8.1¢ per gallon. The
average cost of fuel for the quarter ended June 30, 2006 includes a non-cash
mark to market derivative loss of $185,000 or 0.5¢ per gallon. Our
net loss for the quarter ended June 30, 2007 also includes $2,228,000 of
start-up costs for Lynx Aviation.
Frontier
Airlines Holdings, Inc. (“Frontier Holdings”) includes our mainline operations
which, as of June 30, 2007, consisted of 59 Airbus aircraft; our Frontier
JetExpress Brand operated by Horizon and Republic using seven CRJ 700 aircraft
and four Embraer ERJ-170 aircraft (“Regional Partners”); and Lynx Aviation,
which is in its start-up phase of operations. We anticipate that Lynx Aviation
will begin revenue service in October 2007. Lynx Aviation and Jet
Express services are separate and apart from our mainline
operations.
The
break-out of our mainline, Regional Partners and Lynx Aviation operations from
our consolidated statement of operations are as follows (in
thousands):
|
Mainline
|
Regional
Partners
|
Lynx
Aviation
|
Consolidated
|
|
Three
months ended
|
Three
months ended
|
Three
months ended
|
Three
months ended
|
|
June
30, 2007
|
June
30, 2007
|
June
30, 2007
|
June
30, 2007
|
Revenues:
|
|
|
|
|
Passenger
- mainline
|
$ 303,680
|
$ –
|
$ –
|
$ 303,680
|
Passenger
- regional partner
|
–
|
28,822
|
–
|
28,822
|
Cargo
|
1,510
|
–
|
–
|
1,510
|
Other
|
10,758
|
–
|
–
|
10,758
|
Total
revenues
|
315,948
|
28,822
|
–
|
344,770
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Flight
operations
|
45,226
|
–
|
1,097
|
46,323
|
Aircraft
fuel
|
104,713
|
–
|
–
|
104,713
|
Aircraft
lease
|
28,330
|
–
|
–
|
28,330
|
Aircraft
and traffic servicing
|
44,591
|
–
|
47
|
44,638
|
Maintenance
|
24,370
|
–
|
428
|
24,798
|
Promotion
and sales
|
34,296
|
–
|
1
|
34,297
|
General
and administrative
|
14,733
|
–
|
599
|
15,332
|
Operating
expenses - regional partner
|
–
|
34,357
|
–
|
34,357
|
Gains
on sales of assets, net
|
(22)
|
–
|
–
|
(22)
|
Depreciation
|
10,345
|
–
|
56
|
10,401
|
Total
operating expenses
|
306,582
|
34,357
|
2,228
|
343,167
|
Operating
income (loss)
|
$ 9,366
|
$
(5,535)
|
$ (2,228)
|
$ 1,603
|
Our
mainline passenger yield per revenue passenger mile (“RPM”) was 11.64¢ and
11.69¢ for the quarters ended June 30, 2007 and 2006, respectively, a decrease
of 0.4%. Our mainline average fare was $101.43 for the quarter ended
June 30, 2007 as compared to $102.22 for the quarter ended June 30, 2006, a
decrease of 0.8%. Our length of haul was 952 and 950 miles for the
quarters ended June 30, 2007 and 2006, respectively, an increase of
0.2%. Our mainline load factor was 81.3% for the quarter ended June
30, 2007 as compared to 81.9% for the quarter ended June 30, 2006, a decrease
of
0.6 points. Our mainline passenger RASM for the quarter ended June
30, 2007 and 2006 was 9.46¢ and 9.57¢, respectively, a decrease of
1.1%.
We
have
relatively low operating expenses excluding fuel because we operate only two
similar types of aircraft in a single class of service with high utilization
rates. Our mainline CASM for the quarters ended June 30, 2007 and
2006 was 9.62¢ and 9.49¢, respectively, an increase of 1.4%. Our
mainline CASM excluding fuel for the quarter ended June 30, 2007 was 6.33¢
compared to 6.25¢ for the comparable period last year, an increase of
1.3%.
An
airline's mainline break-even load
factor is the passenger load factor that will result in operating revenues
being
equal to operating expenses, assuming constant revenue per passenger mile and
expenses. For the quarter ended June 30, 2007, our mainline
break-even load factor was 80.1% compared to our achieved passenger load factor
of 81.3%. Our mainline break-even load factor for the quarter ended
June 30, 2006 was 78.8% compared to our achieved passenger load factor of
81.9%. Our mainline break-even load factor increased from the prior
comparable period as a result of an increase in our mainline CASM excluding
Lynx
Aviation to 9.62¢ during the period ended June 30, 2007 from 9.49¢ during the
period ended June 30, 2006, or 1.4%, and a decrease in our mainline RASM of
1.1%.
Small
fluctuations in our RASM or CASM can significantly affect operating results
because we, like other airlines, have high fixed costs in relation to revenues.
Airline operations are highly sensitive to various factors, including the
actions of competing airlines and general economic factors, which can adversely
affect our liquidity, cash flows and results of operations.
Results
of Operations
We
had a
consolidated net loss of $3,483,000 or 10¢ per diluted share for the quarter
ended June 30, 2007, as compared to net income of $3,957,000 or 10¢ per diluted
share for the quarter ended June 30, 2006. Included in our net
loss for the quarter ended June 30, 2007 was a non-cash mark to market
derivative loss which increased fuel expense by $3,743,000. This item
increased our net loss by 11¢ per share for the quarter ended June 30,
2007. Included in our net loss for the quarter ended June 30, 2006
was a non-cash mark to market derivative loss which increased fuel expense
by
$185,000. This item did not impact diluted earnings per share for the
quarter ended June 30, 2006.
The
following table provides certain of our financial and operating data for the
year ended March 31, 2007 and the quarters ended June 30, 2007 and
2006. Mainline and combined data excludes the results of Lynx
Aviation (we anticipate Lynx Aviation to start revenue service in October
2007).
|
Year
Ended
March
31,
|
|
Three
Months Ended
June
30,
|
|
June
30, 2006 to June 30, 2007
|
|
2007
|
|
2007
|
2006
|
|
%
Change
|
Selected
Operating Data - Mainline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
$ 1,037,302
|
|
$ 303,680
|
$ 268,365
|
|
13.2%
|
Revenue
passengers carried (000s)
|
9,140
|
|
2,722
|
2,404
|
|
13.2%
|
Revenue
passenger miles (RPMs) (000s) (2)
|
8,532,577
|
|
2,590,906
|
2,284,552
|
|
13.4%
|
Available
seat miles (ASMs) (000s) (3)
|
11,310,070
|
|
3,186,062
|
2,789,113
|
|
14.2%
|
Passenger
load factor (4)
|
75.4%
|
|
81.3%
|
81.9%
|
|
(0.6
pts)
|
Break-even
load factor (5)
|
76.0%
|
|
80.1%
|
78.8%
|
|
1.3
pts.
|
Block
hours (6)
|
234,965
|
|
66,218
|
57,018
|
|
16.1%
|
Departures
|
97,554
|
|
26,833
|
23,490
|
|
14.2%
|
Average
seats per departure
|
129.6
|
|
129.1
|
129.5
|
|
(0.3%)
|
Average
stage length
|
895
|
|
920
|
917
|
|
0.3%
|
Average
length of haul
|
934
|
|
952
|
950
|
|
0.2%
|
Average
daily block hour utilization (7)
|
11.9
|
|
12.5
|
12.2
|
|
2.5%
|
Passenger
yield per RPM (cents) (8)
|
12.05
|
|
11.64
|
11.69
|
|
(0.4%)
|
Total
yield per RPM (cents) (9), (10)
|
12.62
|
|
12.19
|
12.15
|
|
0.3%
|
Passenger
yield per ASM (RASM) (cents) (11)
|
9.09
|
|
9.46
|
9.57
|
|
(1.1%)
|
Total
yield per ASM (cents) (12)
|
9.52
|
|
9.92
|
9.95
|
|
(0.3%)
|
Cost
per ASM (cents) (CASM)
|
9.46
|
|
9.62
|
9.49
|
|
1.4%
|
Fuel
expense per ASM (cents)
|
3.03
|
|
3.29
|
3.24
|
|
1.5%
|
Cost
per ASM excluding fuel (cents) (13)
|
6.43
|
|
6.33
|
6.25
|
|
1.3%
|
Average
fare (14)
|
$ 102.59
|
|
$ 101.43
|
$ 102.22
|
|
(0.8%)
|
Average
aircraft in service
|
54.1
|
|
58.4
|
51.3
|
|
13.8%
|
Aircraft
in service at end of period
|
57
|
|
59
|
53
|
|
11.3%
|
Average
age of aircraft at end of period
|
3.2
|
|
3.3
|
2.7
|
|
22.2%
|
Average
fuel cost per gallon (15)
|
$ 2.12
|
|
$ 2.27
|
$ 2.28
|
|
(0.4%)
|
Fuel
gallons consumed (000's)
|
161,616
|
|
46,075
|
39,722
|
|
16.0%
|
-
18
-
Selected
Operating Data - Regional Partners:
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
$ 94,164
|
|
$ 28,822
|
|
$ 27,329
|
|
5.5%
|
Revenue
passengers carried (000s)
|
899
|
|
290
|
|
264
|
|
9.8%
|
Revenue
passenger miles (RPMs) (000s) (2)
|
576,431
|
|
177,934
|
|
170,450
|
|
4.4%
|
Available
seat miles (ASMs) (000s) (3)
|
799,914
|
|
243,744
|
|
214,881
|
|
13.4%
|
Passenger
load factor (4)
|
72.1%
|
|
73.0%
|
|
79.3%
|
|
(6.3
pts.)
|
Passenger
yield per RPM (cents) (8)
|
16.34
|
|
16.20
|
|
16.03
|
|
1.1%
|
Passenger
yield per ASM (RASM) (cents) (11)
|
11.77
|
|
11.82
|
|
12.72
|
|
(7.1%)
|
Cost
per ASM (cents)
|
13.55
|
|
14.10
|
|
13.72
|
|
2.8%
|
Average
fare
|
$ 104.72
|
|
$ 99.32
|
|
$ 103.49
|
|
(4.0%)
|
Aircraft
in service at end of period
|
9
|
|
11
|
|
9
|
|
22.2%
|
|
Year
Ended
March
31,
|
|
Three
Months Ended
June
30,
|
|
June
30, 2006 to June 30, 2007
|
|
2007
|
|
2007
|
|
2006
|
|
%
Change
|
Selected
Operating Data - Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
$ 1,131,466
|
|
$ 332,502
|
|
$ 295,694
|
|
12.4%
|
Revenue
passengers carried (000s)
|
10,039
|
|
3,012
|
|
2,668
|
|
12.9%
|
Revenue
passenger miles (RPMs) (000s) (2)
|
9,109,008
|
|
2,768,840
|
|
2,455,002
|
|
12.8%
|
Available
seat miles (ASMs) (000s) (3)
|
12,109,984
|
|
3,429,806
|
|
3,003,994
|
|
14.2%
|
Passenger
load factor (4)
|
75.20%
|
|
80.7%
|
|
81.7%
|
|
(1.0
pts.)
|
Passenger
yield per RPM (cents) (8)
|
12.32
|
|
11.93
|
|
11.99
|
|
(0.5%)
|
Total
yield per RPM (cents) (9), (10)
|
12.85
|
|
12.45
|
|
12.42
|
|
0.2%
|
Passenger
yield per ASM (cents) (11)
|
9.27
|
|
9.63
|
|
9.80
|
|
(1.7%)
|
Total
yield per ASM (cents) (12)
|
9.67
|
|
10.05
|
|
10.15
|
|
(1.0%)
|
Cost
per ASM (cents)
|
9.76
|
|
10.00
|
|
9.79
|
|
2.1%
|
(1)
|
“Passenger
revenue” includes revenues for reduced rate stand-by passengers, charter
revenues, administrative fees, and revenue recognized for unused
tickets
that are greater than one year from issuance date. The
incremental revenue from passengers connecting from regional flights
to
mainline flights is included in our mainline passenger
revenue.
|
(2)
|
“Revenue
passenger miles,” or RPMs, are determined by multiplying the number of
fare-paying passengers carried by the distance flown. This
represents the number of miles flown by revenue paying
passengers.
|
(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. This represents the percentage of
aircraft seating capacity that is actually
utilized.
|
(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.
|
A
reconciliation of the components of the calculation of mainline break-even
load
factor is as follows:
|
Year
Ended March 31,
|
Three
Months Ended
June
30,
|
|
2007
|
2007
|
2006
|
|
(In
thousands)
|
Net
(income) loss
|
$ 20,370
|
$ 3,483
|
$ (3,957)
|
Income
tax (expense) benefit
|
4,626
|
–
|
(3,891)
|
Passenger
revenue
|
1,037,302
|
303,680
|
268,365
|
Regional
partner expense
|
(108,355)
|
(34,357)
|
(29,483)
|
Regional
partner revenue
|
94,164
|
28,822
|
27,329
|
Lynx
Aviation start-up expenses
|
(3,139)
|
(2,228)
|
–
|
Charter
revenue
|
(8,861)
|
(2,195)
|
(1,389)
|
Passenger
revenue mainline (excluding charter) required to
break-even
|
$ 1,036,107
|
$ 297,205
|
$ 256,974
|
|
Year
Ended
March
31,
|
|
Three
Months Ended
June
30,
|
|
2007
|
|
2007
|
|
2006
|
Calculation
of mainline break-even load factor :
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue - mainline (excluding charter)
|
|
|
|
|
|
required
to break-even ($000s)
|
$ 1,036,107
|
|
$ 297,205
|
|
$ 256,974
|
Mainline
yield per RPM (cents)
|
12.05
|
|
11.64
|
|
11.69
|
|
|
|
|
|
|
Mainline
RPMs (000s) required to break-even
|
|
|
|
|
|
assuming
constant yield per RPM
|
8,598,398
|
|
2,553,308
|
|
2,198,238
|
Mainline
ASMs (000's)
|
11,310,070
|
|
3,186,062
|
|
2,789,113
|
Mainline
break-even load factor
|
76.0%
|
|
80.1%
|
|
78.8%
|
(6)
|
“Mainline
block hours” represent the time between aircraft gate departure and
aircraft gate arrival.
|
(7)
|
“Mainline
average daily block hour utilization” represents the total block hours
divided by the number of aircraft days in service, divided by
the weighted
average of aircraft in our fleet during that period. The number
of aircraft includes all aircraft on our operating certificate,
which
includes scheduled aircraft, as well as aircraft out of service
for
maintenance and operational spare aircraft, and excludes aircraft
removed
permanently from revenue service or new aircraft not yet placed
in revenue
service. This represents the amount of time that our aircraft
spend in the air carrying passengers.
|
(8)
|
“Yield
per RPM” is determined by dividing passenger revenues (excluding charter
revenue) by revenue passenger miles.
|
(9)
|
For
purposes of these yield calculations, charter revenue is excluded
from
passenger revenue. These figures may be deemed non-GAAP
financial measures under regulations issued by the Securities
and Exchange
Commission. We believe that presentation of yield excluding
charter revenue is useful to investors because charter flights
are not
included in RPMs or ASMs. Furthermore, in preparing operating
plans and forecasts, we rely on an analysis of yield exclusive
of charter
revenue. Our presentation of non-GAAP financial measures should
not be viewed as a substitute for our financial or statistical
results
based on GAAP. The reconciliation of passenger revenue
excluding charter revenue is as
follows:
|
|
Year
Ended
March
31,
|
|
Three
Months Ended
June
30,
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Passenger
revenue – mainline, as reported
|
$
1,037,302
|
|
$303,680
|
|
$
268,365
|
Less:
charter revenue
|
8,861
|
|
2,195
|
|
1,389
|
Passenger
revenues - mainline excluding charter
|
1,028,441
|
|
301,485
|
|
266,976
|
Add: Passenger
revenues - regional partner
|
94,164
|
|
28,822
|
|
27,329
|
Passenger
revenues, system combined
|
$1,122,605
|
|
$330,307
|
|
$294,305
|
(10)
|
“Total
yield per RPM” is determined by dividing total revenues by revenue
passenger miles. This represents the average amount one
passenger pays to fly one mile.
|
(11)
|
“Yield
per ASM” or “RASM” is determined by dividing passenger revenues (excluding
charter revenue) by available seat
miles.
|
(12)
|
“Total
yield per ASM” is determined by dividing total revenues by available seat
miles.
|
(13)
|
This
may be deemed a non-GAAP financial measure under regulations
issued by the
Securities and Exchange Commission. We believe the presentation
of financial information excluding fuel expense is useful to
investors
because we believe that fuel expense tends to fluctuate more
than other
operating expenses. Excluding fuel from the cost of mainline
operations facilitates the comparison of results of operations
between
current and past periods and enables investors to forecast future
trends
in our operations. Furthermore, in preparing operating plans
and forecasts, we rely, in part, on trends in our historical
results of
operations excluding fuel expense. However, our presentation of
non-GAAP financial measures should not be viewed as a substitute
for our
financial results determined in accordance with
GAAP.
|
(14)
|
“Mainline
average fare” excludes revenue included in passenger revenue for charter
and reduced rate stand-by passengers, administrative fees,
and
revenuerecognized for unused tickets that are greater than
one year from
issuance date.
|
(15)
|
“Average
fuel cost per gallon” includes a non-cash mark to market derivative gain
of $12,753,000, for the year ended March 31, 2007, and non-cash
mark to
market derivative losses of $3,743,000 and $185,000 for the
quarters ended
June 30, 2007 and 2006,
respectively.
|
The
following table provides our
operating revenues and expenses for our mainline operations expressed as cents
per total mainline ASMs and as a percentage of total mainline operating
revenues, as rounded, for the year ended March 31, 2007 and the quarters ended
June 30, 2007 and 2006. Regional Partners and Lynx Aviation revenues,
expenses and ASMs were excluded from this table to provide comparable amounts
to
the prior period presented.
|
|
Year
Ended March 31,
|
|
Quarters
Ended June 30,
|
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
% Of
|
|
|
|
% Of
|
|
|
|
% Of
|
|
|
Cost
Per
|
|
Total
|
|
Cost
Per
|
|
Total
|
|
Cost
Per
|
|
Total
|
|
|
ASM
|
|
Revenue
|
|
ASM
|
|
Revenue
|
|
ASM
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- mainline
|
|
9.17
|
|
96.3%
|
|
9.53
|
|
96.1%
|
|
9.62
|
|
96.7%
|
Cargo
|
|
0.06
|
|
0.7%
|
|
0.05
|
|
0.5%
|
|
0.06
|
|
0.6%
|
Other
|
|
0.29
|
|
3.0%
|
|
0.34
|
|
3.4%
|
|
0.27
|
|
2.7%
|
Total
revenues
|
|
9.52
|
|
100.0%
|
|
9.92
|
|
100.0%
|
|
9.95
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight
operations
|
|
1.43
|
|
15.0%
|
|
1.42
|
|
14.3%
|
|
1.43
|
|
14.3%
|
Aircraft
fuel expense
|
|
3.03
|
|
31.9%
|
|
3.29
|
|
33.1%
|
|
3.24
|
|
32.6%
|
Aircraft
lease expense
|
|
0.96
|
|
10.1%
|
|
0.89
|
|
9.0%
|
|
0.93
|
|
9.3%
|
Aircraft
and traffic servicing
|
|
1.47
|
|
15.5%
|
|
1.40
|
|
14.1%
|
|
1.36
|
|
13.7%
|
Maintenance
|
|
0.78
|
|
8.2%
|
|
0.76
|
|
7.7%
|
|
0.74
|
|
7.4%
|
Promotion
and sales
|
|
1.02
|
|
10.7%
|
|
1.08
|
|
10.8%
|
|
1.05
|
|
10.6%
|
General
and administrative
|
|
0.50
|
|
5.2%
|
|
0.46
|
|
4.7%
|
|
0.47
|
|
4.8%
|
Gains
on sales of assets, net
|
|
(0.01)
|
|
(0.1)%
|
|
–
|
|
–
|
|
–
|
|
–
|
Depreciation
|
|
0.31
|
|
3.2%
|
|
0.32
|
|
3.3%
|
|
0.27
|
|
2.7%
|
Total
operating expenses
|
|
9.49
|
|
99.7%
|
|
9.62
|
|
97.0%
|
|
9.49
|
|
95.4%
|
Mainline
Revenues
Industry
fare pricing behavior has a significant impact on our
revenues. Because of the elasticity of passenger demand, we believe
that increases in fares may at certain levels result in a decrease in passenger
demand in many markets. We cannot predict future fare levels, which
depend to a substantial degree on actions of competitors and the
economy. When sale prices or other price changes are initiated by
competitors in our markets, we believe that we must, in most cases, match those
competitive fares in order to maintain our market share. In addition,
certain markets we serve are destinations that cater to vacation or leisure
travelers, resulting in seasonal fluctuations in passenger demand and revenues
in these markets.
Passenger
Revenues -
Mainline. Mainline passenger revenues totaled
$303,680,000 for the quarter ended June 30, 2007 compared to $268,365,000 for
the quarter ended June 30, 2006, an increase of 13.2%. Mainline
passenger revenues include revenues for reduced rate stand-by passengers,
charter revenue, administrative fees, revenue recognized for tickets that are
not used within one year from their issue dates and revenue recognized from
our
co-branded credit card agreement.
Revenues
from ticket sales generated 90.9% of our mainline passenger revenues and
increased $30,439,000 or 12.4% over the prior year. The increase in
ticket sales resulted from a 14.2% increase in ASM’s, or $34,968,000, offset by
a decrease of 0.6 points in load factor, or $2,020,000, and 0.9% decrease in
our
yields from ticket sales, or $2,509,000. The percentage of
revenues generated from other sources and the percentage of mainline passenger
revenues are as follows: administrative fees were 2.6%; revenue recognized
for
tickets that were not used within one year from issuance were 3.1%; charter
revenues were 0.7% and
earnings
from our co-branded credit card were 2.0%. These sources of revenue
increased mainline passenger revenue by $4,876,000 as compared to the quarter
ended June 30, 2006, or 21.5%, due to our 13.2% increase in passengers and
the
increased usage of our co-branded credit card.
Other
Revenues. Other revenues, comprised principally of the
revenue from the marketing component of our co-branded credit card, interline
and ground handling fees, liquor sales, LiveTV sales, pay-per-view movies and
excess baggage fees, totaled $10,758,000 and $7,496,000 or 3.4% and 2.7% of
total operating revenues excluding regional partner revenue for the quarters
ended June 30, 2007 and 2006, respectively, an increase of 43.5%. The
increase in other revenues was primarily due to the increase in the revenues
earned from the marketing component of our co-branded credit card agreement
and
other partnership agreements.
Mainline
Operating Expenses
Total
mainline operating expenses were
$306,582,000 and $264,644,000 for the quarters ended June 30, 2007 and 2006,
respectively, and represented 97.0% and 95.4% of total mainline revenues,
respectively. Mainline operating expenses increased as a percentage
of mainline revenues during the quarter ended June 30, 2007 largely a result
of
a 1.4% increase in our mainline CASM and a 1.1% decrease in RASM.
Salaries,
Wages and Benefits. We record salaries, wages
and benefits within the specific expense category identified in our statements
of operations to which they pertain. Salaries, wages and benefits
increased 14.4% to $67,415,000 compared to $58,908,000,
and were 21.3% and 21.2% of total
mainline revenues for the quarters ended June 30, 2007 and 2006,
respectively. Salaries, wages and benefits increased over the prior
comparable periods largely as a result of an increase in the number of full-time
equivalent employees to support our continued capacity growth. Our full-time
equivalent employee count increased 11.8% from approximately 4,368 at June
30,
2006 to 4,885 at June 30, 2007, which is less than the 14.2% increase in
mainline ASMs.
Flight
Operations. Flight operations expenses
increased 13.5% to $45,226,000 as compared to $39,836,000, and were 14.3% of
total mainline revenue for both of the quarters ended June 30, 2007 and 2006,
respectively. Flight operations expenses increased due to an increase
in mainline block hours from 57,018 for the quarter ended June 30, 2006 to
66,218 for the quarter ended June 30, 2007, an increase of
16.1%. Flight operations expenses include all expenses related
directly to the operation of the aircraft excluding depreciation of owned
aircraft and aircraft lease expenses and including insurance expenses, pilot
and
flight attendant compensation, in-flight catering, crew overnight expenses,
flight dispatch and flight operations administrative expenses.
Pilot
and
flight attendant salaries before payroll taxes and benefits increased 16.0%
to
$26,380,000 compared to $22,733,000, and were 8.7% and 8.3% of passenger
mainline revenues for the quarters ended June 30, 2007 and 2006,
respectively. We employed approximately 1,652 pilots and flight
attendants at June 30, 2007 as compared to 1,558 at June 30, 2006, an increase
of 6.0%. We increased the number of pilots and flight attendants over
the prior year to support the 16.1% increase in block hours, the 13.8% increase
in the average aircraft in service and the 2.0% increase in our average daily
block hour utilization.
Aircraft
insurance expenses totaled
$2,137,000 (0.7% of total mainline revenues) and $2,712,000 (1.0% of total
mainline revenues) for the quarters ended June 30, 2007 and 2006,
respectively. Aircraft insurance expenses were 79¢ and $1.13 per
passenger for the quarters ended June 30, 2007 and 2006,
respectively. Our aircraft hull and liability coverage renewed on
January 1, 2006 to December 31, 2006 at rates that were reduced by
9.9%. Our rates were further reduced by 33.4% for the policy that
covers January 1, 2007 to December 31, 2007. In December 2002,
through authority granted under the Homeland Security Act of 2002, the U.S.
government expanded its insurance program to enable airlines to elect either
the
government’s excess third-party war risk coverage or for the government to
become the primary insurer for all war risks coverage. We elected to
take primary government coverage in February 2003 and dropped the commercially
available war risk coverage. The current government war risk policy
is in effect until August 31, 2007. We do not know whether the
government will extend the coverage beyond August 31, 2007 and if it does how
long the extension will last. We expect that if the government stops
providing excess war risk coverage to the airline industry, the premiums charged
by aviation insurers for this coverage will be substantially higher than
the
premiums
currently charged by the government or the coverage will not be available from
reputable underwriters.
Aircraft
Fuel
Expense. Aircraft fuel expenses include both the
direct cost of fuel including taxes as well as the cost of delivering fuel
into
the aircraft. Aircraft fuel expenses of $104,713,000 for 46,075,000
gallons used and $90,415,000 for 39,722,000 gallons used and resulted in an
average fuel cost of $2.27 and $2.28 per gallon for the quarters ended June
30,
2007 and 2006, respectively, a decrease of 0.4%. Aircraft fuel
expenses, excluding non-cash mark to market derivative losses, were $2.19 and
$2.27 per gallon for the quarters ended June 30, 2007 and 2006,
respectively. Aircraft fuel expenses represented 33.1% and 32.6% of
total mainline revenues for the quarters ended June 30, 2007 and 2006,
respectively. Fuel prices are subject to change weekly, as we
purchase a very small portion in advance for inventory. Fuel
consumption for the quarters ended June 30, 2007 and 2006 averaged 696 and
697
gallons per block hour, respectively, a decrease of 0.1%.
Our
aircraft fuel expenses for the quarter ended June 30, 2007 include a non-cash
mark to market derivative loss of $3,743,000 recorded as an increase to fuel
expense and cash settlements of $4,337,000 received from a counter-party
recorded as a decrease in fuel expense. Our aircraft fuel expenses for the
quarter ended June 30, 2006 include a non-cash mark to market derivative loss
of
$185,000 recorded as an increase to fuel expenses and cash settlements of
$1,551,000 received from a counter-party recorded as a decrease in fuel
expenses.
Aircraft
and Engine Lease Expenses. Aircraft and engine lease expenses
totaled $28,330,000 (9.0% of total mainline revenue) and $25,882,000 (9.3%
of
total mainline revenue) for the quarters ended June 30, 2007 and 2006,
respectively, or an increase of 9.5%. The increase in lease expense
is due to an increase in the average number of leased aircraft from 35.4 to
38.0, or 7.3%, and increases in lease rates for our spare engines and four
of
our aircraft that have variable rents based on LIBOR.
Aircraft
and Traffic Servicing. Aircraft and traffic servicing expenses
were $44,591,000 and $37,988,000, an increase of 17.4%, for the quarters ended
June 30, 2007 and 2006, respectively, and represented 14.1% and 13.7% of total
mainline revenues. Aircraft and traffic servicing expenses include
all expenses incurred at airports including landing fees, facilities rental,
station labor, ground handling expenses, and interrupted trip expenses
associated with delayed or cancelled flights. Interrupted trip
expenses are amounts paid to other airlines to protect passengers on cancelled
flights as well as hotel, meal and other incidental
expenses. Aircraft and traffic servicing expenses will increase
with the addition of new cities to our route system. During the
quarter ended June 30, 2007, our mainline departures increased to 26,833 from
23,490 for the quarter ended June 30, 2006, or an increase of
14.2%. Aircraft and traffic servicing expenses were $1,662 per
departure for the quarter ended June 30, 2007 as compared to $1,617 per
departure for the quarter ended June 30, 2006, or an increase of
2.8%. This increase was primarily due to rent increases for the
additional six gates at DIA.
Maintenance. Maintenance
expenses of $24,370,000 and $20,596,000 were 7.7% and 7.4% of total revenues
for
the quarters ended June 30, 2007 and 2006, respectively, and increased by 18.3%
in the current period as compared to the quarter ended June 30,
2006. Maintenance expenses include all labor, parts and
supplies expenses related to the maintenance of the
aircraft. Maintenance cost per block hour was $368 and $361 for the
quarters ended June 30, 2007 and 2006, respectively, an increase of
1.9%. During the quarter ended June 30, 2007, we had one major
unscheduled engine maintenance event which was not covered by our maintenance
agreements which increased expenses by approximately $750,000. We
will incur further expenses in our fiscal second quarter of 2008 of the same
magnitude for another major unscheduled maintenance event.
Promotion
and
Sales. Promotion and sales expenses totaled
$34,296,000 and $29,422,000 and were 10.8% and 10.6% of total mainline revenue
for the quarters ended June 30, 2007 and 2006, respectively, and increased
by
16.6% in the current period as compared to the quarter ended June 30,
2006. These expenses include advertising expenses, telecommunications
expenses, wages and benefits for reservation agents and related supervision
as
well as marketing management and sales personnel, credit card fees, travel
agency commissions and computer reservations costs. During the
quarter ended June 30, 2007, promotion and sales expenses per mainline passenger
increased to $12.60 from $12.24 for the quarter ended June 30,
2006.
Promotion
and sales expenses increased primarily due to an increase in travel agency
commissions paid per passenger due to a higher percentage of connecting traffic
booked on external websites that cost more per booking than a local
booking.
General
and
Administrative. General and administrative expenses for
the quarters ended June 30, 2007 and 2006 totaled $14,733,000 and $13,294,000,
respectively, and were 4.7% and 4.8% of total mainline revenues, respectively,
an increase of 10.8%. General and administrative expenses include the
salaries and benefits for our executive officers and various other
administrative personnel including legal, accounting, information technology,
corporate communications, training and human resources and other expenses
associated with these departments. General and administrative
expenses also include employee health benefits, accrued vacation, and general
insurance expenses including worker’s compensation for all of our employees.
General and administrative expenses increased primarily due to increases in
consulting related fees.
Depreciation. Depreciation
expenses of $10,345,000 and $7,532,000 and were approximately 3.3% and 2.7%
of
total mainline revenues for the quarters ended June 30, 2007 and 2006,
respectively, an increase of 37.3%. These expenses include
depreciation of aircraft and aircraft components, office equipment, ground
station equipment, and other fixed assets. The increase in
depreciation is primarily due to an increase in the average number of purchased
aircraft in service to 20.4 during the quarter ended June 30, 2007 compared
to
16.0 purchased aircraft in service for the quarter ended June 30, 2006, an
increase of 27.5%. The increase in depreciation expense is also due to
accelerated depreciation on our Airbus aircraft seats, which we are replacing
over the next two fiscal years, and to investments in rotable aircraft
components, aircraft improvements and ground equipment to support our capacity
growth.
Nonoperating
Income
(Expense). Net nonoperating expense totaled and
$5,086,000 and $2,833,000 for the quarters ended June 30, 2007 and 2006,
respectively. These are comprised primarily of interest income
and expense.
Interest
income was $3,547,000 during the quarter ended June 30, 2007 as compared to
$3,954,000, a decrease of 10.3% from the prior comparable period. The
decrease in interest income was a result of a decrease in our cash position
year
over year which was partially offset by an increase in short-term interest
rates
earned on investments.
Interest
expense increased to $8,467,000 for the quarter ended June 30, 2007 from
$6,832,000 for the quarter ended June 30, 2006, an increase of
23.9%. Debt related to aircraft increased from $330,003,000 as of
June 30, 2006 to $449,261,000 as of June 30, 2007 with an increase in the
average weighted interest rate from 6.99% to 7.20% as of June 30, 2006 and
2007,
respectively.
Income
Tax
Benefit. There was no provision for income taxes for
the quarter ended June 30, 2007 due to accumulated losses for which valuation
allowances have been recorded. We will assess the ongoing utilization of
accumulated losses and the related valuation allowance each quarter.
During the quarter ended June 30, 2006, we recorded an income tax benefit of
$3,891,000 at a 49.6% rate.
Regional
Partners
Regional
partner revenues are derived from Frontier JetExpress operated by Horizon and
Republic. Our mainline passenger revenue increases as a result of
incremental revenue from passengers connecting to/from regional
flights. Operating expenses include all direct costs associated with
Frontier JetExpress operated by Horizon and Republic plus payments of
performance bonuses if earned under the contract. Certain expenses
such as aircraft lease, maintenance and crew costs are included in the operating
agreements with Horizon and Republic in which we reimburse these expenses plus
a
margin. Operating expenses also include other direct costs incurred
for which we do not pay a margin. These expenses are primarily
composed of fuel, airport facility expenses and passenger related
expenses.
Passenger
Revenues – Regional Partners. Regional
partner revenues, consisting of revenues from Frontier JetExpress operated
by
Horizon and Republic, totaled $28,822,000 for the quarter ended June 30,
2007
and
$27,329,000 for the quarter ended June 30, 2006, a 5.5% increase. The
increase in revenue is due to a 9.8% increase in passengers offset by a decrease
in the average fare to $99.32 from $103.49, a decrease of 4.0%. The
decrease in the average fare was largely a result the use of our Frontier
JetExpress aircraft for the San Francisco/Los Angeles shuttle service during
the
period. The Company discontinued this service in July
2007.
Regional
Partners Expense. Regional partner expense for the
quarter ended June 30, 2007 and 2006 totaled $34,357,000 and $29,483,000,
respectively, and was 119.2% and 107.9% of total regional partner revenues,
respectively, an increase of 16.5%. Regional partner expenses include
all direct costs associated with Frontier JetExpress operated by Horizon and
Republic. The increase in regional partner expenses as compared to
revenues was primarily related to the transition of our regional jet service
from Horizon to Republic where both airlines operated with a sub-optimal number
of aircraft during the quarter.
Liquidity
and Capital Resources
Our
liquidity depends to a large extent on the number of passengers who fly with
us,
the fares they pay, our operating and capital expenditures, our financing
activities, and the cost of fuel. We depend on lease or
mortgage-style financing to acquire all of our aircraft, including ten
additional Airbus aircraft that as of June 30, 2007 are scheduled for delivery
through August 2010 and ten Bombardier aircraft scheduled for delivery through
December 2007.
We
had
cash and cash equivalents of $215,431,000 and $202,981,000 at June 30, 2007
and
March 31, 2007, respectively. At June 30, 2007, total current assets
were $375,865,000 as compared to $408,760,000 of total current liabilities,
resulting in negative working capital of $32,895,000. At March 31,
2007, total current assets were $340,405,000 as compared to $359,326,000 of
total current liabilities, resulting in negative working capital of
$18,921,000.
Operating
activities. Cash provided by operating
activities for the three months ended June 30, 2007 was $38,541,000 as compared
to $20,999,000 for the three months ended June 30, 2006. The increase in
operating cash flows was primarily due to the increase in our cash generated
from working capital.
Investing
Activities. Cash provided by investing activities for
the quarter ended June 30, 2007 was $88,252,000. Capital expenditures
were $101,078,000 for the quarter ended June 30, 2007 which included the
purchase of three Airbus A318 aircraft, the purchase of LiveTV equipment,
rotable aircraft components, aircraft improvements, information technology
enhancements, and ground equipment. Purchase deposits applied to the purchase
of
three Airbus A318 aircraft and LiveTV equipment aircraft totaled
$23,095,000. Aircraft lease and purchase deposits made for future
aircraft deliveries during the period were $10,518,000.
Cash
used
in investing activities for the quarter ended June 30, 2006 was
$10,822,000. Capital expenditures were $44,851,000 for the quarter
ended June 30, 2006 which included the purchase and subsequent leaseback of
one
Airbus A319 aircraft, the purchase of LiveTV equipment, rotable aircraft
components, aircraft improvements, information technology enhancements, and
ground equipment. Purchase deposits applied to the purchase of an
Airbus A319 aircraft and LiveTV equipment totaled $8,862,000. We
received $36,493,000 primarily from the sale of the Airbus A319 aircraft and
retired Boeing assets held for sale. Aircraft lease and purchase deposits made
for future aircraft deliveries during the period were $11,326,000.
Financing
Activities. Cash received from financing
activities for the quarter ended June 30, 2007 was
$62,162,000. During the quarter ended June 30, 2007, we borrowed
$69,665,000 for the purchase of three Airbus A318 aircraft offset by payments
of
$7,160,000 for principal payments on our 22 owned aircraft and we also paid
$375,000 in financing fees.
Cash
used
by financing activities for the quarter ended June 30, 2006 was
$6,551,000. During the quarter ended June 30, 2006, we paid
$5,753,000 of principal payments on our 16 owned aircraft.
Other
Items that Impact our Liquidity
We
continue to assess our liquidity position in light of our aircraft purchase
commitments and other capital requirements, the economy, our competition, and
other uncertainties surrounding the airline industry. In September
2005, we filed a shelf registration statement with the SEC, which will enable
us
to periodically sell up to $250,000,000 in equity and debt. In
December 2005, in the first offering under this shelf registration statement,
we
issued $92,000,000 of 5% convertible notes due 2025. We intend to
continue to examine domestic or foreign bank aircraft financing, bank lines
of
credit, aircraft sale-leasebacks, and other transactions as necessary to support
our capital and operating needs. For further information on our
financing plans, activities and commitments, see “Contractual Obligations” and
“Commercial Commitments and Off Balance Sheet Arrangements” below.
The
purchase rights for 17 Airbus
aircraft expired on July 1, 2007. We have ten purchase options with
Bombardier in which our last option for our Bombardier aircraft expires on
December 1, 2007, subject to additional extension rights. We have
temporarily deferred the first five of our Bombardier Q400 aircraft and purchase
options. We have obtained financing for all of our planned Airbus
aircraft deliveries up to our February 2008 delivery and all ten Bombardier
aircraft for which we have firm purchase commitments and expect to have adequate
liquidity to cover our contractual obligations. However, long-term
financing commitments we have secured on the Bombardier aircraft are contingent
on obtaining an operating certificate from the FAA and all Bombardier aircraft
financing will be with Lynx Aviation with Frontier Holdings and Frontier as
guarantors. However, we cannot predict future trends or predict
whether current trends and conditions will continue. Our future
liquidity and capital resources may be impacted by many factors, including
“Risk
Factors” in Item 1A of our annual report on Form 10-K for the year ended March
31, 2007.
We
currently sublease a substantial part of a maintenance hangar located at DIA
from Continental Airlines. We use this facility to perform our heavy maintenance
and some of our line maintenance. The sublease expired in February 2007, and
we
are currently on a month-to-month lease. We are actively exploring options
for a
replacement maintenance facility, which may be located at DIA or another
location. The inability to locate an existing facility at similar lease rates
may cause us to increase our overall maintenance costs or we may be required
to
build or lease a new maintenance facility. To the extent a facility is located
at an airport other than DIA, we may incur relocation expenses and higher than
normal staff attrition. We may also be forced to contract for third
party maintenance services during a transition period, which would increase
our
overall maintenance costs.
Contractual
Obligations
The
following table summarizes our contractual obligations as of June 30,
2007:
|
|
Less
than
|
2-3
|
4-5
|
After
|
|
Total
|
1
year
|
years
|
years
|
5
years
|
|
|
|
|
|
|
Long-term
debt - principal (1)
|
$ 541,261
|
$ 30,409
|
$ 66,389
|
$ 90,708
|
$ 353,755
|
Long-term
debt - interest (1)
|
272,816
|
35,704
|
64,323
|
53,134
|
119,655
|
Operating
leases (2)
|
1,658,992
|
170,532
|
365,802
|
335,915
|
786,743
|
Unconditional
purchase obligations (3) (4)
(5)
|
632,785
|
278,431
|
319,087
|
35,267
|
–
|
Total
contractual cash obligations
|
$ 3,105,854
|
$ 515,076
|
$ 815,601
|
$ 515,024
|
$ 1,260,153
|
(1)
|
At
June 30, 2007, we had 22 loan agreements for 13 Airbus A319 aircraft
and
nine Airbus A318 aircraft. Two of the loans have a term of 10
years and are payable in equal monthly installments, including interest,
payable in arrears. These loans require monthly principal and
interest payments of $218,000 and $215,000, bear interest with rates
of
6.71% and 6.54%, and mature in May and August 2011, at which time
a
balloon payment totaling $10,200,000 is due with respect to each
loan. The remaining 20 loans have interest rates based on LIBOR
plus margins that adjust quarterly or semi-annually. At June
30, 2007, interest rates for these loans ranged from 6.63% to
8.02%. Each of these loans has a term of 12 years, and each
loan has balloon payments ranging from $2,640,000 to $9,312,000 at
the end
of the term. All of the loans are secured by the
aircraft. Actual interest payments will change based on changes
in LIBOR. In July 2005, we also entered into a junior loan in
the amount of $4,900,000 on an Airbus A319 aircraft. This loan
has a seven-year term with quarterly installments of approximately
$250,000. The loan bears interest at a floating rate adjusted
quarterly based on LIBOR, which was 9.13% at June 30, 2007.
In
December 2005, we issued $92,000,000 of 5% convertible notes due
2025. At any time on or after December 20, 2010, we may redeem
any of the convertible notes for the principal amount plus accrued
interest. Note holders may require us to repurchase the notes
for cash for the principal amount plus accrued interest only on
December
15, 2010, 2015 and 2020 or at any time prior to their maturity
following a
designated event as defined in the indenture for the convertible
notes. In the contractual obligations table above, the
convertible notes are reflected based on their stated maturity
of December
2025 with the corresponding interest payments. However, these
notes may be called five years from the date of issuance which
would
impact the timing of the principal payments and the amount of interest
paid.
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(2) As
of June 30, 2007, we have leased 36 Airbus A319 type aircraft and
two
Airbus A318 aircraft under operating leases with expiration dates
ranging
from 2013 to 2019. Under all of our leases, we have made cash
security deposits, which totaled $18,205,000 at June 30,
2007. Additionally, we are required to make additional rent
payments to cover the cost of major scheduled maintenance overhauls
of
these aircraft. These additional rent payments are based on the
number of flight hours flown and/or flight departures and are not
included
as an obligation in the table above. During the
quarters
ended June 30, 2007 and 2006 additional rent expense to cover the
cost of
major scheduled maintenance overhauls of these aircraft totaled
$6,493,000, and $6,640,000, respectively, and are included in maintenance
expense in the statement of operations.
On
January 11, 2007, we signed an agreement with Republic, under which
Republic will operate up to 17 Embraer 170 aircraft each with capacity
of
up to 76-seats under our Frontier JetExpress brand. The
contract period is for an 11-year period starting on the date the
last
aircraft is placed in service, which is scheduled for December
2008. The service began on March 4, 2007 and replaced our
agreement with Horizon. In the contractual obligations table
above, fixed costs associated with the Republic and
Horizon
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agreements are reflected through their respective stated contract
periods.
We
also
lease office space, spare engines and office equipment for our headquarters
and
airport facilities, and certain other equipment with expiration dates ranging
from 2007 to 2015. In addition, we lease certain airport gate
facilities and maintenance facilities on a month-to-month
basis. Amounts for leases that are on a month-to-month basis are not
included as an obligation in the table above.
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(3) As
of June 30, 2007, we have remaining firm purchase commitments for
ten
additional aircraft from Airbus that have scheduled delivery dates
beginning in February 2008 and continuing through August 2010 and
one
remaining firm purchase commitment for one spare Airbus engine scheduled
for delivery in December 2009. We also have ten remaining firm
purchase commitments from Bombardier that have scheduled delivery
dates
all in fiscal year 2008. Included in the purchase commitments
are the remaining amounts due Airbus and Bombardier and amounts for
spare
aircraft components to support the additional aircraft. We are
not under any contractual obligations with respect to spare
parts.
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We
have
secured financing commitments totaling approximately $156,000,000 for
commitments for our scheduled ten Bombardier aircraft. To complete
the purchase of the remaining ten Airbus aircraft scheduled for delivery
starting in February 2008, we must secure additional aircraft financing totaling
approximately $320,000,000 assuming bank financing was used for these remaining
ten aircraft. The terms of the purchase agreement do not allow for
cancellations of any of the purchase commitments. Financing for the
ten Bombardier aircraft is subject to Lynx obtaining its operating
certificate. If we are unable to secure all the necessary financing
it could result in the loss of pre-delivery payments and deposits previously
paid to the manufacturer totaling $16,203,000 for these aircraft for which
we
have not yet secured financing. We expect to finance these remaining
firm commitments through various financing alternatives, including, but not
limited to, domestic and foreign bank financing, leveraged lease arrangements
or
sale/leaseback transactions. There can be no assurances that
additional financing will be available when required or will be on acceptable
terms. Additionally, the terms of the purchase agreement with the manufacturer
would require us to pay penalties or damages in the event of any breach of
contract with our supplier, including possible termination of the
agreement. As of June 30, 2007, we had made pre-delivery payments on
future aircraft deliveries totaling $40,473,000 of which $16,203,000 relates
to
aircraft for which we have not yet secured financing and $24,270,000 relates
to
aircraft for which we have secured financing.
We
also
have agreements in principle with two separate lenders for the financing of
two
A320 aircraft that are planned for delivery in our fourth fiscal
quarter.
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(4)
In October 2002, we entered into a purchase and 12-year services
agreement
with LiveTV to bring DIRECTV AIRBORNE™ satellite programming to every
seatback in our Airbus fleet. We intend to install LiveTV in
every new Airbus aircraft we place in service. The table above
includes amounts for the installation of DirecTV for the remaining
10
Airbus aircraft we currently expect to purchase, less deposits made
of
$299,000.
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(5)
In March 2004, we entered
into a services agreement with Sabre, Inc. for its SabreSonicä
passenger solution to power our
reservations and check-in capabilities along with a broad scope of
technology for streamlining our operations and improving
revenues. The table above includes minimum annual system usage
fees. Usage fees are based on passengers booked, and actual
amounts paid may be in excess of the minimum per the contract
terms.
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Commercial
Commitments and Off-Balance Sheet Arrangements
Letters
of Credit and Cash Deposits
As
we
enter new markets, increase the amount of space we lease, or add leased
aircraft, we are often required to provide the airport authorities and lessors
with a letter of credit, bond or cash security deposits. These
generally approximate up to three months of rent and fees. We also
provide letters of credit for our
workers’
compensation insurance. As of June 30, 2007, we had outstanding
letters of credit, bonds, and cash security deposits totaling $19,317,000,
$2,014,000 and $20,258,000 respectively.
We
also
have an agreement with a financial institution where we can issue letters of
credit of up to 60% of certain spare parts inventories less amounts borrowed
under the credit facility. As of June 30, 2007, we had $18,563,000
available under this facility. We have reduced the amount available for
borrowings by letters of credit issued of $11,300,000.
In
July
2005, we entered into an additional agreement with another financial institution
for a $5,000,000 revolving line of credit that permits us to issue letters
of
credit up to $3,500,000. In June 2006, the revolving line of credit
was increased to $5,750,000 and it now permits us to issue letters of credit
up
to $5,000,000 and matures in June 2008. As of June 30, 2007, we have
utilized all amounts available for letters of credit under this agreement for
standby letters of credit that provide credit support for certain facility
leases.
We
have a
contract with a bankcard processor that requires us to pledge a certificate
of
deposit equal to a certain percentage of our air traffic liability associated
with the estimated amount of bankcard transactions. As of June 30,
2007, that amount totaled $55,203,000. The amount is adjusted
quarterly in arrears based on our air traffic liability associated with these
estimated bankcard transactions. As of September 1, 2007, we expect
that our requirements will results in an increase of approximately
$10,695,000.
We
use
the Airline Reporting Corporation (“ARC”) to provide reporting and settlement
services for travel agency sales and other related transactions. In
order to maintain the minimum bond (or irrevocable letter of credit) coverage
of
$100,000, ARC requires participating carriers to meet, on a quarterly basis,
certain financial tests such as, working capital ratio, and percentage of debt
to debt plus equity. As of June 30, 2007, we met these financial
tests and presently are only obligated to provide the minimum amount of $100,000
in coverage to ARC. If we failed the minimum testing requirements, we
would be required to increase our bonding coverage to four times the weekly
agency net cash sales (sales net of refunds and agency commissions). Based
on
net cash sales remitted to us for the week ended July 21, 2007, the bond
coverage would be increased to $4,326,000 if we failed the tests. If
we were unable to increase the bond amount as a result of our then financial
condition, we could be required to issue a letter of credit that would restrict
cash in an amount equal to the letter of credit.
Hedging
Transactions
In
November 2002, we initiated a fuel hedging program comprised of swap and collar
agreements. Under a swap agreement, the cash settlements are
calculated based on the difference between a fixed swap price and a price based
on an agreed upon published spot price for the underlying
commodity. If the index price is higher than the fixed price, we
receive the difference between the fixed price and the spot price. If
the index price is lower, we pay the difference. A collar agreement
has a cap price and a floor price. When the hedged product’s index
price is above the cap, we receive the difference between the index and the
cap. When the hedged product’s index price is below the floor we pay
the difference between the index and the floor. When the price is between the
cap price and the floor, no payments are required. These fuel hedges have been
designated as trading instruments, as such realized and mark to market
adjustments are included in aircraft fuel expense. The results of
operations for the quarter ended June 30, 2007 and 2006 include non-cash mark
to
market derivative losses of $3,743,000 and $185,000, respectively. Cash
settlements for fuel derivatives contracts for the quarters ended June 30,
2007
and 2006 were receipts of $4,337,000 and $1,551,000, respectively. We
have entered into the following swap and collar agreements that cover periods
during our fiscal year 2008:
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|
Date
|
Product
*
|
Notional
volume **
(barrels
per month)
|
Period
covered
|
Price
(per gallon or barrel)
|
Percentage
of
estimated
fuel
purchases
|
January
2007
|
Jet
A
|
100,000
|
April
1, 2007 - June, 30,2007
|
Swap
priced at
$1.817
per gallon
|
26%
|
|
|
|
|
|
|
January
2007
|
Crude
Oil
|
40,000
|
July
1, 2007-September 30, 2007
|
$64.70
per barrel cap,
with
a floor of $59.15
|
10%
|
January
2007
|
Crude
Oil
|
80,000
|
October
1, 2007 - December 31, 2007
|
$65.90
per barrel cap,
with
a floor of $59.90
|
20%
|
January
2007
|
Crude
Oil
|
80,000
|
April
1, 2007 -
June,
30,2007
|
$59.30
per barrel cap,
with
a floor of $49.30
|
20%
|
January
2007
|
Crude
Oil
|
80,000
|
July
1, 2007-September 30, 2007
|
$60.75
per barrel cap,
with
a floor of $50.45
|
20%
|
January
2007
|
Crude
Oil
|
80,000
|
October
1, 2007 - December 31, 2007
|
$62.00
per barrel cap,
with
a floor of $51.10
|
20%
|
January
2007
|
Crude
Oil
|
80,000
|
January
1, 2008 - March 31, 2008
|
$62.60
per barrel cap,
with
a floor of $52.10
|
19%
|
*
|
Jet
A is Gulf Coast Jet A
fuel. Crude oil is West Texas Intermediate crude
oil.
|
**
|
One
barrel is equal to 42 gallons.
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Maintenance
Contracts
Effective
January 1, 2003, we entered into an engine maintenance agreement with GE Engine
Services, Inc. (“GE”) covering the scheduled and unscheduled repair of our
aircraft engines used on most of our Airbus aircraft. The agreement
was subsequently modified and extended in September 2004. The
agreement is for a 12-year period from the effective date for our owned aircraft
or May 1, 2019, whichever comes first. For each leased aircraft, the term
coincides with the initial lease term of 12 years. This agreement
precludes us from using another third party for such services during the
term. For owned aircraft, this agreement requires monthly payments at
a specified rate multiplied by the number of flight hours the engines were
operated during that month. The costs under this agreement for our
purchased aircraft for the quarters ended June 30, 2007 and 2006 were
approximately $2,405,000 and $1,437,000, respectively. Any unplanned
maintenance expenses not otherwise covered by reserves are paid by
us. For our leased aircraft that are covered by the agreement, we do
not make the flight hour payments to GE under the agreement; instead we make
engine maintenance reserve payments which are expensed as paid as required
under
the applicable lease agreements. At the time a leased engine makes a
scheduled shop visit, the lessors pay GE directly for the repair of aircraft
engines from reserve accounts established under the applicable lease
documents. To the extent actual maintenance expenses incurred exceed
these reserves, we are required to pay these amounts.
Fuel
Consortia
We
participate in numerous fuel consortia with other carriers at major airports
to
reduce the costs of fuel distribution and storage. Interline agreements govern
the rights and responsibilities of the consortia members and provide for the
allocation of the overall costs to operate the consortia based on usage. The
consortia (and in limited cases, the participating carriers) have entered into
long-term agreements to lease certain airport fuel storage and distribution
facilities that are typically financed through tax-exempt bonds (either special
facilities lease revenue bonds or general airport revenue bonds), issued by
various local municipalities. In general, each consortium lease agreement
requires the consortium to make lease payments in amounts sufficient to pay
the
maturing principal and interest payments on the bonds. As of June 30, 2007,
approximately $562,757,000 principal amount of
such
bonds were secured by fuel facility leases at major hubs in which we
participate, as to which each of the signatory airlines has provided indirect
guarantees of the debt. Our exposure is approximately $23,777,000 principal
amount of such bonds based on our most recent consortia participation. Our
exposure could increase if the participation of other carriers decreases or
if
other carriers default. The guarantees will expire when the
tax-exempt bonds are paid in full, which ranges from 2011 to 2033. We
can exit any of our fuel consortia agreements with limited penalties and certain
advance notice
requirements.
We have not recorded a liability on our consolidated balance sheets related
to
these indirect guarantees.
Employees
In
September 2006, the contract with our dispatchers, who are represented by the
Transport Workers Union (TWU), became amendable. We are currently in the
process of re-negotiating this agreement, which affects approximately 16
employees. On May 10, 2007, the TWU filed a request with the National
Mediation Board (NMB) for mediation services. The parties continue to
bargain with the assistance of a federal mediator assigned to the case by the
NMB.
In
March
2006, our material specialists voted for union representation by the IBT
affecting 22 employees. A tentative agreement has been reached with
the International Brotherhood of Teamsters and ratification is expected in
August 2007.
Critical
Accounting Policies and Estimates
There
have been no material changes to our critical accounting policies and estimates
from the information provided in Item 7, Management's Discussion and Analysis
of
Financial Condition and Results of Operations - Critical Accounting Policies
and
Estimates, included in our annual report on Form 10-K for the year ended March
31, 2007.
Item
3: Quantitative and Qualitative Disclosures About Market
Risk
Aircraft
Fuel
Our
earnings are affected by changes in the price and availability of aircraft
fuel. Market risk is estimated as a hypothetical 10 percent change in
the average cost per gallon of fuel for the quarter ended June 30,
2007. Based on actual fuel usage for the quarter ended June 31, 2007,
such a change would have had the effect of increasing or decreasing our mainline
and regional partner aircraft fuel expense for the quarter ended June 31, 2007
by approximately $11,638,000, excluding the impact of our fuel
hedging. Comparatively, based on projected fiscal year 2008 fuel
usage for our mainline operations and regional partner operators, this would
have the effect of increasing or decreasing our aircraft fuel expense in fiscal
year 2008, by approximately $45,838,000, excluding the effects of our fuel
hedging arrangements.
Our
results of operations for the quarter ended June 30, 2007 include cash
settlements on fuel derivative contracts of $4,337,000 recorded as a decrease
to
fuel expense and non-cash mark to market losses of $3,743,000 recorded as an
increase in fuel expense with respect to fuel hedging agreements. As
of June 30, 2007, the fair value of the hedge agreements recorded on the balance
sheet as an asset was $9,986,000.
Interest
We
are
susceptible to market risk associated with changes in variable interest rates
on
long-term debt obligations we incurred and will incur to finance the purchases
of our Airbus aircraft. Interest expense on 76.8% of our debt is
subject to interest rate adjustments every three to six months based upon
changes in the applicable LIBOR rate. A change in the base LIBOR rate
of 100 basis points (1.0%) would have the effect of increasing or decreasing
our
annual interest expense by $4,157,000 assuming the loans outstanding that are
subject to interest rate adjustments at June 30, 2007 totaling $415,667,000
are
outstanding for the entire period.
Item
4. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
An
evaluation was performed under the supervision and with the participation
of our
management, including our Chief Executive Officer, or CEO, and Chief Financial
Officer, or CFO, of the effectiveness of our disclosure controls and procedures
as of June 30, 2007. Based on that evaluation, our management, including
our CEO
and CFO, concluded that our disclosure controls and procedures are effective
to
ensure that information required to be disclosed by us in reports that we
file
or submit under the Exchange Act, is recorded, processed, summarized and
reported as specified in the SEC's rules and forms, and is accumulated and
communicated to our management, including our CEO and CFO, to allow timely
decisions regarding required disclosure.
Management’s
Report on Internal Control over Financial Reporting
There
were no changes in our internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f), identified in connection with the evaluation of our controls
performed during the quarter ended June 30, 2007 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART
II. OTHER INFORMATION
Item
2. Unregistered Sale of Equity Securities and Use of
Proceeds
Issuer
Purchases of Equity Securities
The
following chart provides information regarding Common Stock purchases by the
Company during the period April 1, 2007 through June 30, 2007.
Period
|
Total
Number of
Shares
Purchased
|
Average
Price
Paid
Per
Share
|
Total
number of shares
purchased
as part of
publicly
announced
plans
or programs
|
Maximum
number
of
shares that my
yet
to be purchased
under
the plans or
program
|
|
|
|
|
|
April
1, 2007 through
June
30, 2007
|
87,299
|
$ 5.99
|
87,299
|
–
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Item
6: Exhibits
Exhibit
Numbers Description
of Exhibits
Exhibit
2
– Plan of acquisition, reorganization, arrangement, liquidation or
succession:
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2.1
|
Agreement
and Plan of Merger, dated as of January 31, 2006, by and among
Frontier Airlines, Inc., Frontier Airlines Holdings, Inc., and
FA Sub, Inc. (Annex I to Amendment No. 1 to the Registration
Statement on Form S-4 filed by Frontier Airlines Holdings, Inc.
on February 14, 2006, File
No. 333-131407).
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Exhibit
3
– Articles of Incorporation and Bylaws:
|
3.1
|
Amended
and Restated Certificate of Incorporation of Frontier Airlines Holdings,
Inc. (Annex II to Amendment No. 1 to the Registration Statement
on Form S-4 filed by Frontier Airlines Holdings, Inc. on February
14,
2006, File No. 333-131407).
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|
3.2
|
Bylaws
of Frontier Airlines Holdings, Inc. (Annex III to Amendment No.
1 to the Registration Statement on Form S-4 filed by Frontier Airlines
Holdings, Inc. on February 14, 2006, File No.
333-131407).
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Exhibit
4
– Instruments defining the rights of security holders:
4.1 Specimen
common stock certificate of Frontier Airlines Holdings, Inc.
|
4.2
|
Frontier
Airlines, Inc. Warrant to Purchase Common Stock, No. 1 – Air
Transportation Stabilization Board. Two Warrants, dated as of February
14,
2003, substantially identical in all material respects to this Exhibit,
have been entered into with each of the Supplemental Guarantors granting
each Supplemental Guarantor a warrant to purchase 191,697 shares
under the
same terms and conditions described in this Exhibit. Portions
of this Exhibit have been excluded from the publicly available document
and an order granting confidential treatment of the excluded material
has
been received. (Exhibit 4.6 to the Company’s Current Report on Form 8-K
dated March 25, 2003).
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|
4.2(a)
|
Warrant
Supplement to Frontier Airlines, Inc. Warrant to Purchase Common
Stock,
No. 1 – Air Transportation Stabilization Board. Two Warrant
Supplements dated March 17, 2006, substantially identical in all
material
respects to this Exhibit have been entered into with each of the
Supplemental Guarantors.
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|
4.3
|
Registration
Rights Agreement dated as of February 14, 2003 by and between and
Frontier
Airlines, Inc. as the Issuer, and the Holders of Warrants to Purchase
Common Stock. Portions of this Exhibit have been omitted
excluded from the publicly available document and an order granting
confidential treatment of the excluded material has been
received. (Exhibit 4.5 to the Company’s Current Report on Form
8-K dated March 25, 2003).
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Exhibits
31 and 32 – Certifications
31.1*
|
Certification
of President and Chief Executive Officer of Frontier Airlines Holdings,
Inc. pursuant to Section 302 Sarbanes-Oxley Act of
2002.
|
31.2*
|
Certification
of Chief Financial Officer of Frontier Airlines Holdings, Inc. pursuant
to
Section 302 Sarbanes-Oxley Act of
2002.
|
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32**
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002.
|
* Filed
herewith.
** Furnished
herewith.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
FRONTIER AIRLINES HOLDINGS, INC.
Date: July
27, 2007
|
By:
/s/ Paul H. Tate
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|
Paul
H. Tate, Senior Vice President and
|
|
Chief
Financial Officer
|
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|
|
|
Date: July
27, 2007
|
By:
/s/ Elissa A. Potucek
|
|
Elissa
A. Potucek, Vice President, Controller,
|
|
Treasurer
and Principal Accounting
Officer
|