Frontier Airlines Holdings, Inc. Form 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the fiscal year ended March 31, 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)
|
Registrant’s
telephone number including area code: (720)
374-4200
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Class
|
Name
of exchange on which registered
|
Common
Stock, Par Value of $0.001 per share
|
The
NASDAQ Stock Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the Registrant is a well−known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes
No
X
Indicate
by check mark whether the Registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes
No X
Indicate
by check mark whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ___
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
aggregate market value of common stock held by non-affiliates of the Company
computed by reference to the last quoted price at which such stock sold on
such
date as reported by the Nasdaq National Market as of September 30, 2006 was
$298,817,926.
The
number of shares of the Company’s common stock outstanding as of May 23, 2007 is
36,641,181.
Documents
incorporated by reference
Certain
information required by Part III is incorporated by reference to the Company’s
2007 Proxy Statement.
Page
PART
I
|
Business
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3
|
|
Risk
Factors
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16
|
|
Unresolved
Staff Comments
|
28
|
|
Properties
|
29
|
|
Legal
Proceedings
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30
|
|
Submission
of Matters to a Vote of Security Holders
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30
|
PART
II
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
31
|
|
Selected
Financial Data
|
33
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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38
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
59
|
|
Financial
Statements and Supplementary Data
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60
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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60
|
|
Controls
and Procedures
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60
|
|
Other
Information
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60
|
PART
III
|
Directors,
Executive Officers and Corporate Governance
|
61
|
|
Executive
Compensation
|
61
|
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
61
|
|
Certain
Relationships and Related Transactions and Director
Independence
|
61
|
|
Principal
Accountant Fees and Services
|
61
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PART
IV
|
Exhibits
and Financial Statement Schedules
|
62
|
PART
I
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 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 their impact on 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 Item 7, “Outlook”.
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. 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.
General
On
April 3, 2006, Frontier Airlines, Inc. (“Frontier”) completed its corporate
reorganization (the “Reorganization”). As a result of the Reorganization,
Frontier became a wholly-owned subsidiary of Frontier Airlines Holdings, Inc.
(“Frontier Holdings”), a Delaware corporation, and Frontier Holdings became the
successor issuer to Frontier pursuant to Rule 12g-3 under the Exchange Act.
In
connection with the Reorganization, each outstanding share of common stock,
no
par value, of Frontier was exchanged for one share of common stock, $0.001
par
value, of Frontier Holdings, resulting in each shareholder of Frontier as of
the
close of business on March 31, 2006 becoming a stockholder of Frontier Holdings
as of the opening of business on April 3, 2006. The common stock of Frontier
Holdings is now the publicly traded stock of the company. In this report,
references to “us,” “we,” or the “company” refer to the consolidated results of
Frontier Holdings unless the context requires otherwise.
In
September 2006, we formed a new subsidiary, Lynx Aviation, Inc. (“Lynx
Aviation”). Lynx Aviation intends to assume 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 Federal authorization to provide scheduled air transportation. Lynx
Aviation submitted its
application
to the Department of Transportation in January 2007, and the DOT entered its
show cause order on May 4, 2007. Lynx Aviation expects it will receive its
authorizations in August and commence revenue service operations in September
2007 with ten aircraft in service by the end of January 2008. At this time,
Frontier and Lynx Aviation are the only 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 it has not yet commenced operations.
Now
in our 13th 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”). 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 May 18, 2007, we, in
conjunction with our Frontier JetExpress brand operated by Horizon Air
Industries, Inc. (“Horizon”) and Republic Airlines, Inc. (“Republic”) or
(“Frontier JetExpress”), operate routes linking our Denver hub to 49 U.S. cities
spanning the nation from coast to coast, eight cities in Mexico and two cities
in Canada. We also provide service to Mexico from 10 non-hub cities. 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. On May 3,
2007, we announced that we plan to terminate point-to-point service between
San
Francisco and Los Angeles and between San Francisco and Las Vegas effective
July
10, 2007.
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 59 jets as of May 18, 2007 (38 of which we lease and 21 of which we own),
consisting of 49 Airbus A319s and ten Airbus A318s. In April 2005, we completed
our plan to replace our Boeing aircraft with new purchased and leased Airbus
jet
aircraft. During the years ended March 31, 2007 and 2006, we increased
year-over-year capacity by 14.4% and 8.4%, respectively. During the years ended
March 31, 2007 and 2006, we increased mainline passenger traffic by 14.7% and
12.9%, respectively, outpacing our increase in capacity during both periods.
We
intend to continue our growth strategy and to expand to new markets and add
frequency to existing markets that we believe are underserved.
On
January 11, 2007, we signed an agreement with 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 replaced our agreement with 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 2003, we signed an agreement with Horizon, under which Horizon
operates up to nine 70-seat CRJ 700 aircraft under our Frontier JetExpress
brand. In September 2006, we amended the Horizon Agreement to provide that
all
nine CRJ-700 aircraft will be returned to Horizon during a one-year ramp down
period that began in January 2007 and will be completed in December 2007.
As
of May 18, 2007, Frontier JetExpress provided service to Billings, Montana;
Boise, Idaho; 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; Los Angeles,
California; Omaha, Nebraska; San Francisco, California; and Spokane, Washington.
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 300 daily mainline flight departures and
arrivals and 65 Frontier JetExpress daily system flight departures and arrivals.
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 that we file
or
furnish with the SEC, and are made available as soon as reasonably practicable
after we file or furnish 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 800-432-1FLY.
Overview
of Operations and the Industry
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
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 similar
engines and cockpit configurations and a single class of service. Operating
a
single class of service simplifies our operations, enhances productivity,
increases our capacity and offers an operating cost advantage. The anticipated
addition of the Bombardier Q400 turboprop aircraft through our Lynx Aviation
subsidiary and the expansion of our JetExpress operation will allow us to add
routes to markets that we believe are under-served in Colorado and elsewhere
in
the Rocky Mountain region using the aircraft that we believe will offer
favorable economics and operating performance for the selected routes. The
operations of both Lynx Aviation and Jet Express services are separate and
apart
from our mainline Airbus operations. We anticipate that Lynx Aviation will
begin
revenue service in September 2007.
As
of May 18, 2007, we had remaining firm purchase commitments for 21 aircraft
(one
Airbus 318 aircraft, ten Airbus 320 aircraft and ten Bombardier Q400 aircraft).
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.
We
believe we have a proven management team and a strong company culture and will
continue to focus on differentiating the product and service we provide to
our
passengers. We believe our friendly and dedicated employees, affordable pricing,
accommodating service, in-flight entertainment systems and comfortable airplanes
distinguish our product and service from our competitors. Safety is a primary
concern, and we are proud that our maintenance staff has been awarded the
Federal Aviation Administration (“FAA”) Diamond Award for Excellence for eight
straight years - an award that recognizes our commitment to the ongoing training
and education of our maintenance staff. Our product begins with the Airbus
aircraft, which offers a comfortable passenger cabin that we configure with
one
class of seating, ample leg room, and in-seat 24 channel live television
entertainment. We also provide four additional channels that offer current-run
pay-per-view movies.
The
airline industry is intensely competitive with record high aviation fuel costs.
We expect competition will remain intense. 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 coupled with the record high fuel costs has created financial
hardship for some of our competitors that have been forced to reduce capacity
and, in some cases, seek bankruptcy protection.
Business
Strategy and Markets
Our
business strategy is to provide air service at affordable fares to high volume
markets from our DIA hub and limited point-to-point routes outside of our DIA
hub while seeking ways to leverage our strong market position in Denver and
excellent product and service. Our strategy is based on the following
factors:
|
•
|
Stimulate
demand by offering a combination of low fares, quality service and
frequent flyer credits in our frequent flyer program, EarlyReturns®.
|
|
•
|
Expand
our Denver hub operation and increase connecting traffic by adding
additional high volume markets to our current route system through
use of
our own aircraft, the introduction and expansion of Lynx Aviation
and by
entering into code sharing agreements and other relationships with
other
airlines.
|
|
•
|
Continue
filling gaps in flight frequencies to current markets from our DIA
hub.
|
|
|
Evaluate
other opportunities for additional non-hub point-to-point
routes.
|
Route
System Strategy
Our
route system strategy encompasses connecting our Denver hub to top business
and
leisure destinations. We currently serve 44 of the top 50 destinations from
Denver, as defined by the U.S. Department of Transportation’s, (“DOT”) Origin
and Destination Market Survey.
As
of May 18, 2007, we, in conjunction with Frontier JetExpress, operate routes
linking our Denver hub to 49 U.S. cities spanning the nation from coast to
coast, eight cities in Mexico and two cities in Canada. We also provide service
to Mexico from 10 non-hub cities and 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. On May 3, 2007, we announced that
we
plan to terminate point-to-point service between San Francisco and Los Angeles
and between San Francisco and Las Vegas effective July 10, 2007.
During
the year ended March 31, 2007 and as of May 18, 2007, we added new service
out
of DIA to the following cities with commencement dates as follows:
Destination
|
Commencement
Date
|
|
|
DIA
to Calgary, Alberta, Canada (1)
|
May
25, 2006
|
DIA
to Guadalajara, Mexico
|
December
24, 2006
|
DIA
to Hartford, Connecticut
|
March
2, 2007
|
DIA
to Louisville, Kentucky (1)
|
April
1, 2007
|
DIA
to Vancouver, British Colombia, Canada
|
May
5, 2007
|
DIA
to Memphis, Tennessee
|
May
12, 2007
|
(1)
Operated exclusively by Frontier JetExpress.
|
|
|
|
We
also discontinued service to Baltimore, Maryland effective January 8,
2007
We
have continued our Mexico expansion, and as of May 18, 2007 we serve the
following routes:
|
Current
non-stop
|
Destination
|
round-trip
frequencies
|
|
|
California:
|
|
Los
Angeles to Cabo San Lucas
|
One
Daily
|
San
Diego to Cancun*
|
Once
per week
|
San
Francisco to Cabo San Lucas
|
Daily
except Saturdays
|
San
Jose to Cabo San Lucas*
|
Three
per week
|
Sacramento
to Cabo San Lucas*
|
Four
per week
|
Colorado:
|
|
Denver
to Acapulco*
|
Twice
per week
|
Denver
to Cabo San Lucas
|
Daily
|
Denver
to Cancun
|
Daily
|
Denver
to Cozumel
|
Three
per week
|
Denver
to Guadalajara
|
Four
weekly
|
Denver
to Ixtapa/Zihuatanejo
|
Three
per week
|
Denver
to Mazatlan
|
Four
weekly
|
Denver
to Puerto Vallarta
|
Daily
|
|
|
Missouri:
|
|
Kansas
City to Cabo San Lucas*
|
Once
per week
|
Kansas
City to Puerto Vallarta*
|
Once
per week
|
St.
Louis to Cancun*
|
Three
per week
|
|
|
Indiana:
|
|
Indianapolis
to Cancun*
|
Three
per week
|
|
|
Tennessee:
|
|
Nashville
to Cancun*
|
Three
per week
|
|
|
Utah:
|
|
Salt
Lake City to Cancun
|
Once
per week
|
|
|
*
Seasonal service
|
|
On
March 19, 2007, we announced that we plan to offer daily mainline non-stop
and
one-stop service between DIA and Jacksonville International Airport beginning
June 15, 2007. On February 7, 2007, we also announced that we plan to offer
non-stop flights between Dallas/Ft. Worth and Mazatlan, Mexico three times
a
week beginning on June 7, 2007. On April 25, 2007, we announced that we plan
to
offer daily non-stop service between DIA and Baton Rouge, Louisiana to become
the only low-cost carrier serving Baton Rouge Metropolitan Airport. The new
service will be operated by Republic Airlines using EMB170 equipment beginning
on August 15, 2007.
On
April 3, 2007, the U.S. Department of Transportation issued an “Open-Skies
Notice” inviting all U.S. air carriers now certificated to conduct foreign
scheduled air transportation and interested in applying for blanket open-skies
certificate authority to file applications with the Department. We filed
for this blanket authority in April 2007. In advance of receiving this blanket
authority, on May 14, 2007, we filed an application to provide scheduled air
service from DIA and Los Angeles, California to two destinations in Costa Rica.
We received approval to fly to Costa Rica from the DOT on May 17, 2007 and
plan
to start service to the Santamaria International Airport in San Jose, Costa
Rica
on November 30, 2007.
Fleet
and Operational Upgrades
As
of November 2004, Frontier’s Airbus fleet was certified to FAA Category III
instrument approach minimums. Category III certification reduces the number
of
diversions because of low visibility, a condition that occurs with some
regularity at a number of the cities we serve.
As
of July 2004, ten of our owned A319 aircraft have increased maximum rated thrust
from a base of 22,000 to 23,500 pounds per engine and as of April 2005, these
ten aircraft have increased maximum take-off weight from a base of 70 tons
to
75.5 tons. The improved operational performance of these aircraft allows us
to
serve longer haul markets such as Denver to Anchorage, Alaska, and to depart
from airports with shorter runways while carrying a full passenger load.
In addition, two of the A319 aircraft delivered to us during fiscal year 2007
included over-water configurations and we plan to change three more A319
aircraft that we own to over-water configurations during the year.
Marketing
and Sales
Our
sales efforts target value conscious leisure and business travelers. Value
conscious customers are price-sensitive; however, we believe their travel
decisions are also balanced with other aspects of our product offering such
as
our frequent flyer program, non-stop service, advanced seat assignments, service
level and live television entertainment. In the leisure market, we offer
discounted fares marketed through the Internet, newspaper, radio and
television
advertising along with special promotions and travel packages. In May 2003,
we
launched a new brand strategy and advertising campaign designed to identify
Frontier as “A Whole Different Animal” and to set us apart from our competition.
The campaign includes television, print and radio components that began running
in the Denver market and have since expanded to additional markets along our
routes. We have gathered extensive customer and employee feedback that has
allowed us to identify elements of service that are important to our customers
who have the potential to fly with us more often.
On
May 23, 2006, we launched a new version of our website as part of our strategic
initiative to reduce commissions paid to external travel websites and to provide
better customer service by increasing our website bookings. We have increased
our rate of bookings on our internal website from 36.0% to 37.4% of total
bookings. We began a phased improvement of our website shortly after we
converted our reservation and ticketing automation to Sabre by March 2005.
In
January 2007, we added redemption capabilities for Early Return members. Also,
on May 1, 2007, we implemented a new low fare shopping capability that now
displays fares three days before and after departure and return dates. Results
are listed in a seven-by-seven grid format that allows users to see when the
cheapest fares are being offered. The Web site's default setting will pull
up
flexible fares, but customers can still search by schedule.
In
conjunction with the branding campaign, we have sponsorship agreements as the
exclusive airline of The Pepsi Center in Denver, Denver’s National Hockey League
team, the Colorado Avalanche, and Denver’s National Basketball Association team,
the Denver Nuggets. We also have sponsorship agreements with Colorado’s Major
League Baseball team the Colorado Rockies, Colorado’s National Lacrosse League
team, the Colorado Mammoth, and Colorado’s Arena Football League team, the
Colorado Crush. In addition, we are the exclusive airline partner for the
college athletic programs of the Air Force Academy, University of Colorado,
Colorado State University, the University of Denver, the University of Northern
Colorado, and the University of Wyoming. The agreements allow for prominent
signage in applicable stadiums and arenas, participation in-game promotions,
receipt of prominent logo and advertising placement in publications and access
to joint promotion opportunities. These agreements vary in terms of length
and
the amount and method of compensation to the sponsored entities.
In
order to increase connecting traffic, we have a code share agreement with Great
Lakes Aviation Ltd. and in January 2007, we signed an agreement with Republic
operating as Frontier JetExpress that is replacing our current agreement with
Horizon. This will increase our regional jet fleet from nine aircraft to 17
aircraft. We also expect Lynx Aviation to provide additional connecting traffic
to markets where regional jet service would not be as economically feasible
to
operate or operationally restricted. We also have interline agreements with
105
domestic and international airlines serving cities on our route system.
Generally, these agreements include joint ticketing and baggage services and
other conveniences designed to expedite the connecting process.
In
November 2006, we partnered with AirTran Airways to create the first Low Cost
Carrier referral and frequent flyer partnership in the industry that offers
travelers the ability to reach more than 80 destinations across four countries.
This partnership enables both airlines to increase destination options by
linking phone and online reservations systems as well as enabling Frontier’s
EarlyReturns®
and AirTran’s A+ Rewards members to earn and redeem mileage/travel credits on
both airlines.
To
balance the seasonal demand changes that occur in the leisure market, we have
introduced programs over the past several years that are designed to capture
a
larger share of the corporate market, which tends to be less seasonal than
the
leisure market. These programs include negotiated fares for large companies
that
sign contracts committing to a specified volume of travel, future travel credits
for small and medium size businesses contracting with us, and special discounts
for members of various trade and nonprofit associations.
We
also pursue sales opportunities with meeting and convention arrangers and
government travel offices. The primary tools we use to attract this business
include personal sales calls, direct mail and telemarketing. In addition, we
offer air/ground vacation packages to many destinations on our route system
under contracts with various tour operators.
We
participate in the four major computer reservation systems used by travel agents
to make airline reservations: Amadeus, Galileo, Worldspan and Sabre. We maintain
reservation centers in Denver, Colorado and Las Cruces, New Mexico, operated
by
our own employees.
LiveTV
In
October 2002, we signed a 12 year purchase and long-term services agreement
with
LiveTV, LLC to bring DIRECTV AIRBORNE ™ satellite programming to every seatback
in our Airbus fleet. DIRECTV® programming features 24
channels
of live television delivered to each seat. We charge $5 per segment for access
to the system to offset the costs for the system equipment, programming, and
services. In 2005, we continued to improve our customers’ flying experience by
adding four additional channels that offer current-run pay-per-view movies
for
$8 per segment.
Customer
Loyalty Program
We
have operated EarlyReturns®,
our frequent flyer program, since February 2001. Our frequent flyer program
won
the following awards at the 2007 Freddie Awards for frequent flyer programs:
first place for program of the year and best award (for redemption deals);
second place for best member communication and best customer service; third
place for best website and best award redemption; fourth place for the best
elite level, fifth place for the best bonus promotion (fly 3 get 1 free) and
sixth place for best affinity card. We believe that our frequent flyer program
offers some of the most generous benefits in the industry, including a free
round-trip award ticket within the contiguous U.S. or between the contiguous
U.S. and Canada after accumulating only 15,000 miles (25,000 miles to Alaska
or
any of our destinations in Mexico). There are no blackout dates for award
travel. Additionally, members who earn 25,000 or more Frontier flight miles
or
fly 40 or more Frontier flight segments in a calendar year attain Summit Level
status, which includes a 50% mileage bonus on each paid Frontier flight,
priority check-in and boarding, complimentary on-board cocktails and DIRECTV,
extra allowance on checked baggage and priority baggage handling, standby at
no
charge on return flights the day before, the day of, and the day after the
originally scheduled flight, $100 change fees waived, and access to an exclusive
customer service toll-free phone number. Members who earn 15,000 - 24,999
Frontier flight miles annually, fly 25 or more Frontier flight segments, or
spend $60,000 or more on their Frontier MasterCard in a calendar year attain
Ascent Level status, which includes a 25% mileage bonus on each Frontier flight,
priority check-in and boarding, complimentary DIRECTV service, and access to
an
exclusive customer service toll-free phone number. Members earn one mile for
every mile flown on Frontier. Members can also earn additional miles through
our
program partners, which presently include Hertz Rental Car, 1-800-FLOWERS.com,
Qwest Communications, SuperShuttle, Marriott International and Frontier Airline
Cruises, and can transfer points to miles from Citibank Diners Club. To apply
for the EarlyReturns®
program, customers may visit our Web site at www.frontierairlines.com;
obtain an EarlyReturns®
enrollment form at any of our airport counters or call our EarlyReturns®
Service Center toll-free hotline at 866-26-EARLY, or our reservations at
800-432-1FLY.
In
November 2006, we partnered with AirTran Airways to create the first Low Cost
Carrier referral and frequent flyer partnership in the industry that offers
travelers the ability to reach more than 80 destinations across four countries.
This partnership enables both airlines to increase destination options by
linking phone and online reservation systems as well as enabling Frontier’s
EarlyReturns®
and AirTran’s A+ Rewards members to earn and redeem mileage/travel credits on
both airlines.
In
March 2003, we entered into a co-branded credit card arrangement with a
MasterCard issuing bank. In May 2007, we amended this agreement to extend the
term through December 2014 with enhanced financial terms. Credit card users
earn
miles on their credit card purchases. We receive fees for new accounts, the
purchase of frequent flier miles awarded to credit card customers and a
percentage of the annual renewal fees.
In
June 2004, we entered into an agreement with Points.com that allows for the
sale, purchase and exchange of EarlyReturn®
points. Beginning in July 2005, we entered into an agreement with American
Express that allows its cardholders to convert their Membership Reward points
into EarlyReturns®
points.
In
June 2005, we launched the More Store (www.frontiermorestore.com),
which is an online miles shopping experience designed to provide Ascent and
Summit level EarlyReturns®
members with the ability to purchase merchandise online with frequent flyer
miles in an auction-style bidding process or with a stated amount of miles.
Approximately
26 million points have been redeemed for merchandise since the
launch.
Competition
and Market Barriers
The
Airline Deregulation Act of 1978 produced a highly competitive airline industry,
freed of government regulations that for 40 years prior to the Deregulation
Act
had dictated where domestic airlines could fly and how much they could charge
for their services. Since then, we and other smaller carriers have entered
markets long dominated by larger airlines with substantially greater resources,
such as United Airlines, American Airlines, Northwest Airlines and Delta Air
Lines.
We
compete principally with United, the dominant carrier at DIA. United has a
competitive advantage due to its larger number of flights from DIA, its
significantly broader domestic and international route system, its mature and
robust loyalty program, and its offering a multiple class cabin for most of
its
flights. In February 2003, United launched a new low-fare airline, Ted, which
we
believe was developed in an attempt to operate with lower costs than United’s
mainline operations to compete with us and other low-cost carriers.
In
January 2006, Southwest Airlines, the largest low−fare major U.S. airline,
introduced service at DIA. Southwest Airlines currently has 36 flights out
of
DIA to 10 destinations, and has announced plans to add another six flights
out
of DIA by adding service to Oakland, California and additional frequencies
to
Houston, Texas in June 2007. Southwest pioneered the low−cost model by operating
a single aircraft fleet with high utilization, being highly productive in the
use of its people and assets, providing a simplified fare structure and offering
only a single class of seating with no seat assignments. These methods, coupled
with significant favorable fuel hedging positions, enable Southwest to offer
fares that are significantly lower than those charged by other U.S. airlines.
We
believe we need to match these low fares in the routes in which we compete
with
Southwest in order to retain market share, which has impacted our yields.
Further expansion by Southwest into other markets we serve would cause the
same
result.
During
the month of March 2007, United, Ted, and its commuter affiliates had a total
market share at DIA of approximately 55.4%, down from 55.9% during the month
of
March 2006. During the month of March 2007, Southwest had a total market share
at DIA of approximately 4.6%, up from 3.1% during the month of March 2006.
Our
market share at DIA, including our codeshare affiliates, during the month of
March 2007 was 21.0%, up from 20.5% during the month of March 2006. As of May
1,
2007, we directly compete with United and United regional jet affiliates on
87.7% of the cities we serve out of DIA and with Southwest on 14.0% of the
cities we serve. We compete with United and Southwest primarily on the basis
of
fares, fare flexibility, the number of markets we operate in and the number
of
frequencies within a market, our frequent flyer programs, brand recognition
(particularly in Denver market), the level of passenger entertainment available
on our aircraft and the quality of our customer service.
Where
we do not compete directly with United and/or Southwest, we compete with many
other air carriers for the limited number of passengers desiring to travel
between the cities we serve. With excess capacity in these and almost all
markets, it is extremely difficult to demand fare levels sufficient to offset
the high costs of operating an airline, particularly with the current high
prices for aviation fuel.
At
the present time, New York’s LaGuardia and John F. Kennedy International
Airports and Washington Ronald Reagan National Airport are regulated by means
of
“slot” allocations, which represent government authorization to take off or land
at a particular airport within a specified time period. FAA regulations require
the use of each slot at least 80% of the time and provide for forfeiture of
slots in certain circumstances. At New York LaGuardia airport, we currently
hold
four high-density exemption slots, with two seasonal slots, and at the present
time, we utilize four of these slots to operate three daily round-trip flights
between DIA and LaGuardia. In addition to slot restrictions, Reagan National
is
limited by a perimeter rule, which initially limited flights to and from Reagan
National to 1,250 miles. In April 2000, the Wendell H. Ford Aviation Investment
and Reform Act for the 21st
Century, or AIR 21, was enacted. AIR 21 authorized the DOT to grant up to 12
slot exemptions beyond the 1,250-mile Reagan National perimeter, provided
certain specifications are met. Under AIR 21, we were awarded two slots for
one
daily round-trip flight. In 2004 the Vision
100 - Century of Flight Aviation Authorization Act was
enacted, which authorized the DOT to grant an additional 12 slot exemptions
into
Reagan National. In April 2004, we were granted four additional slots at Reagan
National for two additional round-trip flights.
Another
airport we serve, John Wayne International Airport in Santa Ana, California
(SNA), is also slot controlled at the local level as mandated by a federal
court
order. We were originally awarded six arrival and departure slots at SNA, or
three daily round-trips. We began service with two daily round-trips to SNA
in
August 2003 and added a third daily round- trip in March 2004.
Maintenance
and Repairs
All
of our aircraft maintenance and repairs are accomplished in accordance with
our
maintenance program approved by the FAA. Since mid-1996, we have trained,
staffed and supervised our own maintenance work force at Denver, Colorado.
We
sublease a portion of Continental Airlines' hangar at DIA where we currently
perform most of our own line maintenance and longer interval maintenance through
the “D” check level. Continued access to the Continental hangar at DIA is
currently in question, as discussed more fully in Item 1A, “Risk Factors” of
this report. We also maintain line maintenance facilities at Phoenix, Arizona
and Kansas City, Missouri. Outside FAA approved contractors perform other major
maintenance, such as line maintenance at our spoke cities, longer interval
maintenance when we do not have adequate facilities or staff to meet maintenance
needs and for major engine repairs.
We
have attempted to level our engine maintenance expenses by entering into a
maintenance cost per hour agreement with GE Engine Services, Inc. (“GE”). For
owned aircraft, this
agreement is for a 12-year period from the effective date for our owned aircraft
or May 1, 2019, whichever comes first. For each covered leased aircraft, the
agreement 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
on
the covered engines. This agreement requires non-refundable monthly payments,
which are increased periodically, at a specified rate multiplied by the number
of flight hours the engine operated during that month. Currently,
engines on all of our owned and most of our leased aircraft are subject to
the
GE agreement. For
the covered leased aircraft, the lessors pay GE directly for the repair of
aircraft engines in conjunction with this agreement from reserve accounts
established under the applicable lease documents. For our owned aircraft, we
pay
GE directly and are required to pay any amounts above funded reserves in the
event of a shortfall if maintenance expenses incurred are outside scheduled
maintenance and not otherwise covered by a reserve.
Under
our aircraft lease agreements, we pay all expenses relating to the maintenance
and operation of our aircraft, and we are required to pay supplemental monthly
rent payments to the lessors based on usage. Supplemental rents, which increase
annually, are applied against the cost of scheduled major maintenance. To the
extent these reserves are not used for major maintenance during the lease terms,
excess supplemental rents are forfeited to the aircraft lessors after
termination of the lease. Additionally, to the extent actual maintenance
expenses incurred exceed these reserves, we are required to pay these
amounts.
Our
monthly completion factors for the years ended March 31, 2007, 2006, and 2005,
excluding cancellations that were not related to maintenance, averaged 99.9%,
99.9% and 99.8%, respectively. The completion factor is the percentage of our
scheduled flights that were operated by us, whether or not delayed (i.e., not
canceled). We believe that our high monthly completion factors are attributable
to the reliability of our new Airbus fleet and our record of excellence in
our
maintenance department.
For
eight consecutive years starting in 1999, our maintenance and engineering
department received the FAA’s highest award, the Diamond Certificate of
Excellence, in recognition of 100 percent of our maintenance and engineering
employees completing advanced aircraft maintenance training
programs. The
Diamond Award recognizes advanced training for aircraft maintenance
professionals throughout the airline industry. We were the first Part 121
domestic air carrier to achieve 100 percent participation in this training
program by our maintenance employees.
Fuel
Fuel
prices have increased significantly over the past three years. During the years
ended March 31, 2007, 2006, and 2005, jet fuel, including hedging activities
and
our regional partner operations, accounted for 31.8%, 31.1% and 24.0%,
respectively, of our operating expenses. We have arrangements with major fuel
suppliers for substantial portions of our fuel requirements, and we believe
that
these arrangements assure an adequate supply of fuel for current and anticipated
future operations. Jet fuel costs are subject to wide fluctuations as a result
of sudden disruptions in supply beyond our control. Therefore, we cannot predict
the future availability and cost of jet fuel with any degree of certainty.
Our
mainline average fuel prices per gallon including realized and non-cash mark
to
market hedging activities, taxes and into-plane fees for the last three fiscal
years were as follows:
Fiscal
Year Ended
|
Average
Fuel Price per Gallon
|
Monthly
Low Price per Gallon
|
Monthly
High Price per Gallon
|
|
|
|
|
March
31, 2007
|
$
2.12
|
$
1.57
|
$
2.47
|
March
31, 2006
|
$
1.99
|
$
1.66
|
$
2.65
|
March
31, 2005
|
$
1.41
|
$
1.19
|
$
1.64
|
As
of May 18, 2007, the average price per gallon was approximately $2.30 excluding
the impact of our fuel hedges. We implemented a fuel-hedging program in November
2002, under which we entered into crude oil or Gulf Coast jet fuel derivative
contracts to partially protect us against significant increases in fuel prices.
As of March 31, 2007, we had hedged approximately 46% of our projected fuel
requirements for the quarter ending June 30, 2007, 30% of our projected fuel
requirements for the quarter ending September 30, 2007, 40% of our projected
fuel requirements as of December 31, 2007 and 18.8% of our projected fuel
requirements as of March 31, 2008.
Increases
in fuel prices or a shortage of supply could have a material adverse effect
on
our operations and financial results. Based on our current fleet and operations,
we estimate that a 1¢ increase in the price of fuel per gallon increases our
operating expenses by $2,039,000 on an annualized basis. This number will
increase as our capacity increases. Our ability to pass on increased fuel costs
to passengers through price increases or fuel surcharges may be limited,
particularly because of our affordable fare strategy and intense competition.
Insurance
We
carry $1.0 billion per aircraft per occurrence in property damage insurance
and
passenger and third-party liability insurance, and insurance for aircraft loss
or damage with deductible amounts as required by our aircraft lease agreements,
and customary coverage for other business insurance. While we believe such
insurance is adequate, there can be no assurance that such coverage will
adequately protect us against all losses that we might sustain. Our aircraft
hull and liability coverage renewed on December 31, 2006 for one year at reduced
year-over-year rates.
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.
Employees
As
of May 1, 2007, we had 5,265 employees, including 4,334 full-time and 931
part-time personnel. Our employees included 666 pilots, 978 flight attendants,
1,256 customer service agents, 517 ramp service agents, 334 reservations agents,
132 aircraft appearance agents, 45 catering agents, 341 mechanics and related
personnel, and 996 general management and administrative personnel. We consider
our relations with our employees to be good.
Approximately
22% of our employees are represented by unions. The following table reflects
the
principal collective bargaining agreements, and their respective amendable
dates:
|
Approximate
Number
|
|
Contract
|
Employee
Group
|
of
Employees
|
Representing
Union
|
Amendable
Date
|
|
|
|
|
Pilots
|
666
|
Frontier
Airline Pilots Association
|
March
2011
|
|
|
|
|
Mechanics
|
281
|
Teamsters
Airline Division
|
July
2008
|
|
|
|
|
Dispatchers
|
16
|
Transport
Workers Union
|
Under
Negotiation
|
|
|
|
|
Aircraft
appearance agents and maintenance cleaners
|
132
|
Teamsters
Airline Division
|
October
2013
|
|
|
|
|
Material
Specialist
|
22
|
International
Brotherhood of Teamsters
|
Under
Negotiation
|
In
September 2006, the National Mediation Board notified us that two unions
petitioned for representation of our flight attendants: the International
Brotherhood of Teamsters (“IBT”) and the Frontier Flight Attendants Association
(“FFAA”). Only the IBT had a sufficient number of authorization cards to be
included in the election ballot. The results were counted on November 30, 2006,
and the flight attendants voted against union representation by the IBT. This
is
the fifth time our flight attendants voted against union
representation.
In
February 2007, Frontier and the Frontier Airline Pilots Association (“FAPA”)
announced that FAPA membership ratified a new collective bargaining agreement.
The new four-year agreement amends the previous five-year contract signed in
May
2000. Implementation of the approved agreement began in March 2007.
In
March 2006, our material specialists voted for union representation by the
IBT
affecting 22 employees. We are currently in the process of negotiating this
agreement.
In
September 2006, the contract with our dispatchers, who are represented by the
Transport Workers Union (“TWU”), expired. We are currently in the process of
re-negotiating this agreement, which affects 16 employees.
We
have established a compensation philosophy that we will pay competitive wages
compared to other airlines of similar size and other employers with which we
compete for our labor supply. Employees have the opportunity to earn bonuses
under our profit sharing program and may be granted shares of our common stock
under our Employee Stock Ownership Program (“ESOP”). The bonuses and ESOP grants
are discretionary and reviewed by our Board of Directors each year.
Effective
in May 2000, we enhanced our 401(k) Retirement Savings Plan by announcing an
increased matching contribution by the company. Participants may receive a
50%
company match for contributions up to 10% of salary. This match is discretionary
and is approved on an annual basis by our Board of Directors. The Board of
Directors has approved the continuation of the match through the plan year
ending December 31, 2007.
For
the plan years ended December 31, 2007, 2006 and 2005, the Company contributed
300,000, 400,000, and 346,400 shares of stock to the ESOP, respectively. The
2007 contribution was funded from shares we purchased in the open market and
the
2006 and 2005 contributions were funded from shares issued. These shares are
allocated to eligible employees at the end of the plan year. Employees become
vested in shares allocated to their
account
20% per year and may obtain a distribution of vested shares upon leaving the
company. We believe that the 401(k) match, the ESOP and the related vesting
schedules of 20% per year may reduce our employee turnover rates.
In
September 2004, our stockholders approved an equity incentive plan for officers
and directors that provided a framework for our Board of Directors to grant
certain incentive awards to members of management. In March 2005, our Board
of
Directors adopted a new annual bonus and long-term incentive plan for our
officers and directors. The long-term incentive plan included the issuance
of
stock-only stock appreciation rights, restricted stock units and a three-year
cash incentive pool. Annual bonuses and three-year cash incentive pools are
paid
out based upon the company reaching targeted pre-tax profits and may also be
adjusted based on our annual pre-tax profit performance relative to peer group
companies.
Both
initial and recurring training is required for many employees. We train our
pilots, flight attendants, ground service personnel, reservations personnel
and
mechanics. FAA regulations require pilots to be licensed as commercial pilots,
with specific ratings for aircraft to be flown, to be medically certified or
physically fit, and have to recent flying experience. Mechanics, quality control
inspectors and flight dispatchers must be licensed and qualified for specific
aircraft. Flight attendants must have initial and periodic competency, fitness
training and certification. The FAA approves and monitors our training programs.
Management personnel directly involved in the supervision of flight operations,
training, maintenance and aircraft inspection must meet experience standards
prescribed by FAA regulations.
All
new employees are subject to pre-employment drug testing. Those employees who
perform safety sensitive functions are also subject to random drug and alcohol
testing, and mandatory testing in the event of an accident.
Government
Regulation
General.
All
interstate air carriers are subject to regulation by the DOT, the FAA and other
state and federal government agencies. In general, the amount of regulation
over
domestic air carriers in terms of market entry and exit, pricing and
inter-carrier agreements has been greatly reduced since the enactment of the
Deregulation Act.
U.S.
Department of Transportation.
The DOT’s jurisdiction extends primarily to the economic aspects of air
transportation, such as certification and fitness, insurance, advertising,
computer reservation systems, deceptive and unfair competitive practices, and
consumer protection matters such as compliance with the Air Carrier Access
Act,
on-time performance, denied boarding, discrimination and baggage liability.
The
DOT also is authorized to require reports from air carriers and to investigate
and institute proceedings to enforce its economic regulations and may, in
certain circumstances, assess civil penalties, revoke operating authority and
seek criminal sanctions. We hold a Certificate of Public Convenience and
Necessity issued by the DOT that allows us to engage in air transportation.
In
January 2007, the DOT designated us as a major carrier, which is U.S.-based
airlines
that post more than $1 billion in revenue during a fiscal
year.
U.S.
Federal Aviation Administration.
The FAA’s regulatory authority relates primarily to flight operations and air
safety, including aircraft certification and operations, crew licensing and
training, maintenance standards, and aircraft standards. The FAA also oversees
aircraft noise regulation, ground facilities, dispatch, communications, weather
observation, and flight and duty time. It also controls access to certain
airports through slot allocations, which represent government authorization
for
airlines to take off and land at controlled airports during specified time
periods. The FAA has the authority to suspend temporarily or revoke permanently
the authority of an airline or its licensed personnel for failure to comply
with
FAA regulations and to assess civil and criminal penalties for such failures.
We
hold an operating certificate issued by the FAA pursuant to Part 121 of the
Federal Aviation Regulations. We must have and we maintain FAA certificates
of
airworthiness for all of our aircraft. Our flight personnel, flight and
emergency procedures, aircraft and maintenance facilities and station operations
are subject to periodic inspections and tests by the FAA.
Transportation
Security Administration. On
November 19, 2001, in response to the terrorist acts of September 11, 2001,
the
President of the United States signed into law the Aviation and Transportation
Security Act (“ATSA”). The ATSA created the Transportation Security
Administration (“TSA”), an agency within the DOT, to oversee, among other
things, aviation and airport security. The ATSA provided for the federalization
of airport passenger, baggage, cargo, mail, employee and vendor screening
processes. The ATSA also enhanced background checks, provided federal air
marshals aboard flights, improved flight deck security, and enhanced security
for airport
perimeter
access. In addition, the ATSA required that all checked baggage be screened
by
explosive detection systems by December 31, 2002. Funding for airline and
airport security under the ATSA is primarily provided by a $2.50 per enplanement
ticket tax, with authority granted to the TSA to impose additional fees on
the
air carriers if necessary to cover additional federal aviation security costs.
Since 2002, the TSA has imposed an Aviation Security Infrastructure Fee on
all
airlines to assist in the cost of providing aviation security. The fees assessed
are based on airlines' actual 2000 security costs. Pursuant
to authority granted to the TSA to impose additional fees on air carriers if
necessary to cover additional federal aviation security costs, the TSA has
imposed an additional annual Security Infrastructure Fee on certain airlines,
including us. The industry has opposed and disagrees with the higher assessment
and is working with the TSA on a resolution.
Environmental
Matters. The
Aviation Safety and Noise Abatement Act of 1979, the Airport Noise and Capacity
Act of 1990 and Clean Air Act of 1963 oversee and regulate airlines with respect
to aircraft engine noise and exhaust emissions. We are required to comply with
all applicable FAA noise control regulations and with current exhaust emissions
standards. Our fleet is in compliance with the FAA’s Stage 3 noise level
requirements. In addition, various elements of our operation and maintenance
of
our aircraft are subject to monitoring and control by federal and state agencies
overseeing the use and disposal of hazardous materials and storm water
discharge. We believe we are currently in substantial compliance with all
material requirements of these agencies.
Railway
Labor Act/National Mediation Board. Our
labor relations with respect to our unionized employees are covered under Title
II of the Railway Labor Act and are subject to the jurisdiction of the National
Mediation Board.
Foreign
Operations. The
availability of international routes to U.S. carriers is regulated by treaties
and related agreements between the United States and foreign governments. The
United States typically follows the practice of encouraging foreign governments
to enter into “open skies” agreements that allow multiple carrier designation on
foreign routes. In some cases, countries have sought to limit the number of
carriers allowed to fly these routes. Certain foreign governments impose
limitations on the ability of air carriers to serve a particular city and/or
airport within their country from the U.S. For a U.S. carrier to fly to any
such
international destination, it must first obtain approval from both the U.S.
and
the “foreign country authority”. For those international routes where there is a
limit to the number of carriers or frequency of flights, studies have shown
these routes have more value than those without restrictions. In the past,
U.S.
government route authorities have been sold between carriers.
On
April 3, 2007, the U.S. Department of Transportation issued an “Open-Skies
Notice” inviting all U.S. air carriers now certificated to conduct foreign
scheduled air transportation and interested in applying for blanket open-skies
certificate authority to file applications with the Department. We filed
for this blanket authority in April 2007.
Foreign
Ownership. Pursuant
to U.S. law and DOT regulation, each United States air carrier must qualify
as a
United States citizen, which requires the carrier’s President and at least
two-thirds of its board of directors and other managing officers be comprised
of
United States citizens, that not more than 25% of the carrier’s voting stock may
be owned by foreign nationals, and that the carrier not be otherwise subject
to
foreign control.
Miscellaneous.
We are also subject to regulation or oversight by other federal and state
agencies. Antitrust laws are enforced by the U.S. Department of Justice and
the
Federal Trade Commission. All air carriers are subject to certain provisions
of
the Communications Act of 1934 because of their extensive use of radio and
other
communication facilities, and are required to obtain an aeronautical radio
license from the Federal Communications Commission. The U.S. Citizenship and
Immigration Services, the U.S. Customs Service and the Animal and Plant Health
Inspection Service of the U.S. Department of Agriculture each have jurisdiction
over certain aspects of our aircraft, passengers, cargo and operations.
In
addition to the other information contained in this Form 10-K, the following
risk factors should be considered carefully in evaluating our business and
us.
Our business, financial condition or results of operations could be materially
adversely affected by any of these risks. In addition, please read "Special
Note
About Forward-Looking Statements" in this Form 10-K, where we describe
additional uncertainties associated with our business and the forward-looking
statements included or incorporated by reference in this Form 10-K. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks faced by us
described below and elsewhere included or incorporated by reference in this
Form
10-K. Please note that additional risks not presently known to us or that we
currently deem immaterial may also impair our business and operations.
Risks
Related to Frontier
We
may not be able to obtain or secure financing for our new
aircraft.
As
of March 31, 2007, we have remaining firm purchase commitments for 13 aircraft
from Airbus (three Airbus 318 aircraft and ten Airbus 320 aircraft) and ten
Q400
aircraft from Bombardier. We have secured financing commitments for all ten
of
the Bombardier aircraft and three Airbus A318 aircraft deliveries through
February 2008 totaling approximately $225.3 million. To complete the purchase
of
the remaining ten A320 Airbus aircraft, we must secure aircraft financing
totaling approximately $320.0 million, which we may not be able to obtain on
terms acceptable to us, if at all. The terms of the purchase agreement do not
allow for cancellations of any of the purchase commitments. The amount of
financing required will depend on the required down payment on mortgage-financed
aircraft and the extent to which we lease as opposed to purchase the aircraft.
We are exploring various financing alternatives, including, but not limited
to,
domestic and foreign bank financing, leveraged lease arrangements or
sale/leaseback transactions. There can be no guarantee that additional financing
will be available when required or will be on acceptable terms. Our inability
to
secure the financing could have a material adverse effect on our cash balances
or result in delays in or our inability to take delivery of Airbus aircraft
that
we have agreed to purchase. The failure to take these future deliveries would
impair our strategy for long-term growth and could result in the loss of
pre-delivery payments and deposits previously paid to the manufacturer, and
the
imposition of other penalties or the payment of damages in accordance with
the
terms of the purchase agreement with the manufacturer. 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 March 31, 2007, we had
made pre-delivery payments on future aircraft deliveries totaling $52,453,000,
of which $14,833,000 relates to aircraft for which we have not yet secured
financing and $37,620,000 relates to aircraft for which we have secured
financing.
We
have a significant amount of fixed obligations and we will incur significantly
more fixed obligations, which could increase the risk of failing to meet payment
obligations.
As
of March 31, 2007, our total debt was $478.8 million, including $92.0 million
of
convertible debt due in December 2025 that was issued in December 2005.
Maturities of our long-term debt are $26.8 million in fiscal year 2008, $28.4
million in fiscal year 2009, $30.1 million in fiscal year 2010, $31.9 million
in
2011, $51.0 million in 2012, and an aggregate of $310.6 million for the years
thereafter. In addition, total interest due for our fixed obligations is $246.1
million in the aggregate. Maturities of long-term debt and interest due are
based on the stated maturity; however, the convertible notes are callable by
holders of the notes in December 2010. Our total existing long-term debt has
73.6% that bears floating interest rates and the remaining 26.4% bears fixed
rates. In addition to long-term debt, we have a significant amount of other
fixed obligations under operating leases related to our aircraft, airport
terminal space, other airport facilities and office space. As of March 31,
2007,
future minimum lease payments under non-cancelable operating leases were
approximately $164.0 million in fiscal year 2008, $172.0 million in fiscal
year
2009, $181.6 million in fiscal year 2010, $168.4 million in fiscal year 2011,
$166.5 million in fiscal year 2012 and an aggregate of $837.9 million for the
years thereafter. Approximately 85.8% of our minimum lease payments related
to
aircraft and leased engines are fixed in nature, and the remaining 14.2% are
adjusted periodically based on floating interest rates. As of March 31, 2007,
we
had commitments of
approximately
$721.8 million to purchase 23 additional aircraft over approximately the next
four years, including estimated amounts for contractual price escalations,
spare
parts to support these aircraft and to equip the aircraft with LiveTV, and
obligations relating to a service agreement with Sabre Travel Network. We expect
to incur additional debt or long-term lease obligations as we take delivery
of
new aircraft and other equipment and continue to expand into new
markets.
Many
of our financial obligations contain cross-default
provisions.
Many
of our financial arrangements contain cross-default provisions. As a result,
if
we default in our payment or performance obligations under one of our financial
arrangements and, in some cases, if the amount due thereunder is accelerated,
other financial arrangements may be declared in default and accelerated even
though we are meeting payment and performance obligations on those other
arrangements. If this occurs, we may not have sufficient available cash to
pay
all amounts that are then due and payable under our lease and loan agreements,
and we may have to seek additional debt or equity financing, which may not
be
available on acceptable terms, or at all. If alternative financing were not
available, we would have to sell assets in order to obtain the funds required
to
make the accelerated payments or seek ways to restructure the lease and loan
obligations.
Our
failure to successfully implement our growth strategy could harm our
business.
As
of March 31, 2007, our growth strategy involves adding 13 additional Airbus
aircraft and ten Bombardier Q400 aircraft, which we could choose to increase
to
30 total Airbus aircraft (including the exercise of 17 additional purchase
rights) and 20 Bombardier aircraft (including the exercise of ten additional
options), increasing the frequency of flights to markets we currently serve,
expanding the number of markets served and increasing flight connection
opportunities. The purchase rights on our Airbus aircraft expire on July 1,
2007
and our last option expires on December 1, 2007 for our Bombardier aircraft,
subject to additional extension rights. It is critical that we achieve our
growth strategy in order for our business to attain economies of scale and
to
sustain or improve our results of operations. Increasing the number of markets
we serve depends on our ability to access suitable airports located in our
targeted geographic markets in a manner that is consistent with our cost
strategy. While we currently have sufficient gates and facilities at DIA to
accommodate our current level of operations, our continued mainline expansion,
the increase of our regional jet fleet from nine to 17 aircraft, and the
initiation of turboprop service by Lynx Aviation expected in September 2007,
may
require us to obtain additional gates and other operational facilities at our
Denver hub. Any condition that would deny, limit or delay our access to airports
we seek to serve in the future will constrain our ability to grow or cause
us to
move some of our capacity to other airports. This would limit our ability to
leverage our hub and spoke network. Additionally, traffic may not materialize
in
new markets. Opening new markets requires us to commit a substantial amount
of
resources, even before the new services commence. Expansion will also require
additional skilled personnel, equipment and facilities. An inability to hire
and
retain skilled personnel or to secure the required equipment and facilities
efficiently and cost-effectively may negatively affect our ability to achieve
our growth strategy. We cannot assure you that we will be able to successfully
expand our existing markets or establish new markets, and our failure to do
so
could harm our business.
Growth
of our fleet and expansion of our markets and services may also strain our
existing management resources and systems to the point that they may no longer
be adequate to support our operations, requiring us to make significant
expenditures in these areas. We may need to further develop our information
technology systems and other corporate infrastructure to accommodate future
growth, particularly with respect to efficient Internet ticket sales and
passenger check-in capabilities. We cannot assure you that we will be able
to
sufficiently develop our systems and infrastructure on a timely basis, and
the
failure to do so could harm our business.
We
depend heavily on the Denver market to be successful.
Our
business strategy has historically focused on adding flights to and from our
Denver base of operations. Currently, 96% of our flights originate or depart
from DIA. A reduction in our share of the Denver market, increased competition,
or reduced passenger traffic to or from Denver could have a material adverse
effect on our financial condition and results of operations. In addition, our
dependence on a hub system operating out of DIA makes us more susceptible to
adverse weather conditions and other traffic delays in the Rocky Mountain region
than some of our competitors that may be better able to spread these traffic
risks over larger route networks.
We
face intense competition and market dominance by United Airlines and other
airlines at DIA, and Southwest Airlines service to and from Denver, has
increased competition on certain of our routes.
The
airline industry is highly competitive, primarily due to the effects of the
Airline Deregulation Act of 1978, which substantially eliminated government
authority to regulate domestic routes and fares and increased the ability of
airlines to compete with respect to flight frequencies and fares. We compete
with United in our hub in Denver, and we anticipate that we will compete with
United in any additional markets we elect to serve in the future. United, Ted,
and United’s regional airline affiliates are the dominant carriers out of DIA,
accounting for approximately 55.4% of all revenue passengers out of DIA for
the
month of March 2007. In addition, Southwest Airlines started service to and
from
Denver in January 2006 and currently has 36 daily departures. Southwest’s
introductory fares were significantly below the fares we were able to obtain
prior to its arrival. Fare pressure exerted by Southwest on its announced routes
and on any future expansion in Denver by Southwest will require us to be fare
competitive, and may place additional downward pressure on our yields. In
addition, in the last four years Alaska Airlines, JetBlue Airways and AirTran
Airways have commenced service at DIA. These airlines have offered low
introductory fares and compete on several of our routes. Fare wars, predatory
pricing, ‘‘capacity dumping,’’ in which a competitor places additional aircraft
on selected routes, and other competitive activities could adversely affect
us.
The future activities of United, Southwest and other carriers may have a
material adverse effect on our revenues and results of operations.
United
currently operates ten flights a week to Mexico that compete with our current
routes to Mexico. Most of our current and potential competitors have
significantly greater financial resources, larger route networks, and superior
market identity. Denver is also a hub for United’s low-cost operation Ted, which
began in February 2004. United’s scale and ability to lower the costs of its
mainline operations through its bankruptcy may continue to place downward
pressure on airfares charged in the Denver market and adversely affect our
market share at DIA and our ability to maintain yields required for profitable
operations. The potential for United and Southwest to place downward pressure
on
airfares charged in the Denver market may impair our ability to maintain yields
required for profitable operations.
Competition
on our Mexican routes may increase due to recent regulatory changes, which
may
adversely impact some of our most important markets.
The
U.S. and Mexico amended their bilateral agreement relating to commercial air
service. Previously, only two U.S. based airlines were permitted to provide
air
service between city pairs in the U.S. and Mexico. In many cases, we were one
of
the two U.S. based airlines providing service to the cities we serve in Mexico.
The amendments to the bilateral agreement expanded the authorized service levels
to three U.S. based airlines per city pair. It is therefore highly likely that
we will see other airlines seeking to add service to some of the Mexico
destinations we serve, which would increase competition and perhaps place
downward pressure on airfares in these markets. Flights to resort destinations
in Mexico have represented a significant portion of our vacation-oriented
operations, and if competition results in lower load factors or airfares on
our
Mexico flights, our operating results may be adversely impacted. United
currently operates ten flights a week to Mexico that compete with our current
routes to Mexico.
We
may not have access to adequate gates or airport slots, which could decrease
our
competitiveness.
The
number of gates, ticket counter or office space available to us at DIA, or
any
other airport where we operate or seek to commence operations in the future,
may
be limited due to the lack of available space or disruptions caused by airport
renovation projects. Available facilities may not provide for the best overall
service to our customers and may prevent us from scheduling our flights during
peak or opportune times. The lack of available facilities may limit our ability
to expand service to certain cities or restrict our ability to plan departures
and arrivals in a manner that provides efficient service or connecting times
to
and through our Denver hub. Inefficient operations may result in a reduction
in
passenger bookings or lost revenue.
In
the U.S., the FAA currently regulates slot allocations at O’Hare International
Airport in Chicago, at JFK and LaGuardia Airports in New York City, and at
Ronald Reagan National Airport in Washington D.C. John Wayne Airport in Orange
County also limits arrivals and departures at its airport for noise control
purposes. We currently operate at LaGuardia Airport, Ronald Reagan National
Airport and John Wayne Airport through arrival and departure slots at these
airports. In each case, the agencies controlling slot allocations reserve the
right to recall slot allocations for, among other reasons, lack of meeting
frequency or capacity requirements. If we lose existing slot allocations, are
denied requests for additional slot allocations at these airports, or are denied
slot allocations at other slot-controlled airports where we wish to operate
in
the future, our ability to provide service would be restricted, eliminated,
or
reduced. Because these cities represent key markets, the resulting restriction
on our service could negatively effect our results of operations.
We
experience high costs at DIA, which may impact our results of
operations.
We
operate our hub of flight operations from DIA where we experience high costs.
Financed through revenue bonds, DIA depends on landing fees, gate rentals,
income from airlines, the traveling public, and other fees to generate income
to
service its debt and to support its operations. Our cost of operations at DIA
will vary as traffic increases or diminishes at the airport or as significant
improvement projects are undertaken by the airport. We believe that our
operating costs at DIA substantially exceed those that other airlines incur
at
most hub airports in other cities, which decreases our ability to compete with
other airlines with lower costs at their hub airports. In addition, United
represents a significant tenant at DIA. In connection with United’s bankruptcy,
United and DIA restructured United’s lease agreement in a fashion that reduces
the amounts United is required to pay under its lease. Normally, the decrease
in
payments by United would result in the increase in amounts paid by all other
airlines. At this time, however, the City and County of Denver has agreed to
offset the decrease in payments negotiated by United. The city’s obligation to
make these offset payments is subject to rescission in certain circumstances.
If
these payments are rescinded or if United otherwise significantly reduces
operations at DIA, the overall costs at DIA may significantly increase for
all
other carriers operating at DIA, including ourselves. Also, we have recently
added six additional gates in Concourse A, related holdroom space and more
space
to accommodate our DIA regional operations.
Our
all-Airbus mainline fleet creates certain concentration
risks.
As
of March 31, 2007, we operated 57 Airbus aircraft. We completed our transition
from Boeing aircraft to operating only Airbus aircraft on our mainline routes
in
April 2005. One of the key elements of this strategy is to produce 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 cannot assure you that we will achieve all of the cost savings
we
anticipated from the fleet transition.
Since
we operate only Airbus aircraft on our mainline routes and GE engines, we are
dependent on single manufacturers for future aircraft acquisitions or
deliveries, spare parts or warranty service. If Airbus is unable to perform
its
obligations under existing purchase agreements,
or
is unable to provide future aircraft or services, whether by fire, strike or
other events that affect its ability to fulfill contractual obligations or
manufacture aircraft or spare parts, we would have to find another supplier
for
our aircraft. If acceptable Airbus aircraft were otherwise not available in
the
marketplace, Boeing is the only other manufacturer from which we could purchase
or lease alternate aircraft. If we were forced to acquire Boeing aircraft,
we
would need to address fleet transition issues, including substantial costs
associated with retraining our employees, acquiring new spare parts, and
replacing our manuals. In addition, the fleet efficiency benefits described
above may no longer be available.
Our
business would be significantly disrupted if an FAA airworthiness directive
or
service bulletin were issued that resulted in the grounding of Airbus aircraft
or GE engines of the type we operate while the defect was being corrected.
Our
business could also be harmed if the public avoids flying Airbus aircraft due
to
an adverse perception about the aircraft’s safety or dependability, whether real
or perceived, in the event of an accident or other incident involving an Airbus
aircraft of the type we fly.
If
we, through our new subsidiary Lynx Aviation, fail to successfully take delivery
of and operate reliably the new Bombardier Q400 aircraft we agreed to purchase,
our business could be harmed.
Acquisition
of a new type of aircraft, such as the Bombardier Q400, which we plan to place
into revenue service in September 2007, involves a variety of risks relating
to
its ability to be successfully placed into service, including delays in meeting
the agreed upon delivery schedule and the inability of the aircraft and all
of
its components to comply with agreed upon specifications and performance
standards. In addition, Lynx Aviation needs to obtain a certificate of public
convenience and necessity and an operating certificate in order to operate
these
aircraft. Application for these government authorizations was submitted in
January 2007 and we anticipate receiving these authorizations in time for Lynx
Aviation to commence operations in September 2007. However, approval of our
application could be delayed. In the meantime, we are incurring significant
start-up costs for Lynx, including the hiring and training of employees and
making pre-delivery payments on the Bombardier Q400 aircraft. We are also
required to purchase these aircraft in accordance with the timing and terms
of
our purchase agreement with Bombardier. Any delay in the ability for Lynx
Aviation to commence operations and generate revenues while we continue to
incur
these significant start-up costs will likely have a significant impact on our
results of operations.
We
rely on one vendor to provide our LiveTV service.
One
of the unique features of our Airbus fleet is that every seat in each of our
Airbus aircraft is equipped with LiveTV. LiveTV is provided by a subsidiary
of
JetBlue Airways, a competitor of ours. We do not know of any other company
that
could provide us economically with LiveTV equipment and related satellite
signals for programming. Our LiveTV installations have exceeded the number
of
installations provided for in our contract with the supplier of LiveTV, and
although we have had discussions with the supplier about expanding the number
of
aircraft covered by the contract, we have not finalized the terms of an expanded
agreement. If the supplier of LiveTV were to stop supplying us with the
equipment or service for any reason, or refused to supply equipment for our
future aircraft deliveries, we could lose one of the unique services that we
believe differentiates us from our competitors.
Our
maintenance expenses may be higher than we anticipate and will increase as
our
fleet ages.
We
bear the cost of all routine and major maintenance on our owned and leased
aircraft. Maintenance expenses comprise a significant portion of our operating
expenses. In addition, we are required periodically to take aircraft out of
service for heavy maintenance checks, which can increase costs and reduce
revenue. We also may be required to comply with regulations and airworthiness
directives the FAA issues, the cost of which our aircraft lessors may only
partially assume depending upon the magnitude of the expense. Although we
believe that our owned and leased aircraft are currently in compliance with
all
FAA issued airworthiness directives, additional airworthiness directives likely
will be required in the future, necessitating additional expense.
Because
the average age of our aircraft is approximately 3.3 years, our aircraft require
less maintenance now than they will in the future. We have incurred lower
maintenance expenses because most of the parts on our aircraft are under
multi-year warranties. Our maintenance costs will increase significantly, both
on an absolute basis and as a percentage of our operating expenses, as our
fleet
ages and these warranties expire.
We
may need to make other arrangements for our maintenance facility.
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 has expired and attempts to
negotiate a fixed term extension have been unsuccessful to date. Therefore,
we
are currently renting this facility on a month-to-month basis. Continental
has
also indicated that it may reduce the amount of space we could sublease. The
space reduction would prevent us from accommodating both our heavy and line
maintenance functions at the Continental hangar. If Continental reduces the
space covered by a sublease extension, or if we receive a notice to vacate
from
Continental, our maintenance operations would be significantly disrupted and
we
would likely need to rely on outside maintenance providers to cover our
maintenance requirements until we located a new facility or facilities. This
disruption would significantly increase our costs. We are currently is the
design stages of a new line maintenance facility at DIA and are moving
aggressively to complete this project, but it may not be completed prior to
a
reduction in our subleased space or our need to vacate the Continental facility.
We have also issued a request for proposals for the lease or construction of
new
or existing hangar and shop space to accommodate our heavy maintenance
functions. This facility may be located at DIA or elsewhere, depending on the
responses we receive. If we are required to relocate our heavy maintenance
operations, we will incur relocation expenses and our heavy maintenance
operations will likely be disrupted during the relocation process. The inability
to procure new maintenance facilities in a timely fashion may cause us to
increase our overall maintenance costs. Further, the lease or financing costs
of
a new facility or facilities may be higher than those of our current sublease
with Continental.
Our
landing fees may increase because of local noise abatement
procedures.
As
a result of litigation and pressure from residents in the areas surrounding
airports, airport operators have taken actions over the years to reduce aircraft
noise. These actions have included regulations requiring aircraft to meet
prescribed decibel limits by designated dates, curfews during nighttime hours,
restrictions on frequency of aircraft operations, and various operational
procedures for noise abatement. The Airport Noise and Capacity Act of 1990
recognized the right of airport operators with special noise problems to
implement local noise abatement procedures as long as the procedures do not
interfere unreasonably with the interstate and foreign commerce of the national
air transportation system. Compliance with local noise abatement procedures
may
lead to increased landing fees.
An
agreement between the City and County of Denver and another county adjacent
to
Denver specifies maximum aircraft noise levels at designated monitoring points
in the vicinity of DIA with significant payments payable by the city to the
other county for each substantiated noise violation under the agreement. DIA
has
incurred these payment obligations and likely will incur such obligations in
the
future, which it will pass on to us and other air carriers serving DIA by
increasing landing fees. Additionally, noise regulations could be enacted in
the
future that would increase our expenses and could have a material adverse effect
on our operations.
Unionization
affects our costs and may affect our operations.
Five
of our employee groups are represented by unions: our pilots, dispatchers,
mechanics, material specialist and aircraft appearance agents. In addition,
since 1997 we have had union organizing attempts that were defeated by our
flight attendants and ramp service agents. The collective bargaining agreement
with our pilots union, FAPA, expired in May 2005. In February 2007, FAPA
membership ratified a four year agreement that amends the previous five-year
contract signed in May 2005. In March 2006, our material specialists voted
for
union representation by the IBT, which affects approximately 22 employees.
We
are currently in the process of negotiating their first agreement. In September
2006, the contract with our dispatchers, who are represented by the TWU,
expired. We are currently in the process of re-negotiating this agreement,
which
affects approximately 16 employees.
If
we are unable to reach agreement with any of the represented work groups whose
contracts are currently being negotiated, or if currently non-unionized
employees were to unionize and we were unable to reach agreement on the terms
of
their employment, we may need to go to mediation and may experience widespread
employee dissatisfaction. We could be subject to work slowdowns or stoppages.
In
addition, we may be subject to disruptions by organized labor groups protesting
certain groups for their non-union status or conducting sympathy action for
fellow members striking at other airlines. Any of these events would be
disruptive to our operations and could harm our business.
The
lack of marketing alliances could harm our business.
Many
airlines have marketing alliances with other airlines, under which they market
and advertise their status as marketing alliance partners. Among other things,
they share the use of two-letter flight designator codes to identify their
flights and fares in the computerized reservation systems and permit reciprocity
in their frequent flyer programs. We do not have an extensive network of
marketing partners. The lack of marketing alliances puts us at a competitive
disadvantage to global network carriers, whose ability to attract passengers
through more widespread alliances, particularly on international routes, may
adversely affect our passenger traffic and our results of operations.
Our
lack of higher borrowing capacity under our current lines of credit and our
lack
of other borrowing facilities makes us highly dependent upon our existing cash
and operating cash flows.
Airlines
require substantial liquidity to operate. We have a line of credit with a
maximum borrowing amount of $20.0 million based on 60% of the value of certain
spare parts inventory. As of May 18, 2007, based on our eligible spare parts
inventory, we could borrow up to $16.5 million, which was reduced by letters
of
credit issued of $11.3 million as of March 31, 2007. We also have an additional
revolving line of credit for $5.8 million, and we can issue letters of credit
for up to $5.0 million of which $4.8 million had been issued as of March 31,
2007. Our limited borrowing capacity means we rely primarily on operating cash
flows to provide working capital. Unless we secure additional borrowing capacity
under lines of credit, borrowing facilities or other financing, we will be
dependent upon our existing cash and operating cash flows to fund our operations
and to make scheduled payments on our debt and other fixed obligations. If
we
deplete our existing cash, fail to generate sufficient funds from operations
to
meet these cash requirements and are unable to secure additional lines of
credit, borrowing facility or other financing, we could default on our debt
and
other fixed obligations. Our inability to meet our obligations as they become
due would seriously harm our business and financial results, particularly in
light of the cross-default clauses contained in many of our financing
arrangements.
If
we are unable to attract and retain qualified personnel at reasonable costs,
our
business will be harmed.
Our
business is labor intensive, with labor costs totaling $246.6 million, $219.4
million and $202.3 million for the years ended March 31, 2007, 2006 and 2005,
respectively. We expect salaries, wages and benefits to increase on a gross
basis. These costs could increase as a percentage of our overall costs, which
could harm our business. Our growth plans will require us to hire, train and
retain a significant number of new employees in the future. From time to time,
the airline industry has experienced a shortage of personnel licensed by the
FAA, especially pilots and mechanics. We compete against the major U.S. airlines
for labor in these highly skilled positions. Many of the major U.S. airlines
offer wage and benefit packages that exceed our wage and benefit packages.
As a
result, in the future, we may have to increase significantly wages and benefits
in order to attract and retain qualified personnel or risk considerable employee
turnover. If we are unable to hire, train and retain qualified employees at
a
reasonable cost, we may be unable to complete our growth plans and our business
could be harmed.
We
rely heavily on automated systems and technology to operate our business and
any
failure of these systems could harm our business.
We
are increasingly dependent on automated systems and technology to operate our
business, enhance customer service and achieve low operating costs, including
our computerized airline reservation system, telecommunication systems, website,
check-in kiosks and in-flight entertainment systems. Substantial or repeated
system failures to any of the above systems could reduce the attractiveness
of
our services and could result in our customers purchasing tickets from another
airline. Any disruptions in these systems could result in the loss of important
data, increase our expenses and generally harm our business. In addition, a
seemingly high percentage of customers have been booking flights on our airline
through third-party websites, which has increased our distribution costs. If
any
of these third-party websites experiences system failures or discontinues
listing our flights on its systems, our bookings and revenues may be adversely
impacted.
We
implement improvements to our website and reservations system from time to
time.
Implementation of changes to these systems may cause operational and financial
disruptions if we experience transition or system cutover issues, if the new
systems do not perform as we expect them to, or if vendors do not deliver
systems upgrades or other components on a timely basis. Any such disruptions
may
have the effect of discouraging some travelers from purchasing tickets from
us
and increasing our reservations staffing.
Risks
Associated with the Airline Industry
The
airline industry has incurred significant losses resulting in airline
restructuring and bankruptcies, which could result in changes in our
industry.
Financial
losses throughout the airline industry in recent years have resulted in airlines
renegotiating or attempting to renegotiate labor contracts, reconfiguring flight
schedules, furloughing or terminating employees, and taking other efficiency
and
cost-cutting measures. Despite these actions, several airlines have sought
reorganization under Chapter 11 of the U.S. Bankruptcy Code, which permits
them
to reduce labor rates, restructure debt, terminate pension plans and generally
reduce their cost structure. Such factors may have a greater impact during
time
periods when the industry encounters continued financial losses, as airlines
under financial pressures may institute pricing structures to achieve near-term
survival rather than long-term viability. It is foreseeable that further airline
reorganizations, bankruptcies, or consolidations may occur, the effects of
which
we are unable to predict. We cannot assure you that the occurrence of these
events, or potential changes resulting from these events, will not harm our
business or the industry.
We
may be subject to terrorist attacks or other acts of war and increased costs
or
reductions in demand for air travel due to hostilities in the Middle East or
other parts of the world.
Although
the entire industry is substantially enhancing security equipment and
procedures, it is impossible to guarantee that additional terrorist attacks,
such as the terrorist attacks that occurred on September 11, 2001 and more
recent threats in August 2006, or other acts of war will not occur. Given the
weakened state of the airline industry, if additional terrorist attacks or
acts
of war occur, particularly in the near future, it can be expected that the
impact of those attacks on the industry may be similar in nature to but
substantially greater than those resulting from the September 11 terrorist
attacks.
Increases
in fuel costs affect our operating costs and
competitiveness.
Fuel
is a major component of our operating expenses, accounting for 31.8% of our
total operating expenses for the year ended March 31, 2007, up from 31.1% for
the year ended March 31, 2006. On an actual basis, mainline fuel costs including
the impact of hedging increased to $343.1 million, representing an average
cost
of $2.12 per gallon, from $281.9 million, or $1.99 per gallon, over the same
periods. Both the cost and availability of fuel are influenced by many economic
and political factors and events occurring in oil-producing countries throughout
the world, which causes fuel costs to fluctuate widely. High oil prices have
had
a significant adverse impact on our results of operations over the past two
fiscal years. We cannot predict our future cost and availability of fuel, or
the
impact or further disruptions in oil supplies or refinery productivity based
on
natural disasters, which affect our ability to compete. The unavailability
of
adequate fuel supplies could have a material adverse effect on our operations
and profitability. In addition, larger airlines may have a competitive advantage
because they pay lower prices for fuel and other airlines, such as Southwest
Airlines, may have substantial fuel hedges that give them a competitive
advantage. We generally follow industry trends by imposing a fuel surcharge
in
response to significant fuel price increases. However, our ability to pass
on
increased fuel costs have been and may continue to be limited by economic and
competitive conditions. Although we implemented a fuel hedging program in 2003,
under which we entered into Gulf Coast jet fuel and West Texas Intermediate
crude derivative contracts that are intended to partially protect us against
significant increases in fuel prices, this program is limited in fuel volume
and
duration. As of March 31, 2007, we had hedged following percentages for our
projected fuel requirements as follows:
|
●
|
Approximately
46% for the quarter ending June 30, 2007
|
|
●
|
Approximately
30% for the quarter ending September 30, 2007
|
|
●
|
Approximately
40% for the quarter ending December 31, 2007
|
|
●
|
Approximately
19% for the quarter ending March 31,
2008
|
The
airline industry is seasonal and cyclical, resulting in unpredictable liquidity
and earnings.
Because
the airline industry is seasonal and cyclical, our liquidity and earnings will
fluctuate and be unpredictable. Our operations primarily depend on passenger
travel demand and seasonal variations. Our weakest travel periods are generally
during the quarters ending in March and December. The airline industry is also
a
highly cyclical business with substantial volatility. Airlines frequently
experience short-term cash requirements. These requirements are caused by
seasonal fluctuations in traffic, which often reduce cash during off-peak
periods, and various other factors, including price competition from other
airlines, national and international events, fuel prices, and general economic
conditions including inflation. Our operating and financial results are likely
to be negatively impacted by national or regional economic conditions in the
U.S., and particularly in Colorado.
Our
current insurance costs could increase if the U.S. government does not provide
war risk coverage to airlines.
Following
the September 11 terrorist attacks, aviation insurers dramatically increased
airline insurance premiums and significantly reduced the maximum amount of
insurance coverage available to airlines for liability to persons other than
passengers for claims resulting from acts of terrorism, war or similar events
to
$50 million per event and in the aggregate. In light of this development, under
the Air Transportation Safety and System Stabilization Act, the U.S. government
has provided domestic airlines with excess war risk coverage above $50 million
up to an estimated $1.6 billion per event for us.
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. Significant increases in insurance premiums would harm our
financial condition and results of operations.
Our
financial results and reputation could be harmed in the event of an accident
or
incident involving our aircraft.
An
accident or incident involving one of our aircraft could involve repair or
replacement of a damaged aircraft and its consequential temporary or permanent
loss from service, and significant potential claims of injured passengers and
others. We are required by the DOT and our lenders and lessors to carry hull,
liability and war risk insurance. Although we believe we currently maintain
liability insurance in amounts and of the type generally consistent with
industry practice, the amount of such coverage may not be adequate and we may
be
forced to bear substantial losses from an accident. Substantial claims resulting
from an accident in excess of our related insurance coverage would harm our
business and financial results. Moreover, any aircraft accident or incident,
even if fully insured, could cause a public perception that we are less safe
or
reliable than other airlines, which would harm our business.
We
are in a high fixed cost business, and any unexpected decrease in revenues
would
harm us.
The
airline industry is characterized by low profit margins and high fixed costs
primarily for personnel, fuel, aircraft ownership and lease costs and other
rents. The expenses of an aircraft flight do not vary significantly with the
number of passengers carried and, as a result, a relatively small change in
the
number of passengers or in pricing would have a disproportionate effect on
our
operating and financial results. Accordingly, a shortfall from expected revenue
levels can have a material adverse effect on our profitability and liquidity.
We
are often affected by factors beyond our control, including weather conditions,
traffic congestion at airports and increased security measures, and irrational
pricing from competitors, any of which could harm our operating results and
financial condition.
Delays
or cancellations due to adverse weather conditions or other factors beyond
our
control could adversely affect us.
Like
other airlines, we are subject to delays caused by factors beyond our control,
including adverse weather conditions, air traffic congestion at airports and
increased security measures. Delays frustrate passengers, reduce aircraft
utilization and increase costs, all of which negatively affect profitability.
During periods of snow, rain, fog, hurricanes or other storms, or other adverse
weather conditions, flights may be cancelled or significantly delayed.
Cancellations or delays due to weather conditions, traffic control problems
and
breaches in security could harm our operating results and financial condition.
In
December 2006 and January 2007, major snow storms in Denver, Colorado had a
significant negative impact on our operating results. In the December 2006
snow
storms, we cancelled 875 flights, 104,567 passengers were impacted and one
storm
completely shut down DIA for almost 48 hours. We estimate that this storm
reduced our revenue for the quarter ended December 31, 2006 by approximately
$13,200,000 ($12,200,000 in mainline passenger revenue and $1,000,000 in
regional partner revenue) and $3,500,000 in January 2007. In addition, the
snow
storms increased many variable costs including $3,300,000 in additional glycol
expenses over the prior year and $889,000 in additional wages related to our
flight crews and station personnel, offset by a reduction of fuel, landing
fees,
maintenance expenses and catering expenses of $3,306,000.
We
are subject to strict federal regulations, and compliance with federal
regulations increases our costs and decreases our
revenues.
Airlines
are subject to extensive regulatory and legal requirements that involve
significant compliance costs. Any future changes in regulatory oversight of
airlines generally, or low-fare carriers in particular, could result in a
material increase in our operating expenses or otherwise hinder our business.
In
the last several years, Congress has passed laws and the DOT and FAA have issued
regulations relating to the operation of airlines that have required significant
expenditures. For example, the President signed into law the Stabilization
Act
in November 2001. This law federalized substantially all aspects of civil
aviation security and requires, among other things, the implementation of
certain security measures by airlines and airports, including a requirement
that
all passenger baggage be screened. Funding for airline and airport security
under the law is primarily provided by a $2.50 per enplanement ticket tax
effective February 1, 2002, with authority granted to the TSA to impose
additional fees on air carriers if necessary. Under the Appropriations Act
enacted on April 16, 2003, the $2.50 enplanement tax was temporarily suspended
on ticket sales from June 1, 2003 through September 30, 2003. This enplanement
tax resumed on October 1, 2003, and recently proposed legislation, although
unsuccessful to date, would increase the ticket tax to $5.00 per enplanement.
To
the extent this increase could not be passed on to the passenger, it would
result in a significant increase in our cost of operations. In addition, the
acquisition, installation and operation of the required baggage screening
systems by airports will result in capital expenses and costs by those airports
that will likely be passed on to the airlines through increased use and landing
fees. On February 17, 2002, the Stabilization Act imposed a base security
infrastructure fee on commercial air carriers in an amount equal to the calendar
year ended 2000 airport security expenses. The infrastructure fee for us is
$1,625,000 annually subject to final audit. Pursuant
to authority granted to the TSA to impose additional fees on air carriers if
necessary to cover additional federal
aviation
security costs, the TSA has imposed an additional annual Security Infrastructure
Fee on certain airlines, including Frontier. A
revision in the fee structure assessed by the TSA could result in increased
cost
for us.
The airline industry has opposed and disagrees with the higher assessment and
is
working with the TSA on a resolution.
Although
we have obtained the necessary authority from the DOT and the FAA to conduct
flight operations and are currently seeking such authority from the FAA with
respect to our Bombardier aircraft, we must maintain this authority by our
continued compliance with applicable statutes, rules, and regulations pertaining
to the airline industry, including any new rules and regulations that may be
adopted in the future. We believe that the FAA strictly scrutinizes smaller
airlines like ours, which makes us susceptible to regulatory demands that can
negatively impact our operations. We may not be able to continue to comply
with
all present and future rules and regulations. In addition, we cannot predict
the
costs of compliance with these regulations and the effect of compliance on
our
profitability, although these costs may be material.
None.
Aircraft
As
of May 18, 2007, excluding JetExpress, we operate 49 Airbus A319 aircraft and
ten Airbus A318 aircraft in all-coach seating configurations. The age of these
aircraft, their passenger capacities and expiration years for the leased
aircraft are shown in the following table:
Aircraft
|
No.
of
|
Year
of
|
Approximate
|
Lease
|
Model
|
Aircraft
|
Manufacture
|
Seating
Capacity
|
Expiration
|
|
|
|
|
|
A319
|
36
|
2001
- 2007
|
132
|
2013
- 2019
|
A319
|
13
|
2001
- 2006
|
132
|
Owned
|
A318
|
2
|
2004
|
114
|
2016
|
A318
|
8
|
2003
- 2007
|
114
|
Owned
|
We
have
completed our fleet replacement plan to phase out our Boeing aircraft and have
replaced them with a combination of Airbus A319 and A318 aircraft. In March
2000, we entered into a purchase agreement with Airbus, as subsequently amended
in April 2006, to purchase 38 Airbus aircraft. As of May 18, 2007, we had taken
delivery of 27 of these aircraft, four of which we sold and leased back. In
addition, prior to the delivery of two aircraft in fiscal year 2004, we assigned
delivery to a lessor and agreed to lease these aircraft over 12-year terms.
Our
purchase agreement with Airbus also includes purchase rights for up to 17
additional aircraft, and allows us to purchase Airbus A318 or A320 aircraft
in
lieu of the A319 aircraft at our option. We have remaining firm purchase
commitments for 11 Airbus aircraft and 10 Bombardier Q400 aircraft. We
anticipate the following fleet composition as of the end of each fiscal year
through 2011:
Fiscal
Year Ending
|
A319
|
A318
|
A320
|
Q400
|
End
of Year Cumulative Total Fleet
|
March
31, 2007
|
49
|
8
|
-
|
-
|
57
|
March
31, 2008
|
49
|
11
|
2
|
10
|
72
|
March
31, 2009
|
49
|
11
|
3
|
10
|
73
|
March
31, 2010
|
49
|
11
|
8
|
10
|
78
|
March
31, 2011
|
49
|
11
|
10
|
10
|
80
|
|
|
|
|
|
This
table does not include any of the 17 Airbus and ten Bombardier Q400 aircraft
for
which we have purchase rights and options respectively, which would allow us
to
take delivery of additional A318, A319 or A320 aircraft beginning in fiscal
year
2009. The purchase rights on our Airbus aircraft expire on July 1, 2007 and
our
last option expires on December 1, 2007 for our Bombardier aircraft, subject
to
additional extension rights. In addition, we can defer delivery of two A320
aircraft to be delivered in November 2009 and February 2010 into the year 2011.
Facilities
We
lease approximately 70,000 square feet of space at our headquarters facility
near DIA. The lease expires in January 2015. We also lease an additional 20,000
square feet of space in a building adjacent to our main headquarters. This
lease
expires in July 2008. We are currently examining options to acquire additional
office space to accommodate our growth.
Our
Denver, Colorado reservations facility is 16,000 square foot facility, also
in
Denver, Colorado, which we have leased for a 10-year lease term ending in June
2011. In August 2000, we established a second reservations center facility
in
Las Cruces, New Mexico. This facility is approximately 12,000 square feet and
is
leased for a term of 122 months ending August 2010.
Lynx
Aviation currently leases approximately 12,000 square feet of space in
Westminster, Colorado. The lease expires in December 2012.
We
have entered into an airport lease and facilities agreement expiring in 2010
with the City and County of Denver, Colorado, at DIA for ticket counter space,
22 gates in Concourse A and associated operations space. Our future growth
may
require us to work with DIA and the City and County of Denver, Colorado to
develop access to additional gates and other airport facilities. If the
construction of additional facilities is required to meet our growth needs,
it
is likely that we would be obligated to lease the additional facilities, thereby
increasing our overall rates and charges paid to the airport. Because our
overall rates and charges will be based on the final project costs as well
as
the number of passengers and gross weight landed at the airport, it is not
possible at this time to determine the amount of future rates and charges at
DIA.
We
sublease a portion of Continental Airlines’ hangar at DIA. The primary term of
this sublease expired in February 2007 and we now occupy that facility on a
month-to-month basis. Additionally, we lease maintenance facilities in Kansas
City, Missouri and Phoenix, Arizona.
Each
of our airport locations requires leased space associated with gate operations,
ticketing and baggage operations. We either lease the ticket counters, gates,
and airport office facilities at each of the airports we serve from the
appropriate airport authority or sublease them from other airlines.
From
time to time, we are engaged in routine litigation incidental to our business.
We believe there are no legal proceedings pending in which we are a party or
of
which any of our property is the subject that are not adequately covered by
insurance maintained by us or which have sufficient merit to result in a
material adverse affect upon our business, financial condition, results of
operations, or liquidity.
None
PART
II
Price
Range of Common Stock
Our
common stock is listed on the NASDAQ Global Market and is traded under the
symbol FRNT. As of May 18, 2007, there were 1,639 holders of record of our
common stock. The following table shows the range of high and low sales prices
per share for our common stock for the periods indicated as reported by
NASDAQ.
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
Fiscal
Year 2007 Quarter Ended
|
|
|
|
|
|
|
|
|
|
June
30, 2006
|
|
$
|
7.83
|
|
$
|
5.66
|
|
September
30, 2006
|
|
$
|
8.63
|
|
$
|
5.79
|
|
December
31, 2006
|
|
$
|
9.08
|
|
$
|
6.87
|
|
March
31, 2007
|
|
$
|
8.07
|
|
$
|
5.90
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2006 Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2005
|
|
$
|
12.96
|
|
$
|
9.26
|
|
September
30, 2005
|
|
$
|
13.01
|
|
$
|
8.90
|
|
December
31, 2005
|
|
$
|
10.92
|
|
$
|
7.57
|
|
March
31, 2006
|
|
$
|
9.40
|
|
$
|
6.43
|
|
Dividend
Policy
We
have not declared or paid cash dividends on our common stock. We currently
intend to retain any future earnings to fund operations and the continued
development of our business, and, thus, do not expect to pay any cash dividends
on our common stock in the foreseeable future. Future cash dividends, if any,
will be determined by our Board of Directors and will be based upon our
earnings, capital requirements, financial condition and other factors deemed
relevant by the Board of Directors.
Performance
Graph
The
following graph shows the cumulative total shareholder return on Frontier’s
common stock compared to the cumulative total return of two other indices:
(i)
The Nasdaq National Market Composite Index of U.S. Companies (IXICN), and (ii)
the Peer Group Index of similar line-of business companies consisting of Midwest
Express Airlines (MEH), AirTran Holdings, Inc. (AAI), and JetBlue Airways
Corporation (JBLU) (the “Peer Group”). JetBlue did not begin trading until April
2002, and is not included in the Peer Group Index until fiscal year 2003. The
graph shows the value at the end of each of the last five fiscal years of $100
invested in Frontier Holdings common stock or the indices on March 31, 2002,
assumes reinvestment of dividends, and takes into account stock splits.
Historical stock price performance is not necessarily indicative of future
stock
price performance.
![](graph.jpg)
|
Mar-02
|
Mar-03
|
Mar-04
|
Mar-05
|
Mar-06
|
Mar-07
|
|
|
|
|
|
|
|
Frontier
Airlines Holdings, Inc.
|
100.00
|
27.13
|
56.88
|
57.21
|
42.03
|
32.81
|
|
|
|
|
|
|
|
NASDAQ
Market Index
|
100.00
|
72.68
|
108.07
|
108.34
|
126.79
|
131.23
|
|
|
|
|
|
|
|
Peer
Group Index
|
100.00
|
70.15
|
115.46
|
85.90
|
138.55
|
109.92
|
Issuer
Purchases of Equity Securities
The
following chart provides information regarding Common Stock purchases by
the
Company during the period January 1, 2007 through March 31, 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 may
yet
to be purchased
under
the plans
or
program
|
|
|
|
|
|
January
1, 2007 through
January
31, 2007
|
-
|
-
|
-
|
-
|
February
1, 2007 through
February
28, 2007
|
-
|
-
|
-
|
-
|
March
1, 2007 through
March
31, 2007
|
212,701
|
$
6.14
|
212,701
|
87,299
|
The
following selected financial and operating data as of and for each of the years
ended March 31, 2007, 2006, 2005, 2004, and 2003 are derived from our audited
financial statements. This data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and the related notes thereto included
elsewhere in this report.
|
|
Year
Ended March 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Amounts
in thousands except per share
amounts)
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
$
|
1,170,949
|
|
$
|
1,001,522
|
|
$
|
837,585
|
|
$
|
644,739
|
|
$
|
469,992
|
|
Total
operating expenses
|
|
|
1,181,651
|
|
|
1,009,419
|
|
|
864,032
|
|
|
617,257
|
|
|
500,783
|
|
Operating
income (loss)
|
|
|
(9,834
|
)
|
|
(7,897
|
)
|
|
(26,447
|
)
|
|
27,482
|
|
|
(30,791
|
)
|
Income
(loss) before income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
cumulative effect of change in accounting principle
|
|
|
(24,996
|
)
|
|
(20,468
|
)
|
|
(35,838
|
)
|
|
20,457
|
|
|
(39,509
|
)
|
Income
tax expense (benefit)
|
|
|
(4,626
|
)
|
|
(6,497
|
)
|
|
(12,408
|
)
|
|
7,822
|
|
|
(14,655
|
)
|
Income
(loss) before cumulative effect of change in accounting
principle
|
|
|
(20,370
|
)
|
|
(13,971
|
)
|
|
(23,430
|
)
|
|
12,635
|
|
|
(24,854
|
)
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,011
|
|
Net
income (loss)
|
|
$
|
(20,370
|
)
|
$
|
(13,971
|
)
|
$
|
(23,430
|
)
|
$
|
12,635
|
|
$
|
(22,843
|
)
|
Income
(loss) per share before cumulative effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
a change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.56
|
)
|
$
|
(0.39
|
)
|
$
|
(0.66
|
)
|
$
|
0.39
|
|
$
|
(0.84
|
)
|
Diluted
|
|
$
|
(0.56
|
)
|
$
|
(0.39
|
)
|
$
|
(0.66
|
)
|
$
|
0.36
|
|
$
|
(0.84
|
)
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.56
|
)
|
$
|
(0.39
|
)
|
$
|
(0.66
|
)
|
$
|
0.39
|
|
$
|
(0.77
|
)
|
Diluted
|
|
$
|
(0.56
|
)
|
$
|
(0.39
|
)
|
$
|
(0.66
|
)
|
$
|
0.36
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and short-term investments
|
|
$
|
202,981
|
|
$
|
272,840
|
|
$
|
174,795
|
|
$
|
190,609
|
|
$
|
104,880
|
|
Current
assets
|
|
|
340,405
|
|
|
390,957
|
|
|
275,550
|
|
|
269,733
|
|
|
191,291
|
|
Total
assets
|
|
|
1,042,868
|
|
|
970,432
|
|
|
792,011
|
|
|
769,706
|
|
|
588,315
|
|
Current
liabilities
|
|
|
359,326
|
|
|
301,011
|
|
|
233,850
|
|
|
181,659
|
|
|
130,519
|
|
Long-term
debt
|
|
|
451,908
|
|
|
405,482
|
|
|
282,792
|
|
|
280,001
|
|
|
261,739
|
|
Total
liabilities
|
|
|
833,372
|
|
|
741,656
|
|
|
554,090
|
|
|
511,764
|
|
|
429,348
|
|
Stockholders'
equity
|
|
|
209,496
|
|
|
228,776
|
|
|
237,920
|
|
|
257,942
|
|
|
158,967
|
|
Working
capital (deficit)
|
|
|
(18,921
|
)
|
|
89,946
|
|
|
41,700
|
|
|
88,074
|
|
|
60,772
|
|
|
|
Year
Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Selected
Operating Data - Mainline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
|
$
|
1,037,302
|
|
$
|
878,681
|
|
$
|
731,822
|
|
$
|
615,390
|
|
$
|
460,188
|
|
Revenue
passengers carried (000s)
|
|
|
9,140
|
|
|
7,764
|
|
|
6,653
|
|
|
5,569
|
|
|
3,926
|
|
Revenue
passenger miles (RPMs) (000s) (3)
|
|
|
8,532,577
|
|
|
7,436,830
|
|
|
6,587,589
|
|
|
5,120,587
|
|
|
3,599,553
|
|
Available
seat miles (ASMs) (000s) (4)
|
|
|
11,310,070
|
|
|
9,885,599
|
|
|
9,115,868
|
|
|
7,153,740
|
|
|
6,013,261
|
|
Passenger
load factor (5)
|
|
|
75.4
|
%
|
|
75.2
|
%
|
|
72.3
|
%
|
|
71.6
|
%
|
|
59.9
|
%
|
Break-even
load factor (6)
|
|
|
76.3
|
%
|
|
75.8
|
%
|
|
75.0
|
%
|
|
68.8
|
%
|
|
65.0
|
%
|
Block
hours (7)
|
|
|
234,965
|
|
|
202,300
|
|
|
182,581
|
|
|
142,466
|
|
|
120,297
|
|
Departures
|
|
|
97,554
|
|
|
82,878
|
|
|
72,888
|
|
|
61,812
|
|
|
53,081
|
|
Average
seats per departure
|
|
|
129.6
|
|
|
129.4
|
|
|
130.1
|
|
|
132.2
|
|
|
132.1
|
|
Average
stage length
|
|
|
895
|
|
|
922
|
|
|
961
|
|
|
875
|
|
|
858
|
|
Average
length of haul
|
|
|
934
|
|
|
958
|
|
|
990
|
|
|
919
|
|
|
917
|
|
Average
daily block hour utilization (8)
|
|
|
11.9
|
|
|
11.5
|
|
|
11.1
|
|
|
10.4
|
|
|
9.8
|
|
Passenger
yield per RPM (cents) (9), (10)
|
|
|
12.05
|
|
|
11.68
|
|
|
11.03
|
|
|
11.96
|
|
|
12.74
|
|
Total
yield per RPM (cents) (11)
|
|
|
12.62
|
|
|
12.22
|
|
|
11.44
|
|
|
12.37
|
|
|
13.06
|
|
Passenger
yield per ASM (cents) (12)
|
|
|
9.09
|
|
|
8.79
|
|
|
7.97
|
|
|
8.56
|
|
|
7.63
|
|
Total
yield per ASM (cents) (13)
|
|
|
9.52
|
|
|
9.19
|
|
|
8.26
|
|
|
8.86
|
|
|
7.82
|
|
Cost
per ASM (cents)
|
|
|
9.49
|
|
|
9.13
|
|
|
8.46
|
|
|
8.42
|
|
|
8.33
|
|
Fuel
expense per ASM (cents)
|
|
|
3.03
|
|
|
2.85
|
|
|
2.04
|
|
|
1.52
|
|
|
1.43
|
|
Cost
per ASM excluding fuel (cents) (14)
|
|
|
6.46
|
|
|
6.28
|
|
|
6.42
|
|
|
6.90
|
|
|
6.90
|
|
Average
fare (15)
|
|
$
|
102.59
|
|
$
|
103.05
|
|
$
|
102.31
|
|
$
|
103.54
|
|
$
|
108.81
|
|
Average
aircraft in service
|
|
|
54.1
|
|
|
48.2
|
|
|
44.9
|
|
|
37.3
|
|
|
33.8
|
|
Aircraft
in service at end of period
|
|
|
57
|
|
|
50
|
|
|
47
|
|
|
38
|
|
|
36
|
|
Average
age of aircraft at end of period
|
|
|
3.2
|
|
|
2.6
|
|
|
2.5
|
|
|
3.9
|
|
|
7.4
|
|
Average
fuel cost per gallon (16)
|
|
$
|
2.12
|
|
$
|
1.99
|
|
$
|
1.41
|
|
$
|
1.04
|
|
$
|
0.96
|
|
Fuel
gallons consumed (000's)
|
|
|
161,616
|
|
|
141,474
|
|
|
131,906
|
|
|
104,799
|
|
|
89,236
|
|
Selected
Operating Data - Regional Partner (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
|
$ |
94,164
|
|
$ |
92,826
|
|
$ |
84,269
|
|
$ |
11,191
|
|
$ |
- |
|
Revenue
passengers carried (000s)
|
|
|
899 |
|
|
912 |
|
|
872 |
|
|
115 |
|
|
- |
|
Revenue
passenger miles (RPMs) (000s) (3)
|
|
|
576,431
|
|
|
591,787
|
|
|
527,205
|
|
|
75,974
|
|
|
- |
|
Available
seat miles (ASMs) (000s) (4)
|
|
|
799,914
|
|
|
821,244
|
|
|
736,287
|
|
|
111,144
|
|
|
- |
|
Passenger
load factor (5)
|
|
|
72.1
|
%
|
|
72.1
|
%
|
|
71.6
|
%
|
|
68.4
|
%
|
|
-
|
|
Passenger
yield per RPM (cents) (9)
|
|
|
16.34
|
|
|
15.69
|
|
|
15.98
|
|
|
14.73
|
|
|
-
|
|
Passenger
yield per ASM (cents) (12)
|
|
|
11.77
|
|
|
11.30
|
|
|
11.45
|
|
|
10.07
|
|
|
-
|
|
Cost
per ASM (cents)
|
|
|
13.55
|
|
|
13.01
|
|
|
12.56
|
|
|
13.17
|
|
|
-
|
|
Average
fare (15)
|
|
$
|
104.72
|
|
$
|
101.78
|
|
$
|
96.66
|
|
$
|
97.03
|
|
$
|
-
|
|
Aircraft
in service at end of period
|
|
|
9
|
|
|
9
|
|
|
9
|
|
|
7
|
|
|
-
|
|
|
|
Year
Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Selected
Operating Data - Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
|
$
|
1,131,466
|
|
$
|
971,507
|
|
$
|
816,091
|
|
$
|
626,581
|
|
$
|
460,188
|
|
Revenue
passengers carried (000s)
|
|
|
10,039
|
|
|
8,676
|
|
|
7,525
|
|
|
5,684
|
|
|
3,926
|
|
Revenue
passenger miles (RPMs) (000s) (3)
|
|
|
9,109,008
|
|
|
8,028,617
|
|
|
7,114,794
|
|
|
5,196,561
|
|
|
3,599,553
|
|
Available
seat miles (ASMs) (000s) (4)
|
|
|
12,109,984
|
|
|
10,706,843
|
|
|
9,852,155
|
|
|
7,264,884
|
|
|
6,013,261
|
|
Passenger
load factor (5)
|
|
|
75.2
|
%
|
|
75.0
|
%
|
|
72.2
|
%
|
|
71.5
|
%
|
|
59.9
|
%
|
Passenger
yield per RPM (cents) (9), (10)
|
|
|
12.32
|
|
|
11.98
|
|
|
11.39
|
|
|
12.01
|
|
|
12.74
|
|
Total
yield per RPM (cents) (11)
|
|
|
12.85
|
|
|
12.47
|
|
|
11.77
|
|
|
12.41
|
|
|
13.06
|
|
Passenger
yield per ASM (cents) (12)
|
|
|
9.27
|
|
|
8.98
|
|
|
8.23
|
|
|
8.59
|
|
|
7.63
|
|
Total
yield per ASM (cents) (13)
|
|
|
9.67
|
|
|
9.35
|
|
|
8.50
|
|
|
8.87
|
|
|
7.82
|
|
Cost
per ASM (cents)
|
|
|
9.76
|
|
|
9.43
|
|
|
8.77
|
|
|
8.50
|
|
|
8.33
|
|
(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)
|
Regional
Partner operating data includes the operations of Republic, Horizon
and
Mesa Airlines. On January 11, 2007, we signed an agreement with 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 is
replacing our agreement with Horizon, which will expire on return
of the
last aircraft in December 2007. In September 2003, we signed an agreement
with Horizon, under which Horizon operates up to nine 70-seat CRJ
700
aircraft under our Frontier JetExpress brand. The service began on
January
1, 2004 and replaced our codeshare with Mesa Airlines, which terminated
on
December 31, 2003. In accordance with Emerging Issues Task Force
No.
01-08, “Determining Whether an Arrangement Contains a Lease” (“EITF
01-08”), we have concluded that the Horizon and Republic agreements
contain leases as the agreements convey the right to use a specific
number
and specific type of aircraft over a stated period of time. Therefore,
we
are recording revenues and expenses related to these agreements on
a gross
basis. Under the Mesa agreement, we recorded JetExpress revenues
reduced
by related expenses net in other revenues. JetExpress operations
under the
Mesa agreement from April 1, 2003 to December 31, 2003 and from February
1, 2003 to March 31, 2003 are not included in regional partner statistics
in 2004 and 2003 because the Mesa arrangement was effective prior
to May
28, 2003, the effective date of EITF
01-08.
|
Amounts
included in other revenues for Mesa for the years ended March 31, 2007, 2006,
2005, 2004 and 2003 were as follows:
|
|
Year
Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa
revenues (000s)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
25,155
|
|
$
|
1,608
|
|
Mesa
expenses (000s)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(23,438
|
)
|
|
(2,314
|
)
|
Net
amount in other revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,717
|
|
$
|
(706
|
)
|
Mesa’s
revenue passenger miles (RPMs) and available seat miles (ASMs) for the years
ended March 31, 2007, 2006, 2005, 2004 and 2003
were
as follows:
|
|
Year
Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa
RPMs (000s)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
148,163
|
|
|
11,004
|
|
Mesa
ASMs (000s)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
174,435
|
|
|
17,759
|
|
(3)
|
“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.
|
(4)
|
“Available
seat miles,” or ASMs, are determined by multiplying the number of seats
available for passengers by the number of miles
flown.
|
(5)
|
“Passenger
load factor” is determined by dividing revenue passenger miles by
available seat miles. This represents the percentage of aircraft
seating
capacity that is actually utilized.
|
(6)
|
“Break-even
load factor” is the passenger load factor that will result in operating
revenues being equal to operating expenses, assuming constant revenue
per
passenger mile and expenses.
|
A
reconciliation of the components of the calculation of break-even load factor
is
as follows:
|
|
Year
Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(in
thousands)
|
|
(Income)
loss before cumulative effect of accounting change
|
|
$
|
20,370
|
|
$
|
13,971
|
|
$
|
23,430
|
|
$
|
(12,635
|
)
|
$
|
24,854
|
|
Income
tax (expense) benefit
|
|
|
4,626
|
|
|
6,497
|
|
|
12,408
|
|
|
(7,822
|
)
|
|
14,655
|
|
Passenger
revenue
|
|
|
1,037,302
|
|
|
878,681
|
|
|
731,822
|
|
|
615,390
|
|
|
460,188
|
|
Regional
partner expense
|
|
|
(108,355
|
)
|
|
(106,866
|
)
|
|
(92,481
|
)
|
|
(14,634
|
)
|
|
-
|
|
Regional
partner revenue
|
|
|
94,164
|
|
|
92,826
|
|
|
84,269
|
|
|
11,191
|
|
|
-
|
|
Charter
revenue
|
|
|
(8,861
|
)
|
|
(10,011
|
)
|
|
(5,381
|
)
|
|
(2,724
|
)
|
|
(1,515
|
)
|
Passenger
revenue mainline (excluding charter and regional partner revenue
required
to break even)
|
|
$
|
1,039,246
|
|
$
|
875,098
|
|
$
|
754,067
|
|
$
|
588,766
|
|
$
|
498,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
calculation of the break-even load factor is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Passenger
revenue mainline (excluding charter and regional partner revenue
required
to break even) ($000s)
|
|
$
|
1,039,246
|
|
$
|
875,098
|
|
$
|
754,067
|
|
$
|
588,766
|
|
$
|
498,182
|
|
Mainline
yield per RPM (cents)
|
|
|
12.05
|
|
|
11.68
|
|
|
11.03
|
|
|
11.96
|
|
|
12.74
|
|
Mainline
revenue passenger miles (000s) to break even assuming
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
constant
yield per RPM
|
|
|
8,624,448
|
|
|
7,492,277
|
|
|
6,838,110
|
|
|
4,920,834
|
|
|
3,909,610
|
|
Mainline
available seat miles (000's)
|
|
|
11,310,070
|
|
|
9,885,599
|
|
|
9,115,868
|
|
|
7,153,740
|
|
|
6,013,261
|
|
Mainline
break-even load factor
|
|
|
76.3
|
%
|
|
75.8
|
%
|
|
75.0
|
%
|
|
68.8
|
%
|
|
65.0
|
%
|
(7)
|
“Block
hours” represent the time between aircraft gate departure and aircraft
gate arrival.
|
(8)
|
“Average
daily block hour utilization” represents the total block hours divided by
the number of aircraft days in service, divided by the weighted
average of
aircraft in our fleet during that period. The number of aircraft
includes
all aircraft on our operating certificate, which includes scheduled
aircraft, as well as aircraft out of service for maintenance
and
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.
|
(9)
|
“Passenger
yield per RPM” is determined by dividing passenger revenues (excluding
charter revenue) by revenue passenger
miles.
|
(10)
|
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 SEC. 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 calculation of passenger revenue excluding charter
revenue is as
follows:
|
|
|
Year
Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenues - mainline, as reported
|
|
$
|
1,037,302
|
|
$
|
878,681
|
|
$
|
731,822
|
|
$
|
615,390
|
|
$
|
460,188
|
|
Less:
charter revenue
|
|
|
8,861
|
|
|
10,011
|
|
|
5,381
|
|
|
2,724
|
|
|
1,515
|
|
Passenger
revenues - mainline excluding charter
|
|
|
1,028,441
|
|
|
868,670
|
|
|
726,441
|
|
|
612,666
|
|
|
458,673
|
|
Add:
Passenger revenues - regional partner
|
|
|
94,164
|
|
|
92,826
|
|
|
84,269
|
|
|
11,191
|
|
|
-
|
|
Passenger
revenues, system combined
|
|
$
|
1,122,605
|
|
$
|
961,496
|
|
$
|
810,710
|
|
$
|
623,857
|
|
$
|
458,673
|
|
(11)
|
“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.
|
(12) |
“Passenger
yield per ASM” or “RASM” is determined by dividing passenger revenues
(excluding charter revenue) by available seat
miles.
|
(13) |
“Total
yield per ASM” is determined by dividing total revenues by available seat
miles.
|
(14) |
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 better 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.
|
(15) |
“Average
fare” excludes revenue included in passenger revenue for charter and
reduced rate stand-by passengers, administrative fees, and revenue
recognized for unused tickets that are greater than one year from
issuance
date.
|
(16) |
“Average
fuel cost per gallon” includes non-cash mark to market gains/(losses) from
fuel hedging of $12,753,000, $(2,163,000), $2,837,000, and $469,000
for
the years ended March 31, 2007, 2006, 2005, and 2004,
respectively.
|
Overview
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 DIA. We are the
second largest jet service carrier at DIA based on departures. We offer our
customers a differentiated product, with a new aircraft, affordable pricing,
and
in-seat DirectTV with 24 channels of live television entertainment with four
additional channels of current-run pay-per-view movies in a one class cabin
on
our mainline routes. As of March 31, 2007, we, in conjunction with Frontier
JetExpress, operate routes linking our Denver hub to 46 U.S. cities from
coast
to coast, to eight cities in Mexico and to one city in Canada. As of March
31,
2007, we provided jet service to Mexico from ten non-hub cities and 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.
During
the year ended March 31, 2007, we had a net loss of $20,370,000 or 56¢ per
diluted share, as compared to a net loss of $13,971,000 or 39¢ per diluted share
for the year ended March 31, 2006. Included in our net loss for the year ended
March 31, 2007 was a non-cash mark to market derivative gain which decreased
fuel expense by $12,753,000 and $656,000 in gains on Boeing parts held for
sale
which were offset by a tax valuation allowance of $3,980,000. These items,
net
of income taxes, decreased our net loss by 12¢ per share for the year ended
March 31, 2007. Included in our net loss for the year ended March 31, 2006
was a
non-cash mark to market derivative loss, which increased fuel expense by
$2,163,000 and $3,414,000 of aircraft and facility exit charges which related
primarily to three leased Boeing 737-300 aircraft we ceased using during the
first quarter of fiscal year 2006, offset by gains on the sale of Boeing parts
held for sale of $1,144,000 These items, net of income taxes, increased our
net
loss by 8¢ per share for the year ended March 31, 2006.
Our
losses over the past three years have been primarily driven by rising fuel
costs
and our inability to pass these increases on to our customers due to a highly
competitive market. We have seen a sharp rise in fuel costs since January 2004,
and fuel costs may continue to increase or remain at these historically high
levels. Our average fuel cost per gallon, including hedging activities, was
$2.12 for the year ended March 31, 2007 compared to $1.99 for the year ended
March 31, 2006, an increase of 6.5%. We have implemented several strategic
initiatives to decrease our fuel burn rate during the year, which resulted
in a
decrease of our fuel burn rate to an average of 688 gallons per block hour
from
an average of 699 gallons per block hour for fiscal year 2006, a decrease of
1.6%.
We
have increased passenger revenues by 18.1% over the prior year which is a result
of increasing our capacity (as measured by ASM’s) by 14.4% while increasing our
passenger yields by 3.2%. The increase in our passenger yields can be primarily
attributed to a 2.5% reduction in our average length of haul as we had a
decrease of our average fare from $103.05 to $102.59, or 0.4%, due to
competitive pricing pressure.
We
have relatively low operating expenses excluding fuel because we currently
operate a single fleet of aircraft on our mainline routes in a single class
of
service with high aircraft utilization rates. Our mainline CASM, or cost per
available seat mile, for the year ended March 31, 2007 and 2006 was 9.49¢ and
9.13¢, respectively, an increase of 3.9%. The increase in mainline CASM was
largely due to an increase in fuel expense to 3.03¢ per ASM from 2.85¢ per ASM
for the years ended March 31, 2007 and 2006, respectively, an increase of 6.3%.
Mainline CASM excluding fuel was 6.46¢ per ASM as compared to 6.28¢ per ASM for
the years ended March 31, 2007 and 2006, respectively, an increase of 2.9%.
This
increase in mainline CASM is partially due to $3,582,000 of start-up costs
in
Lynx Aviation, $3,800,000 of expenses (primarily deicing expense) associated
with unusually inclement weather at DIA, a decrease in the average stage length
of 2.9%, an increase in promotion and sales expense related to increased rates
in reservation and travel agency expenses and increases in advertising spending.
We
intend to continue our focused growth strategy, which included the completion
of
our fleet transition from a Boeing fleet to an all Airbus fleet in April 2005.
One of the key elements of this strategy is to produce 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.
As of March 31, 2007, we have remaining firm purchase commitments for 13 Airbus
aircraft from Airbus and ten 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 exists. 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 protection.
Highlights
from the 2007 Fiscal Year
|
·
|
We
took delivery of six new Airbus A319 aircraft and one new Airbus
A318
aircraft (3 owned and 4 leased), for an increase of seven aircraft
and a
fleet total of 57 available for revenue service at year end.
|
|
|
|
|
·
|
In
January 2007, the DOT designated us as a major carrier, which is
U.S.-based
airlines
that post more than $1 billion in revenue during a fiscal
year.
|
|
|
|
|
·
|
We
formed a new subsidiary, Lynx Aviation, Inc., which intends to assume
a
purchase agreement between Frontier Holdings and Bombardier, Inc.
for ten
Q400 turboprop aircraft (with an option to purchase ten additional
aircraft) and will be operated with its own operating
certificate.
|
|
|
|
|
·
|
On
January 11, 2007, we signed an agreement with Republic Airlines,
Inc.,
which Republic will operate up to 17 Embraer 170 aircraft with capacity
of
76-seats under our Frontier JetExpress brand. The service began on
March
4, 2007 and is replacing our agreement with Horizon.
|
|
|
|
|
·
|
The
City and County of Denver announced that it reached an agreement
with
United Airlines under which United Airlines gave up the six gates
it
leased on Concourse A. We lease these gates on a preferential basis.
|
|
|
|
|
·
|
We
unveiled “A Whole Different Website” with new features and
functionality.
|
|
|
|
|
·
|
We
renewed our title as the official and now exclusive airline sponsor
of the
Colorado Rockies, Denver's major league baseball team, for an additional
five years.
|
|
|
|
|
·
|
We
entered into an exclusive three year agreement with Marriott
International’s guest loyalty program, Marriott Rewards®, in conjunction
with our EarlyReturns®
frequent flyer program.
|
|
|
|
|
·
|
In
December 2006, the readers of Business Traveler magazine selected
us as
the best low cost carrier in the U.S. in the magazine’s 18th annual
Readers’ Choice Business Travel Survey.
|
|
|
|
|
·
|
In
November 2006, we partnered with AirTran Airways to create the first
Low
Cost Carrier referral and frequent flyer partnership in the industry
that
offers travelers the ability to reach more than 80 destinations across
four countries. This partnership enables both airlines to increase
destination options by linking phone and online reservations systems
as
well as enabling our EarlyReturns®
and AirTran’s A+ Rewards members to earn and redeem mileage/travel credits
on both airlines.
|
|
|
|
|
·
|
On
November 30, 2006, our flight attendants voted against union
representation by the IBT. This is the fifth time our flight attendants
voted against union representation.
|
|
|
|
|
·
|
In
February 2007, FAPA ratified a new collective bargaining agreement.
The
new four-year agreement amended the previous five-year contract signed
in
May 2000.
|
|
|
|
Outlook
Although
we have been able to raise capital and continue to grow, the highly competitive
nature of the airline industry could prevent us from attaining the passenger
traffic or yields required to reach profitable operations in new and existing
markets. We expect our mainline full-year operating capacity for fiscal year
2008 to increase by approximately 12% to 14% over fiscal year 2007 with the
addition of three A318’s, two A320’s and ten Q400’s. While the industry
revenue environment remains extremely competitive, our passenger revenue per
available seat mile is expected to increase slightly in fiscal year 2008.
Our
mainline cost per available seat mile, excluding fuel, is expected to also
rise
slightly over fiscal 2007 as we will be investing in the start-up operations
of
Lynx Aviation for the first two quarters of fiscal year 2008 until revenue
service begins, which is estimated to be in September 2007. Fuel
costs have risen sharply in 2007 and may remain at these historically high
levels or increase even further. Due
to the unpredictability of the price of fuel and these historically high fuel
costs, we cannot predict if we will be profitable in fiscal 2008.
Selected
Mainline Operating Statistics
To
a large extent, changes in operating expenses for airlines are driven by changes
in capacity, or ASMs. 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 years
ended March 31, 2007, 2006, and 2005. Regional partner revenues, expenses and
ASMs were excluded from this table. This data should be read in conjunction
with
“Selected Financial Data” contained in Item 6 to this report.
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Revenue/Cost
Per
ASM
|
|
|
%
Of Total
|
|
|
Revenue/Cost
Per
|
|
|
%
Of Total
|
|
|
Revenue/Cost
Per
|
|
|
%
Of Total
|
|
|
|
(in
cents)
|
(in
cents)
|
(in
cents)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- mainline
|
|
|
9.17
|
|
|
96.3
|
%
|
|
8.89
|
|
|
96.7
|
%
|
|
8.03
|
|
|
97.1
|
%
|
Cargo
|
|
|
0.06
|
|
|
0.7
|
%
|
|
0.06
|
|
|
0.6
|
%
|
|
0.05
|
|
|
0.7
|
%
|
Other
|
|
|
0.29
|
|
|
3.0
|
%
|
|
0.24
|
|
|
2.7
|
%
|
|
0.18
|
|
|
2.2
|
%
|
Total
revenues
|
|
|
9.52
|
|
|
100.0
|
%
|
|
9.19
|
|
|
100.0
|
%
|
|
8.26
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight
operations
|
|
|
1.43
|
|
|
15.0
|
%
|
|
1.43
|
|
|
15.5
|
%
|
|
1.45
|
|
|
17.5
|
%
|
Aircraft
fuel expense
|
|
|
3.03
|
|
|
31.9
|
%
|
|
2.85
|
|
|
31.0
|
%
|
|
2.04
|
|
|
24.7
|
%
|
Aircraft
lease expense
|
|
|
0.96
|
|
|
10.1
|
%
|
|
0.95
|
|
|
10.4
|
%
|
|
0.95
|
|
|
11.5
|
%
|
Aircraft
and traffic servicing
|
|
|
1.47
|
|
|
15.5
|
%
|
|
1.40
|
|
|
15.2
|
%
|
|
1.42
|
|
|
17.2
|
%
|
Maintenance
|
|
|
0.78
|
|
|
8.2
|
%
|
|
0.78
|
|
|
8.5
|
%
|
|
0.84
|
|
|
10.2
|
%
|
Promotion
and sales
|
|
|
1.02
|
|
|
10.7
|
%
|
|
0.91
|
|
|
9.9
|
%
|
|
0.88
|
|
|
10.7
|
%
|
General
and administrative
|
|
|
0.50
|
|
|
5.2
|
%
|
|
0.50
|
|
|
5.4
|
%
|
|
0.53
|
|
|
6.4
|
%
|
Aircraft
lease and facility exit costs
|
|
|
-
|
|
|
-
|
|
|
0.03
|
|
|
0.4
|
%
|
|
-
|
|
|
-
|
|
Impairments
and (gains)/ losses on sales of assets, net
|
|
|
(0.01
|
)
|
|
(0.1
|
)%
|
|
(0.01
|
)
|
|
(0.1
|
)%
|
|
0.06
|
|
|
0.7
|
%
|
Depreciation
|
|
|
0.31
|
|
|
3.2
|
%
|
|
0.29
|
|
|
3.1
|
%
|
|
0.29
|
|
|
3.5
|
%
|
Total
operating expenses
|
|
|
9.49
|
|
|
99.7
|
%
|
|
9.13
|
|
|
99.3
|
%
|
|
8.46
|
|
|
102.4
|
%
|
Results
of Operations - Year Ended March 31, 2007 Compared to Year Ended March 31,
2006
We
had a net loss of $20,370,000 or 56¢ per diluted share for the year ended March
31, 2007, as compared to a net loss of $13,971,000 or 39¢ per diluted share for
the year ended March 31, 2006. Included in our net loss for the year ended
March
31, 2007 was a tax valuation allowance of $3,980,000 offset by a non-cash mark
to market derivative gain which decreased fuel expense by $12,753,000 and
$656,000 in gains on Boeing parts held for sale. These items, net of income
taxes, decreased our net loss by 12¢ per share for the year ended March 31,
2007.
Included
in our net loss for the year ended March 31, 2006 were the following items
before the effect of income taxes: aircraft lease and facility exit charges
of
$3,414,000 primarily relating to three leased Boeing 737-300 aircraft that
we
ceased using during the first quarter, gains of $1,144,000 related to the sale
of Boeing parts held for sale and other assets and a non-cash mark to market
loss on fuel hedges of $2,163,000. These items, net of income taxes, increased
our net loss by 8¢ per share.
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 $1,037,302,000 for the year ended March
31,
2007 compared to $878,681,000 for the year ended March 31, 2006, an increase
of
18.1%. 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 ticketed passenger sales generated 90.4% of our mainline passenger revenues
and increased $137,676,000 or 17.2% over the year ended March 31, 2006. The
increase in mainline revenue earned from ticketed passenger sales resulted
from
a 14.4% increase in ASMs, or $115,282,000, an increase of 0.2 points in load
factor, or $2,596,000, and an increase in our yields from ticket sales of 2.2%
or $19,798,000. The percentage of revenues generated from other sources compared
to total mainline passenger revenue are as follows: Administrative fees were
2.7%; revenue recognized for tickets that were not used within one year from
issuance were 3.0%, charter revenues were 0.9% and revenue from our co-branded
credit card were 1.9%. These sources of revenue increased total mainline
passenger revenues by $20,317,000 as compared to the year ended March 31, 2006.
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
$32,603,000 and $24,338,000 for the year ended March 31, 2007 and March 31,
2006, respectively, an increase of 34.0% and were 3.0% and 2.7% of total
mainline operating revenues for the years ended March 31, 2007 and 2006. The
increase in other revenues was primarily due to the increase of $6,646,000
in
the revenues earned for the marketing component of our co-branded credit card
agreement and other partnership agreements.
Mainline
Operating Expenses
Total
mainline operating expenses were $1,073,296,000 and $902,553,000 for the years
ended March 31, 2007 and 2006, respectively, an increase of 18.9%, and
represented 99.7% and 99.3% of total mainline revenues, respectively. Mainline
operating expenses increased slightly as a percentage of mainline revenue during
the year ended March 31, 2006 largely a result of a 6.5% increase in our
aircraft fuel cost per gallon for the year ended March 31, 2006 as compared
to
the prior comparable period.
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 12.4% to $246,568,000 compared to $219,380,000,
and
were 22.9% and 24.1% of total mainline revenues for the years ended March 31,
2007 and 2006, respectively. Salaries, wages and benefits increased over the
prior comparable period 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 from approximately 4,200 at March
31, 2006 to 4,800 at March 31, 2007, or 14.3%.
Flight
Operations.
Flight operations expenses increased 14.3% to $161,544,000 as compared to
$141,316,000, and were 15.0% and 15.5% of total mainline revenues, for the
year
ended March 31, 2007 and 2006, respectively. Flight operations expenses
increased due to an increase in mainline block hours from 202,300 for the year
ended March 31, 2006 to 234,965 for the year ended March 31, 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 15.1%
to $95,020,000 compared to $82,566,000, and were 8.8% and 9.1% of total mainline
revenue for the year ended March 31, 2007 and 2006, respectively. We employed
approximately 1,865 full time equivalent pilots and flight attendants at March
31, 2007 as compared to 1,614 at March 31, 2006, an increase of 15.6%. We
increased the number of pilots and flight attendants over the prior year to
support the 16.1% increase in block hours and the 12.2% increase in the average
aircraft in service.
Aircraft
insurance expenses totaled $9,819,000 (0.9% of total mainline revenue) and
$9,896,000 (1.1% of total mainline revenue) for the years ended March 31, 2007
and 2006, respectively. Aircraft insurance expenses were $1.07 per passenger
and
$1.27 per passenger for the years ended March 31, 2007 and 2006, respectively,
a
decrease on a per passenger basis of 15.7%. 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. Aircraft
fuel costs of $343,082,000 for 161,616,000 gallons used and $281,906,000
for
141,474,000 gallons used and resulted in an average fuel cost of $2.12 and
$1.99
per gallon for the year ended March 31, 2007 and 2006, respectively, an increase
of 6.5% per gallon. Aircraft fuel costs, excluding hedging losses and gains,
were $2.18 and $2.02 per gallon for the year ended March 31, 2007 and 2006,
respectively, an increase of 7.9%. Aircraft fuel expenses represented 31.9%
and
31.0% of total mainline revenue for the years ended March 31, 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 years ended
March 31, 2007 and 2006 averaged 688 and 699 gallons per block hour,
respectively, a decrease of 1.6%. Fuel consumption per block hour decreased
during the year ended March 31, 2007 from the prior year due to the
implementation of several fuel conservation initiatives.
Our
aircraft fuel expenses for the year ended March 31, 2007 include a non-cash
mark
to market derivative gain of $12,753,000 recorded as a decrease to fuel expense
offset by cash settlements of $3,925,000 paid to a counter-party recorded as
an
increase in fuel expense. Our aircraft fuel expenses for the year ended March
31, 2006 include a non-cash mark to market derivative loss of $2,163,000
recorded an increase to fuel expense offset by cash settlements of $5,338,000
received from a counter-party recorded as a decrease in fuel expense.
Aircraft
and Engine Lease.
Aircraft lease expenses totaled $108,623,000 (10.1% of total
mainline revenue) and $94,229,000 (10.4% of total mainline revenue) for the
years ended March 31, 2007 and 2006, respectively, an increase of 15.3%. The
increase in lease expense is due to an increase in the average number of leased
aircraft from 32.7 to 36.7, or 12.2%, and increases in lease rates for four
of
our aircraft that have variable rents based on LIBOR.
Aircraft
and Traffic Servicing.
Aircraft and traffic servicing expenses were $166,525,000 and $138,492,000,
an
increase of 20.2%, for the years ended March 31, 2007 and 2006, respectively,
and represented 15.5% and 15.2% of total mainline revenues. Aircraft and traffic
servicing expenses will increase with the addition of new cities to our route
system. 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. During the year ended March 31, 2007, our departures
increased to 97,554 from 82,878 for the year ended March 31, 2006, an increase
of 17.7%. Aircraft and traffic servicing expenses were $1,707 per departure
for
the year ended March 31, 2007 as compared to $1,671 per departure for the year
ended March 31, 2006, an increase of 2.2%. Aircraft and traffic servicing during
the year ended March 31, 2007 included an increase in glycol expenses of
$3,300,000, or 83.6%, over the prior year primarily related to the significant
snow storms in Denver in December 2006 and January 2007. In addition, we had
additional operating costs of $5,106,000 during the year ended March 31, 2007
as
compared to the fiscal year ended March 31, 2006 primarily related to our Los
Angeles to San Francisco shuttle, which operated five times a day, and an
increase in the rates charged by the Los Angeles airport.
Maintenance.
Maintenance expenses of $87,978,000 and $77,238,000 were 8.2% and 8.5% of total
revenue for the years ended March 31, 2007 and 2006, respectively, an increase
of 13.9% as compared to the year ended March 31, 2006. Maintenance expenses
include all labor, parts and supplies expenses related to the maintenance of
the
aircraft. Maintenance cost per block hour was $374 and $382 for the years ended
March 31,
2007
and 2006, respectively, a decrease of 2.1%, primarily related to several leased
aircraft in which supplemental rent amounts reached the maximum reserve amount
required during the year and increases in maintenance labor performed in which
we receive reimbursement against these reserves.
Promotion
and Sales.
Promotion
and sales expenses totaled $115,536,000 and $89,751,000 and were 10.7% and
9.9%
of total mainline revenues for the years ended March 31, 2007 and 2006,
respectively, an increase of 28.7%. 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
year ended March 31, 2006, promotion and sales expense was reduced by $4,444,000
due to the favorable resolution of a sales and use tax credit on the taxation
of
ticketing services that related to the period September 2001 to March 2005.
During the year ended March 31, 2007, promotion and sales expenses, per mainline
passenger increased to $12.64 from $12.13 (excluding the sales and use tax
credit) for the year ended March 31, 2006. Promotion and sales expenses per
mainline passenger increased primarily as a result of an increase in the
commission rates paid to external travel websites, an increase in advertising
expenses and the inclusion of the favorable tax ruling in the fiscal year 2006
promotion and sales expense.
General
and Administrative.
General and administrative expenses for the years ended March 31, 2007 and
2006
totaled $56,019,000 and $48,979,000, respectively, an increase of 14.4%, and
were 5.2% and 5.4% of total mainline revenues, respectively. General and
administrative expenses include the wages 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 due to increases in our worker’s
compensation expense, consulting and legal expenses (primarily related to the
start-up of Lynx Aviation) offset by a reduction in our health insurance expense
as compared to the year ended March 31, 2006.
Depreciation.
Depreciation expenses were $34,702,000 and $28,372,000 and were approximately
3.2% and 3.1% of total mainline revenue for the years ended March 31, 2007
and
2006, respectively, an increase of 22.3%. 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 17.7 during
the year ended March 31, 2007 as compared to 15.5 purchased aircraft in service
for the year ended March 31, 2006, an increase of 14.2%. The increase in
depreciation expense is also due to accelerated depreciation on our aircraft
seats which we are replacing over the next two fiscal years and investments
in
rotable aircraft components, aircraft improvements and ground equipment to
support the 14.4% increase in our capacity during the year ended March 31,
2007.
Business
interruption insurance proceeds.
We recorded insurance proceeds of $868,000 as a result of final settlements
of
business interruption claims that covered lost profits when our service to
Cancun, Mexico and New Orleans, Louisiana were disrupted by hurricanes during
the fiscal year ended March 31, 2006.
Nonoperating
(Income) Expense. Net
nonoperating expense totaled $15,162,000 for the year ended March 31, 2007
as
compared to net nonoperating expense of $12,571,000 for the year ended March
31,
2006, an increase of 20.6%.
Interest
income increased to $14,982,000 from $9,366,000 during the year ended March
31,
2007 from the year ended March 31, 2006 as a result of an increase in short-term
interest rates earned on investments and an increase in our average cash
position during the year ended March 31, 2007 largely as a result of the net
proceeds of $88,759,000 from our convertible notes offering in December 2005.
Interest
expense, net of capitalized interest, increased to $29,899,000 for the year
ended March 31, 2007 from $21,758,000 for the year ended March 31, 2006, an
increase of 37.4%. The increase in interest expense was a result of additional
debt for the acquisition of three additional purchased aircraft, an increase
in
the weighted average borrowing rate and additional debt of $92,000,000 from
our
convertible notes offering in December 2005. Debt related to aircraft increased
from $335,756,000 as of March 31, 2006 to $386,755,000 as of March 31, 2007
with
an increase in the average weighted interest rate from 6.55% to 7.15% as of
March 31, 2006 and 2007, respectively.
Income
Tax Benefit. We
recorded an income tax benefit of $4,626,000 during the year ended March 31,
2007, which includes a valuation allowance of $3,980,000 which resulted in
an
effective tax rate of 18.5%, compared to an income tax benefit of $6,497,000
during the year ended March 31, 2006 at a 31.7% rate. During the year ended
March 31, 2007, our tax benefit was at a federal rate of 35.0% plus the blended
state rate of 2.7% (net of federal benefit) and was decreased by the tax effect
of permanent differences of 3.6%. During the years ended March 31, 2007 and
2006, we recorded valuation allowances of $3,980,000 and $273,000 against
federal and certain state net operating loss carryforwards since it was more
likely than not that these tax benefits were not going to be realized due to
lack of taxable income in these jurisdictions before those net operating loss
carryforwards expire.
Regional
Partner
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 Partner. Regional partner revenues, consisting of
revenues from Frontier JetExpress operated by Horizon and Republic, totaled
$94,164,000 for the year ended March 31, 2007 and $92,826,000 for the year
ended
March 31, 2006, a 1.4% increase. The increase in revenue is due to an increase
in the average fare to $104.72 during the year ended March 31, 2007 from $101.78
during the year ended March 31, 2006, an increase of 2.9%.
Operating
Expenses -
Regional Partner. Regional partner expense for the year
ended March 31, 2007 and 2006 totaled $108,355,000 and $106,866,000,
respectively, a 1.4% increase, and was 115.1% of total regional partner revenues
for each of the years ended March 31, 2007 and 2006. Regional partner operating
expenses include all direct costs associated with Frontier JetExpress operated
by Horizon and Republic. The increase in expenses is primarily due to a
$1,450,000 increase in fuel expense for the regional partner operations as
compared to the prior year.
Results
of Operations - Year Ended March 31, 2006 Compared to Year Ended March 31,
2005
We
had a net loss of $13,971,000 or 39¢ per diluted share for the year ended March
31, 2006, as compared to a net loss of $23,430,000 or $0.66 per diluted share
for the year ended March 31, 2005. Included in our net loss for the year ended
March 31, 2006 were the following items before the effect of income taxes:
aircraft lease and facility exit charges of $3,414,000 primarily relating to
three leased Boeing 737-300 aircraft that we ceased using during the first
quarter and a non-cash mark to market loss on fuel hedges of $2,163,000, offset
by gains of $1,144,000 related to the sale of Boeing parts held for sale and
other assets. These items, net of income taxes, increased our net loss by 8¢ per
share. Also, included in our results is $421,000 in additional federal airport
security expenses due to a retroactive assessment by the TSA. We believe this
assessment is improper and are vigorously contesting it.
Included
in our net loss for the year ended March 31, 2005 were the following items
before the effect of income taxes: a write down of $5,123,000 of the carrying
value of expendable Boeing 737 inventory and losses on sales of assets of
$85,000 which was partially offset by and non-cash mark to market gain on fuel
hedges of $2,837,000. These items, net of income taxes, increased our net loss
by 4¢ per diluted share.
Mainline
Revenues
Passenger
Revenues
-
Mainline.
Mainline passenger revenues totaled $878,681,000 for the year ended March 31,
2006 compared to $731,822,000 for the year ended March 31, 2005, an increase
of
$146,859,000 or 20.0%.
Revenues
from ticket sales generated 91.0% of our mainline passenger revenues and
increased $119,360,000 or 17.5% over prior year. The increase in ticket sales
resulted from an 8.4% increase in ASMs, or $57,476,000, a 4.0% increase in
load
factor, or $30,274,000, and a 4.1% increase in our yields from ticket sales,
or
$31,610,000. Revenues generated from other sources and the percentage of
mainline passenger revenues are as follows: Administrative fees were 2.4%;
revenue recognized for tickets that are not used within one year from issuance
were 2.9%, charter revenues were 1.1% and earnings from our co-branded credit
card were 1.3%. These sources of revenue increased mainline passenger revenue
by
$18,737,000 as compared to prior year, or 38.1%, due to our 16.7% increase
in
passengers and the increased usage of our co-branded credit card.
Other
Revenues.
Other revenues totaled $24,338,000 for the year ended March 31, 2006 compared
to
$16,536,000 for the year ended March 31, 2005, an increase of $7,802,000 or
47.2%. The increase in other revenues was primarily due to an increase the
revenue received from our co-branded credit card, increased revenue generated
from ground handling contracts, increased revenues in excess baggage fees and
pay-per-view movies.
Mainline
Operating Expenses
Total
mainline operating expenses were $902,553,000 and $771,551,000 for the years
ended March 31, 2006 and 2005, respectively, and represented 99.3% and 102.4%
of
total mainline revenues, respectively. Mainline operating expenses decreased
as
a percentage of mainline revenue during the year ended March 31, 2006 largely
a
result of a 10.3% increase in our RASM coupled with an increase in our load
factors of 2.9 points. This decrease was significantly offset by an increase
of
41.1% in our aircraft fuel cost per gallon for the year ended March 31, 2006
as
compared to the prior comparable period.
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 8.4% to $219,380,000 compared to $202,341,000,
and
were 24.1% and 26.9% of total mainline revenues for the years ended March 31,
2006 and 2005, respectively. Salaries, wages and benefits increased over the
prior comparable periods largely as a result of general wage increases,
increases in heath insurance costs and increases in workers compensation
insurance. Our full time equivalent employee count increased 13.5% from 3,700
at
March 31, 2005 to 4,200 at March 31, 2006.
Flight
Operations.
Flight operations expenses increased 7.0% to $141,316,000 as compared to
$132,022,000, and were 15.5% and 17.5% of total mainline revenues, for the
year
ended March 31, 2006 and 2005, respectively. Flight operations expenses
increased due to an increase in mainline block hours from 182,581 for the year
ended March 31, 2005 to 202,300 for the year ended March 31, 2006, an increase
of 10.8%.
Pilot
and flight attendant salaries before payroll taxes and benefits increased 13.9%
to $82,566,000 compared to $72,487,000, and were 9.1% and 9.6% of total mainline
revenue for the year ended March 31, 2006 and 2005, respectively. We increased
the number of pilots and flight attendants over the prior year by 16.1% to
support the 10.8% increase in block hours and the 7.3% increase in the average
aircraft in service.
Aircraft
insurance expenses totaled $9,896,000 (1.1% of total mainline revenues) and
$10,219,000 (1.4% of total mainline revenue) for the year ended March 31, 2006
and 2005, respectively, a decrease of 3.2%. Aircraft insurance expenses were
13¢
and 16¢ per RPM for the year ended March 31, 2006 and 2005, respectively, a
decrease of 18.8%. Our aircraft hull and liability coverage was renewed at
reduced premium rates twice during the year.
Aircraft
Fuel.
Aircraft
fuel costs of $281,906,000 for 141,474,000 gallons used and $185,821,000 for
131,906,000 gallons used and resulted in an average fuel cost of $1.99 and
$1.41
per gallon for the year ended March 31, 2006 and 2005, respectively, an increase
of 41.1% per gallon. Aircraft fuel costs, excluding hedging losses and gains,
were $2.02 and $1.47 per gallon for the year ended March 31, 2006 and 2005,
respectively, an increase of 37.4%. Aircraft fuel expenses represented 31.0%
and
24.7% of total mainline revenue for the years ended March 31, 2006 and 2005,
respectively. Our results of operations for the year ended March 31, 2006
include a non-cash mark to market derivative loss of $2,163,000 and realized
gains of $5,338,000 in cash settlements received from a counter-party recorded
as a decrease in fuel expense. Our results of operations for the year ended
March 31, 2005 include a non-cash mark to market derivative gain of $2,837,000
and a realized gain of approximately $4,768,000 in cash settlements received
from a counter-party recorded as a decreases in fuel expense.
Aircraft
Lease. Aircraft lease expenses totaled $94,229,000 (10.4% of
total mainline revenues) and $87,096,000 (11.5% of total mainline revenue)
for
the years ended March 31, 2006 and 2005, respectively, an increase of 8.2%.
The
increase in lease expense is due to an increase in the average number of leased
aircraft from 30.9 to 32.7, or 5.8%, costs associated with the late return
of
certain Boeing aircraft, increases in lease rates for four of our aircraft
that
have variable rents based on LIBOR and additional rent related to two spare
engine leases.
Aircraft
and Traffic Servicing.
Aircraft and traffic servicing expenses were $138,492,000 and $129,470,000,
an
increase of 7.0%, for the years ended March 31, 2006 and 2005, respectively,
and
represented 15.2% and 17.2% of total mainline revenues. During the year ended
March 31, 2006, we added a net of six cities with mainline only service. During
the year ended March 31, 2006, our departures increased to 82,878 from 72,888
for the year ended March 31, 2005, an increase of 13.7%. Aircraft and traffic
servicing expenses were $1,671 per departure for the year ended March 31, 2006
as compared to $1,776 per departure for the year ended March 31, 2005, a
decrease of 5.9%. This decrease in the amount of expenses per departure is
related to the realization of economies of scale.
Maintenance.
Maintenance expenses of $77,238,000 and $76,679,000 were 8.5% and 10.2% of
total
mainline revenues for the years ended March 31, 2006 and 2005, respectively,
an
increase of 0.7%. Maintenance cost per block hour was $382 and $420 for the
years ended March 31, 2006 and 2005, respectively, a decrease of 9.0%.
Maintenance cost per block hour decreased as a result of our transition to
an
all Airbus fleet that is less costly to maintain than our older Boeing aircraft,
offset slightly by maintenance costs associated with meeting the return
condition requirements of five Boeing aircraft during the year. Our mainline
average age of aircraft was 2.6 years as of March 31, 2006.
Promotion
and Sales.
Promotion
and sales expenses totaled $89,751,000 and $80,407,000 and were 9.9% and 10.7%
of total mainlines revenues for the years ended March 31, 2006 and 2005,
respectively, an increase of 11.6%. During the year ended March 31, 2006,
promotion and sales expense was reduced by $4,444,000 due to the favorable
resolution in the current fiscal year of a sales and use tax credit on the
taxation of ticketing services which related to the period September 2001 to
March 2005. During the year ended March 31, 2006, promotion and sales expenses,
excluding this item, per mainline passenger increased to $12.13 from $12.09
for
the year ended March 31, 2005. Promotion and sales expenses per mainline
passenger increased primarily as a result of an increase in the commission
rates
paid to external travel websites.
General
and Administrative.
General and administrative expenses for the years ended March 31, 2006 and
2005
totaled $48,979,000 and $48,350,000, respectively, an increase of 1.3%, and
were
5.4% and 6.4% of total
mainline
revenues respectively. General and administrative expenses remained relatively
flat, despite increased rates for health insurance and worker’s compensation,
due to $2,958,000 of expenses incurred during the fiscal year ended March 31,
2005 for the Sabre implementation .
Aircraft
Lease and Facility Exit Costs. In
April
2005, we finalized our transition to an all Airbus fleet and ceased using three
of our Boeing 737-300 leased aircraft, which had original lease termination
dates in September 2005, August 2005 and May 2006. We negotiated an early
termination fee for the aircraft with an original termination date of May 2006.
As such, we recorded a charge of $3,312,000 to reflect the estimated fair value
of the remaining lease payments and a one-time early return payment. We also
recorded $102,000 of facility exit costs for a revised estimate of time to
obtain a sublease on leased space we ceased using in fiscal year 2005. There
were no similar costs incurred during the year ended March 31,
2005.
Gains
and Losses on Sales of Assets, Net.
During
the year ended March 31, 2006, we had net gains totaling $1,144,000, which
related primarily to the sale of Boeing spare parts. During the year ended
March
31, 2005, we incurred a net loss totaling $85,000 on the sale of Boeing spare
parts and other assets.
Depreciation.
Depreciation expenses were $28,372,000 and $26,498,000, or approximately 3.1%
and 3.5% of total mainline revenues for the years ended March 31, 2006 and
2005,
respectively, an increase of 7.1%. The increase in depreciation expense is
primarily due to an increase in the average number of owned aircraft from 14.0
to 15.5, or 10.7%.
Nonoperating
(Income) Expense. Net
nonoperating expense totaled $12,571,000 for the year ended March 31, 2006
as
compared to net nonoperating expense of $9,391,000 for the year ended March
31,
2005, an increase of 33.9%.
Interest
income increased to $9,366,000 from $3,758,000 during the year ended March
31,
2006 from the prior year as a result of an increase in short-term interest
rates
earned on investments and an increase in our cash position largely as a result
of the net proceeds of $88,759,000 from our convertible notes offering in
December 2005.
Interest
expense increased to $21,758,000 for the year ended March 31, 2006 from
$13,184,000 for the year ended March 31, 2005, an increase of 65.0%. The
increase in interest expense was a result of additional debt for the acquisition
of two additional purchased aircraft, an increase in the weighted average
borrowing rate and additional debt of $92,000,000 from our convertible notes
offering in December 2005. Interest on our convertible notes is at a fixed
rate
of 5.0% and resulted in an increase of $1,651,000 in interest
expense. Debt
related to aircraft increased from $301,015,000 as of March 31, 2005 to
$335,756,000 as of March 31, 2006 with an increase in the average weighted
interest rate from 4.82% to 6.55% as of March 31, 2005 and 2006, respectively.
Income
Tax Benefit. We
recorded an income tax benefit of $6,497,000 during the year ended March 31,
2006 at a 31.7% rate, compared to an income tax benefit of $12,408,000 during
the year ended March 31, 2005 at a 34.6% rate. During the year ended March
31,
2006, our tax benefit was at a federal rate of 35.0% plus the blended state
rate
of 3.0% (net of federal benefit) and was decreased by the tax effect of
permanent differences of 3.6%. During the year ended March 31, 2006, we
increased our valuation allowance by $273,000 against certain state net
operating loss carryforwards since it was more likely than not that the tax
benefit was not going to be realized due to lack of taxable income in these
jurisdictions before those net operating loss carryforwards expire.
Regional
Partner
Passenger
Revenues -
Regional Partner. Regional partner revenues totaled
$92,826,000 for the year ended March 31, 2006 and $84,269,000 for the year
ended
March 31, 2005, a 10.2% increase. The increase in revenue is due to an increase
in our utilization of the aircraft resulting in an increase of 4.6% in
passengers coupled with an increase in the average fare to $101.78 from $96.66,
an increase of 5.3%.
Operating
Expenses -
Regional Partner. Regional partner operating expenses for
the year ended March 31, 2006 and 2005 totaled $106,866,000 and $92,481,000,
respectively, and was 115.1% and 109.7% of total regional partner revenues,
respectively. The increase in operating expenses is primarily due to a 47.2%
increase in fuel expense for the regional partner operations and an increase
in
performance bonuses paid.
Liquidity
and Capital Resources
Our
liquidity depends to a large extent on the number of passengers who fly with
us,
advanced ticket sales, 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 13
additional Airbus aircraft that as of March 31, 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 $202,981,000 and $272,840,000 at March 31,
2007
and March 31, 2006, respectively. 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. At March 31, 2006, total current
assets were $390,957,000 as compared to $301,011,000 of total current
liabilities, resulting in working capital of $89,946,000. The decrease in our
working capital from March 31, 2006 to March 31, 2007 is largely a result of
an
increase in our air traffic liability of $30,091,000 and cash used for aircraft
pre-delivery payments for our Airbus and Bombardier aircraft and other capital
expenditures.
Operating
Activities.
Cash provided by operating activities for the year ended March 31, 2007 was
$23,227,000 as compared to $79,642,000 for the year ended March 31, 2006. The
decrease in operating cash flows was primarily due to an increase in our
bankcard and letter of credit collateral requirements of $9,161,000, which
increased our restricted cash. We also increased our fuel and expendable
inventories by $9,012,000 to support the increase in the number of aircraft
in
our fleet.
Investing
Activities. Cash
used in investing activities for the year ended March 31, 2007 was $141,310,000.
Capital expenditures of $172,270,000 for the year ended March 31, 2007 included
the purchase of three Airbus A319 aircraft, one Airbus A318 aircraft and one
spare engine, the purchase of LiveTV equipment, rotable aircraft components,
aircraft improvements, information technology enhancements and ground equipment.
We received $43,947,000 primarily from the sale of one of the three newly
acquired Airbus A319 aircraft and a spare engine in two sale-leaseback
transactions and proceeds from the sale of Boeing assets held for sale. Aircraft
lease and purchase deposits made during the period were $47,933,000, including
$15,276,000 for pre-delivery payments on Bombardier Q400 aircraft, and
pre-delivery payments and deposits totaling $34,946,000 were applied against
the
purchase of four Airbus A319 aircraft, one spare engine and LiveTV
equipment.
Cash
used in investing activities for the year ended March 31, 2006 was $95,502,000.
Capital expenditures were $93,775,000 for the year ended March 31, 2006 and
included the purchase of two Airbus A319 aircraft, the purchase of LiveTV
equipment, the purchase of one spare engine that was delivered to us and that
we
sold in a sale-leaseback transaction, rotable aircraft components, aircraft
improvements and ground equipment. We received $9,843,000 from the sale of
the
spare engine that we sold in a sale-leaseback transaction, the sale of Boeing
spare parts held for sale and other assets. Aircraft lease and purchase deposits
made during the period were $36,117,000, which was offset by pre-delivery
payments totaling $19,513,000 applied against the purchase of two Airbus A319
aircraft and LiveTV equipment.
Financing
Activities.
Cash provided by financing activities for the year ended March 31, 2007 was
$48,224,000. During the year ended March 31, 2007, we paid $23,439,000 of debt
principal payments on our 19 owned aircraft and we borrowed $74,438,000 to
purchase two additional Airbus A319 aircraft and one Airbus A318 aircraft.
We
were also required to increase our compensation balance at a bank by $750,000
to
secure letters of credit.
Cash
provided by financing activities for the year ended March 31, 2006 was
$116,905,000. On December 7, 2005, we completed the issuance of $92,000,000
principal amount of 5% convertible notes due 2025, raising net proceeds of
approximately $88,759,000. The net proceeds from our convertible debt offering
are being used for general working capital purposes and capital expenditures
related to the purchase of financing of aircraft and expansion of our
operations. During the year ended March 31, 2006, we borrowed $54,700,000 for
the purchase of two Airbus A319 aircraft, paid $19,959,000 of debt principal
payments on 16 owned aircraft and repaid short-term borrowings of $5,000,000
under a revolving line of credit. During the year ended March 31, 2006, we
also
received $1,551,000 from the exercise of common stock options and paid
$1,146,000 of fees for aircraft debt financing.
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 preferred and common stock and debt
and
other securities. 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” below.
We
have obtained financing for all of our planned Airbus aircraft deliveries until
February 2008 and all ten Bombardier aircraft for which we have firm purchase
commitments and expect to have adequate liquidity to cover our contractual
obligations. 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 those described as “Risk Factors” in
Item 1A of this report.
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. 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 these facilities are located at airports other than DIA, we may incur
relocation expenses and higher than normal staff attrition.
Contractual
Obligations
The
following table summarizes our contractual obligations as of March 31,
2007:
|
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
4-5
years
|
|
After
5
years
|
|
|
|
Long-term
debt - principal payments (1)
|
|
$
|
478,755
|
|
$
|
26,847
|
|
$
|
58,581
|
|
$
|
82,937
|
|
$
|
310,390
|
|
Long-term
debt - interest payments (1)
|
|
|
246,146
|
|
|
31,476
|
|
|
56,923
|
|
|
47,173
|
|
|
110,574
|
|
Operating
leases (2)
|
|
|
1,690,342
|
|
|
163,982
|
|
|
353,573
|
|
|
334,848
|
|
|
837,939
|
|
Unconditional
purchase obligations (3) (4) (5)
|
|
|
721,788
|
|
|
353,463
|
|
|
297,896
|
|
|
70,429
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
3,137,031
|
|
$
|
575,768
|
|
$
|
766,973
|
|
$
|
535,387
|
|
$
|
1,258,903
|
|
(1)
|
At
March 31, 2007, we had 19 loan agreements for 13 Airbus A319 aircraft
and
six 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 17
loans have
interest rates based on LIBOR plus margins that adjust quarterly
or
semi-annually. At March 31, 2007, interest rates for these loans
ranged
from 6.63% to 7.99%. Each of these loans has a term of 12 years,
and each
loan has balloon payments ranging from $2,640,000 to $9,215,000
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 March 31,
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.
|
|
|
|
|
(2)
|
As
of March 31, 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 March 31, 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 years ended March 31, 2007, 2006, and 2005, additional
rent
expense to cover the cost of major scheduled maintenance overhauls
of
these aircraft totaled $26,187,000, $24,933,000 and $25,974,000,
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 replaces our agreement with Horizon. In the contractual
obligations table above, fixed costs associated with the Republic
and
Horizon 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.
|
(3) |
As
of March 31, 2007, we have remaining firm
purchase commitments for 13 additional aircraft from Airbus that
have
scheduled delivery dates beginning in April 2007 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.
|
|
|
|
We
have secured financing commitments totaling approximately $225,300,000
for
13 of these additional aircraft, including commitments for all
of our
scheduled Airbus deliveries until February 2008 and all ten Bombardier
aircraft. To complete the purchase of the remaining aircraft, we
must
secure additional aircraft financing totaling approximately $320,000,000
assuming bank financing was used for the remaining ten aircraft.
The terms
of the purchase agreement do not allow for cancellations of any
of the
purchase commitments. 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 $14,833,000
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
March 31,
2007, we had made pre-delivery payments on future aircraft deliveries
totaling $52,453,000 of which $14,833,000 relates to aircraft for
which we
have not yet secured financing and $37,620,000 relates to aircraft
for
which we have secured financing.
|
|
|
(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 13 Airbus aircraft
we
currently expect to purchase, less deposits made of
$896,000.
|
|
|
(5) |
In
March 2004, we entered into a services
agreement with Sabre, Inc. for its SabreSonic™
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.
|
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 March 31, 2007, we had
outstanding letters of credit, bonds, and cash security deposits totaling
$18,996,000, $1,914,000 and $20,850,000 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 May 1, 2007, we had $16,500,000 available
under
this facility, which is reduced 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. As of March 31, 2007, we have utilized $4,821,000 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
March 31, 2007, that amount totaled $39,186,000. The amount is adjusted
quarterly in arrears based on our air traffic liability associated with these
estimated bankcard transactions. As of June 1, 2007, our requirements results
in
an increase of approximately $16,016,000.
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 March 31, 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 May 18, 2007, the bond coverage would
be
increased to $5,038,000 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 year ended
March 31, 2007, 2006 and 2005 include non-cash mark to market derivative
gains/(losses) of $12,753,000, $(2,163,000) and $2,837,000, respectively. Cash
settlements for fuel derivatives contracts for the year ended March 31, 2007,
2006, and 2005 were payments of $3,925,000, and receipts of $5,338,000 and
$4,768,000, respectively. We have entered into the following swap and collar
agreements that cover periods during our fiscal years 2007 and
2008:
|
|
|
|
|
|
Date
|
Product
*
|
Notional
volume **
(barrels
per month)
|
Period
covered
|
Price
(per gallon or barrel)
|
Percentage
of estimated fuel purchases
|
November
2005
|
Jet
A
|
50,000
|
April
1, 2006 -
June
30, 2006
|
$1.83
per gallon, with a floor of $1.6925 per gallon
|
15%
|
June
2006
|
Crude
Oil
|
85,000
|
July
1, 2006 -
September
30, 2006
|
$76.00
per barrel cap,
with
a floor of $67.15
|
24%
|
June
2006
|
Crude
Oil
|
50,000
|
October
31, 2006 - December 31, 2006
|
$77.00
per barrel cap,
with
a floor of $69.40
|
14%
|
September
2006
|
Jet
A
|
90,000
|
October
1, 2006 - December 31, 2006
|
Swap
priced at
$1.9545
per gallon
|
26%
|
September
2006
|
Jet
A
|
55,000
|
January
1, 2007 -
March
31, 2007
|
$2.27
per gallon,
with
a floor of $1.9485 per gallon
|
15%
|
September
2006
|
Jet
A
|
70,000
|
October
1, 2006 - December 31, 2006
|
$1.94
per gallon,
with
a floor of $1.7775 per gallon
|
20%
|
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.
In
March 2003, we entered into an interest rate swap agreement with a notional
amount of $27,000,000 to hedge a portion of our LIBOR based borrowings through
March 31, 2007. Under the interest rate swap agreement, we are paying a fixed
rate of 2.45% and receive a variable rate based on the three month LIBOR. During
the years ended March 31, 2007 and 2006, interest expense was decreased by
$187,000 and $216,000, respectively, as a result of this agreement. At March
31,
2007 and 2006, the interest rate swap agreement had estimated values of $0
and
$105,000, respectively, which were included in deferred loan fees and other
assets.
Changes
in the fair value of interest rate swaps designated as hedging instruments
are
reported in accumulated other comprehensive income included in stockholders’
equity. Approximately $105,000 of mark to market gains are included in
accumulated other comprehensive income included in stockholders’ equity, net of
income
taxes of $40,000, for the year ended March 31, 2007. Approximately $238,000
of
mark to market gains are included in accumulated other comprehensive income
included in stockholders’ equity, net of income taxes of $87,000, for the year
ended March 31, 2006.
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 years ended March 31, 2007,
2006, and 2005 were approximately $6,374,000, $3,545,000 and $2,603,000,
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 March 31,
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 $24,412,000 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.
Critical
Accounting Policies
The
preparation of financial statements in conformity with U.S 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.
Critical
accounting policies are defined as those that are both important to the
portrayal of our financial condition and results, and require management to
exercise significant judgments. Our most critical accounting policies are
described briefly below.
Revenue
Recognition
Passenger,
cargo, and other revenues are recognized when the transportation is provided
or
after the tickets expire, one year after date of issuance, and are net of excise
taxes, passenger facility charges and security fees. Revenues that have been
deferred are included in the accompanying consolidated balance sheets as air
traffic liability. Included in passenger revenue are change fees which may
be
imposed on passengers for making schedule
changes
to non-refundable tickets. Change fees are recognized as revenue at the
time the change fees are collected from the passenger as they are a separate
transaction that occurs subsequent to the date of the original ticket sale.
Aircraft
Maintenance
We
operate under an FAA-approved continuous inspection and maintenance program.
We
account for maintenance activities on the direct expense method. Under this
method, major overhaul maintenance costs are recognized as expense as
maintenance services are performed, as flight hours are flown for nonrefundable
maintenance payments required by lease agreements, and as the obligation is
incurred for payments made under service agreements. Routine maintenance and
repairs are charged to operations as incurred.
Effective
January 1, 2003, we executed a 12-year engine services agreement with GE
covering the scheduled and unscheduled repair of Airbus engines. This agreement
was extended to May 1, 2019 in September 2004. Under the terms of the services
agreement, we agreed to pay GE an annual rate per-engine-hour, payable monthly,
and GE assumed the responsibility to overhaul our engines on Airbus aircraft
as
required during the term of the services agreement, subject to certain
exclusions. We believe the rate per-engine hour approximates the periodic cost
we would have incurred to service those engines. Accordingly, these payments
are
expensed as the obligation is incurred.
Derivative
Instruments
We
account for derivative financial instruments in accordance with the provisions
of Statement of Financial Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 requires
us to measure all derivatives at fair value and to recognize them in the balance
sheet as an asset or liability. For derivatives designated as cash flow hedges,
changes in fair value of the derivative are generally reported in other
comprehensive income and are subsequently reclassified into earnings when the
hedged item affects earnings. Changes in fair value of derivative instruments
not designated as hedging instruments and ineffective portions of hedges are
recognized in earnings in the current period.
We
enter into derivative instruments to hedge the interest payments associated
with
a portion of our LIBOR-based borrowings and fuel purchases. We designate certain
interest rate swaps as qualifying cash flow hedges. We also enter into
derivative instruments to reduce exposure to the effect of fluctuations in
fuel
prices. These transactions are accounted for as trading instruments under SFAS
133. As a result, we record these instruments at fair market value and recognize
realized and mark to market gains and losses in aircraft fuel
expense.
Customer
Loyalty Program
In
2001, we established EarlyReturns®,
a frequent flyer program to encourage travel on our airline and foster customer
loyalty. We account for the EarlyReturns®
program under the incremental cost method whereby travel awards are valued
at
the incremental cost of carrying one passenger based on expected redemptions.
Those incremental costs are based on expectations of expenses to be incurred
on
a per passenger basis and include food and beverages, fuel, liability insurance,
and ticketing costs. The incremental costs do not include allocations of
overhead expenses, salaries, aircraft cost or flight profit or losses. We do
not
record a liability for mileage earned by participants who have not reached
the
level to become eligible for a free travel award. We do not record a liability
for the expected redemption of miles for non-travel awards since the cost to
us
of these awards is negligible.
As
of March 31, 2007 and 2006, we estimated that approximately 324,000 and 193,000
round-trip flight awards, respectively, were eligible for redemption by
EarlyReturns®
members who have mileage credits exceeding the 15,000-mile free round-trip
domestic ticket award threshold. As of March 31, 2007 and 2006, we had recorded
a liability of approximately $4,249,000 and $2,776,000, respectively, for these
rewards.
We
sell points in EarlyReturns®
to third parties. The portion of the sale that is for travel is deferred and
recognized as passenger revenue when we estimate transportation is provided.
The
remaining portion, referred to as the marketing component, is recognized in
the
month received and included in other revenue.
Co-Branded
Credit Card Arrangement
We
entered into a co-branded credit card arrangement with a MasterCard issuing
bank
in March 2003. In May 2007, this agreement was amended to extend the contract
to
December 2014 with enhanced financial terms. The terms of this affinity
agreement provide that we will receive a fixed fee for each new account, which
varies based on the type of account, and a percentage of the annual renewal
fees
that the bank receives. We receive an increased fee for new accounts solicited
by us. We also receive fees for the purchase of frequent flier miles awarded
to
the credit card customers.
We
account for all fees received under the co-branded credit card program by
allocating the fees between the portion that represents the estimated value
of
the subsequent travel award to be provided, and the portion which represents
a
marketing fee to cover marketing and other related costs to administer the
program. This latter portion (referred to as the marketing component) represents
the residual after determining the value of the travel component. The component
representing travel is determined by reference to an equivalent restricted
fare,
which is used as a proxy for the value of travel of a frequent flyer mileage
award. The travel component is deferred and recognized as revenue over the
estimated usage period of the frequent flyer mileage awards of 20 months. We
have estimated the period over which the frequent flier mileage awards will
be
used based on the history of usage of the frequent flier mileage awards. We
record the marketing component of the revenue earned under this agreement in
other revenue in the month received.
For
the year ended March 31, 2007, we earned total fees of $36,917,000. Of that
amount, $25,219,000 was deferred as the travel award component, with the
remaining marketing component of $11,698,000 recognized as other revenue. For
the year ended March 31, 2006, we earned total fees of $24,986,000. Of that
amount, $19,686,000 was deferred as the travel award component, with the
remaining marketing component of $5,300,000 recognized as other revenue. For
the
year ended March 31, 2005, we earned total fees of $12,227,000. Of that amount,
$8,455,000 was deferred as the travel award component, and the remaining
marketing component of $3,772,000 was recognized as other revenue. Amortization
of deferred revenue recognized in earnings during the years ended March 31,
2007, 2006 and 2005 was $20,158,000, $11,059,000 and $4,396,000,
respectively.
Income
Taxes
We
account for income taxes using the asset and liability method. Under that
method, deferred income taxes are recognized for the tax consequences of
“temporary differences” by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and
tax bases of existing assets and liabilities and net operating losses (“NOL’s”)
and tax credit carryforwards. A valuation allowance is provided to the extent
that it is more likely than not that deferred tax assets will not be realized.
During
the year ended March 31, 2007, we recorded additional valuation allowances
of
$3,980,000 against our net deferred tax asset related to state and federal
net
operating loss carryforwards. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. We
considered the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. The
NOL’s that have been generated are due in large part to the accelerated
depreciation over a shorter useful life for tax purposes. While we
continue to take delivery of new aircraft, we expect our fleet acquisitions
to
be substantially complete by fiscal 2009. Since our NOL’s do not begin to
expire until 2023, we expect these NOL’s to be available in future periods when
tax depreciation is at a minimal level, and taxable income is high. However,
based upon the level of historical book losses, we provided a valuation
allowance in fiscal 2007 for the net deferred tax asset. Based upon
the projections for future taxable income over the periods in which the deferred
tax assets become deductible, and available tax planning strategies, we believe
it is more likely than not that we will realize the benefits of the deductible
differences, net of our existing valuation allowances at March 31, 2007.
The amount of the deferred tax asset considered realizable, however, could
be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
Self-Insurance
We
are self insured for the majority of our group health insurance costs, subject
to specific retention levels. We rely on claims experience and the advice of
consulting actuaries and administrators in determining an adequate liability
for
self-insurance claims. Our self-insurance healthcare liability represents our
estimate of claims that have been incurred but not reported as of March 31,
2007. This liability, which totaled $1,639,000 at March 31, 2007, was estimated
based on our claims experience. We determine the actual average claims cost
per
employee and the number of days between the incurrence of a claim and the date
it is paid. The estimate of our liability for employee healthcare represents
our
estimate of unreported claims with an increase in claims based on trend
factors.
We
are also self-insured for the majority of our workers’ compensation cost. Our
liability for workers’ compensation claims is the estimated total cost of the
claims on a fully-developed basis, up to a maximum amount, based on reserves
for
these claims that are established by a third-party administrator. The liability
at March 31, 2007 totaled $7,178,000.
While
we believe that the estimate of our self-insurance liabilities are reasonable,
significant differences in our experience or a significant change in any of
our
assumptions could materially affect the amount of healthcare and workers
compensation expenses we have recorded.
Stock-Based
Compensation.
We
estimate the fair value of stock options and stock appreciation rights granted
using the Black-Scholes-Merton option pricing model and the assumptions shown
in
Note 12 to our consolidated financial statements. We estimate the expected
term
of options granted using our historical exercise patterns, which we believe
are
representative of future exercise behavior. We estimate volatility of our common
stock using the historical closing prices of our common stock using the period
equal to the expected term of the options, which we believe is representative
of
the future behavior of our common stock. Our risk-free interest rate assumption
is determined using the Federal Reserve nominal rates for U.S. Treasury
zero-coupon bonds with maturities similar to those of the expected term of
the
award being valued. We have never paid any cash dividends on our common stock
and we do not anticipate paying any cash dividends in the foreseeable future.
Therefore, we assumed an expected dividend yield of zero. Stock-based
compensation expense for restricted stock units (“RSU”) are based on the fair
value of our common stock on the date of grant and is amortized over the vesting
period, generally five years. Each RSU is settled in shares of our common stock
after the vesting period. We record stock-based compensation expense only for
those options and awards expected to vest using an estimated forfeiture rate
based on our historical pre-vesting forfeiture data and periodically will revise
those estimates in subsequent periods if actual forfeitures differ from those
estimates.
New
Accounting Standards Not Yet Adopted
In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes.
This Interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosure, and transition. The Interpretation is effective
for
fiscal years beginning after December 15, 2006. We have not yet reached a
final determination of the potential financial statement impact of the adoption
of FIN 48 but we do not expected it to have a material impact on the Company’s
financial position, results of operations or cash flows.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair
Value Measurements,
(“FAS 157”). This Standard defines fair value, establishes a framework for
measuring fair value in 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. We
have not yet determined the impact of the adopting FAS 157.
FAS
159 is effective for fiscal years beginning after November 15, 2007. We have
not
yet determined the impact of adopting FAS 159.
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 year ended March 31, 2007. Based on actual fuel
usage
for the year ended March 31, 2007, such a change would have had the effect
of
increasing or decreasing our mainline and regional partner aircraft fuel expense
by approximately $38,507,000, 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 $44,453,000, measured as of March 31, 2007, excluding the effects
of our fuel hedging arrangements.
Our
results of operations for the year ended March 31, 2007 include cash settlements
on fuel derivative contracts of $3,925,000 recorded as a increase to fuel
expense and non-cash mark to market gains of $12,753,000 recorded as a decrease
in fuel expense with respect to fuel hedging agreements. As of March 31, 2007,
the fair value of the hedge agreements recorded on the balance sheet as an
asset
was $13,729,000.
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 73.6% of our outstanding
debt at March 31,2007 is subject to interest rate adjustments every three to
nine 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 $3,524,000 assuming the loans
outstanding that are subject to interest rate adjustments at March 31, 2007
totaling $352,441,000 are outstanding for the entire period.
Our
interest rate swap agreement with a notional amount of $27,000,000 to hedge
a
portion of our LIBOR based borrowings expired in March 2007.
Our
consolidated financial statements are filed as a part of this report immediately
following the signature page.
Not
applicable.
Disclosure
Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of
1934, as amended) as of March 31, 2007. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective to ensure that the information required
to be disclosed by us in this Annual Report on Form 10-K was recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and instructions for Form 10-K.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, our management concluded that our internal
control over financial reporting was effective as of March 31,
2007.
Our
management's assessment of the effectiveness of our internal control over
financial reporting as of March 31, 2007 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report which
is included elsewhere herein.
Changes
in Internal Control
There
were no changes in our internal control over financial reporting identified
in
connection with the evaluation of our controls performed during the quarter
ended March 31, 2007 that have materially affected, or are reasonably likely
to
materially affect, our internal control over financial reporting.
None.
PART
III
Code
of Ethics
The
information required by this Item is incorporated herein by reference to the
data under the heading “Election of Directors” in the Proxy Statement to be used
in connection with the solicitation of proxies for our annual meeting of
stockholders to be held on September 6, 2007. We plan to file the definitive
Proxy Statement with the SEC on or before July 28, 2007.
Audit
Committee Financial Expert
The
information required by this Item is incorporated herein by reference to the
data under the heading “Election of Directors” in the Proxy Statement to be used
in connection with the solicitation of proxies for our annual meeting of
stockholders to be held on September 6, 2007. We plan to file the definitive
Proxy Statement with the SEC on or before July 28, 2007.
The
information required by this Item is incorporated herein by reference to the
data under the heading “Executive Compensation” in the Proxy Statement to be
used in connection with the solicitation of proxies for our annual meeting
of
stockholders to be held on September 6, 2007. We plan to file the definitive
Proxy Statement with the SEC on or before July 28, 2007.
The
information required by this Item is incorporated herein by reference to the
data under the heading “Voting Securities and Principal Holders Thereof” in the
Proxy Statement to be used in connection with the solicitation of proxies for
our annual meeting of stockholders to be held on September 6, 2007. We plan
to
file the definitive Proxy Statement with the SEC on or before July 28,
2007.
The
information required by this Item is incorporated herein by reference to the
data under the heading “Related Transactions” in the Proxy Statement to be used
in connection with the solicitation of proxies for our annual meeting of
stockholders to be held on September 6, 2007. We plan to file the definitive
Proxy Statement with the SEC on or before July 28, 2007.
The
information required by this Item is incorporated herein by reference to the
data under the heading “Principal Accounting Fees and Services” in the Proxy
Statement to be used in connection with the solicitation of proxies for our
annual meeting of stockholders to be held on September 6, 2007. We plan to
file
the definitive Proxy Statement with the SEC on or before July 28,
2007.
PART
IV
Exhibit
|
|
Numbers
|
Description
of Exhibits
|
Exhibit
2 - Plan of acquisition, reorganization, arrangement, liquidation or
succession:
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).
|
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).
|
|
|
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).
|
Exhibit
4 - Instruments defining the rights of security holders:
4.1
|
Specimen
common stock certificate of Frontier Airlines Holdings, Inc.
(Exhibit 4.1
to the Company’s
Annual
Report on Form 10-K for the year ended March 31, 2006).
|
|
|
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).
|
|
|
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. (Exhibit 4.2(a) to the Company’s
Annual
Report on Form 10-K for the year ended March 31, 2006).
|
|
|
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).
|
Exhibit
10 - Material Contracts:
10.1
|
Airport
Use and Facilities Agreement, Denver International Airport (Exhibit
10.7
to
the Company’s Annual Report on Form 10-KSB for the year ended March 31,
1995; Commission
File No. 0-4877).
|
10.2
|
Space
and Use Agreement between Continental Airlines, Inc. and the
Company.
(Exhibit
10.43 to the Company’s Annual Report on Form 10-K for the year ended March
31, 1999).
|
10.2(a)
|
Second
Amendment to Space and Use Agreement between
Continental Airlines, Inc. and the Company.
Portions
of this Exhibit have been omitted and filed separately
with the Securities
and Exchange Commission in a confidential treatment request
under Rule
24b-2 of the Securities Exchange Act of 1934, as amended.
(Exhibit 10.3(a) to the Company’s
Annual
Report on Form 10-K for the year ended March 31, 2003).
|
|
|
10.3
|
Airbus
A318/A319 Purchase Agreement dated as of March 10, 2000
between AVSA,
S.A.R.L., Seller, and Frontier Airlines, Inc., Buyer. Portions
of this
exhibit have been excluded from the publicly available
document and an
order granting confidential treatment of the excluded material
has been
received. (Exhibit
10.51 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2000).
|
|
|
10.3(a)
|
Amendment
No. 9 to the A318/A319 Purchase Agreement dated as of March
10, 2000
between AVSA, S.A.R.L. and Frontier Airlines, Inc. Portions
of this
exhibit have been excluded from the publicly available
document and filed
separately with the SEC in a confidential treatment request
under Rule
24b-2 of the Securities Exchange Act of 1934, as amended.
(Exhibit 10.3(a) to the Company’s
Annual
Report on Form 10-K for the year ended March 31, 2006).
|
|
|
10.4
|
Aircraft
Lease Common Terms Agreement dated as of April 20, 2000
between General
Electric Capital Corporation and Frontier Airlines, Inc.
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 10.52 to the Company’s
Annual
Report on Form 10-K for the year ended March 31, 2000).
|
|
|
10.5
|
Aircraft
Lease Agreement dated as of April 20, 2000 between Aviation
Financial
Services, Inc., Lessor, and Frontier Airlines, Inc., Lessee,
in respect of
15 Airbus A319 Aircraft. After
3 aircraft were leased under this Exhibit with Aviation
Financial
Services, Inc. as Lessor, related entities of Aviation
Financial Services,
Inc. replaced it as the Lessor, but each lease with these
related entities
is substantially identical in all material respects to
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
10.53 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2000).
|
|
|
10.6
|
Lease
dated as of May 5, 2000 for Frontier Center One, LLC, as
landlord, and
Frontier Airlines, Inc., as tenant. 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
10.55 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2000).
|
|
|
10.6(a)
|
Amendment
Number Two to Lease Agreement. Portions of this exhibit
have been omitted
and filed separately with the Securities and Exchange Commission
in a
confidential treatment request under Rule 24b-2 of the
Securities Exchange
Act of 1934, as amended. (Exhibit 10.7(a) to the Company’s
Annual
Report on Form 10-K for the year ended March 31, 2005).
|
|
|
10.7
|
Operating
Agreement of Frontier Center One, LLC, dated as of May
10, 2000 between
Shea Frontier Center, LLC, and 7001 Tower, LLC, and Frontier
Airlines,
Inc. 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
10.56 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2000).
|
|
|
10.8
|
Standard
Industrial Lease dated April 27, 2000, between Mesilla
Valley Business
Park, LLC, landlord, and Frontier Airlines, Inc., tenant.
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
10.57 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2000).
|
|
|
10.9
|
General
Terms Agreement No. 6-13616 between CFM International and
Frontier
Airlines, Inc. 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
10.60 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000). |
|
|
10.10
|
Lease
Agreement dated as of December 15, 2000 between Gateway Office
Four, LLC,
Lessor, and Frontier Airlines, Inc., Lessee. (Exhibit
10.61 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
December 31, 2000).
|
|
|
10.11
|
Code
Share Agreement dated as of May 3, 2001 between Frontier Airlines,
Inc.
and Great Lakes Aviation, Ltd. 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
10.62 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2001).
|
|
|
10.11(a)
|
Amendment
No. 1 to the Codeshare Agreement dated as of May 3, 2001 between
Frontier
Airlines, Inc. and Great Lakes Aviation, Ltd. Portions of the
exhibit have
been excluded from the publicly available document and an order
granting
confidential treatment of the excluded material has been received.
(Exhibit
10.62(a) to the Company’s Quarterly Report on Form 10-Q for the quarter
ended December 31, 2001).
|
|
|
+10.12
|
Employee
Stock Ownership Plan of Frontier Airlines, Inc. as amended and
restated,
effective January 1, 1997 and executed February 5, 2002. (Exhibit
10.66 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
December 31, 2001).
|
|
|
+10.12(a)
|
Amendment
of the Employee Stock Ownership Plan of Frontier Airlines, Inc.
as amended
and restated, effective January 1, 1997 and executed February
5, 2002 for
EGTRRA. (Exhibit
10.66(a) to the Company’s Quarterly Report on Form 10-Q for the quarter
ended December 31, 2001).
|
|
|
10.12(b)
|
Second
Amendment to the Employee Stock Ownership Plan of Frontier Airlines,
Inc.
executed March 30, 2006 and effective April 3, 2006. (Exhibit
10.12(b) to
the Company’s Annual Report on Form 10-K for the year ended March 31,
2006).
|
|
|
+10.13
|
Director
Compensation Agreement between Frontier Airlines, Inc. and Samuel
D.
Addoms dated effective April 1, 2002. This
agreement was modified on April 1, 2003, to expressly describe
the second
installment exercise period as on or after December 31, 2003,
and the
third installment exercise period as on or after April 1, 2004.
(Exhibit
10.67 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2002).
|
|
|
+10.13(a)
|
Amendment
No. 2 to the Director Compensation Agreement between Frontier
Airlines,
Inc. and Samuel D. Addoms dated effective April 1, 2003. (Exhibit
10.13(a)
to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006).
|
|
|
10.14
|
Secured
Credit Agreement dated as of October 10, 2002 between Frontier
Airlines,
Inc. and Credit Agricole Indosuez in respect to three Airbus
319 aircraft.
Portions of this exhibit have been excluded form the publicly
available
document and an order granting confidential treatment of the
excluded
material has been received. (Exhibit
10.75 to the Company’s Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 2002).
|
|
|
10.15
|
Aircraft
Mortgage and Security Agreement dated as of October 10, 2002
between
Frontier Airlines, Inc. and Credit Agricole Indosuez in respect
to 3
Airbus 319 aircraft. Portions of this exhibit have been excluded
form the
publicly available document and an order granting confidential
treatment
of the excluded material has been received. (Exhibit
10.76 to the Company’s Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 2002).
|
|
|
10.16
|
Codeshare
Agreement dated as of September 18, 2003 between Horizon Air
Industries,
Inc. and Frontier Airlines, Inc. Portions of this exhibit have
been
omitted and filed separately with the Securities and Exchange
Commission
in a confidential treatment request under Rule 24b-2 of the Securities
Exchange Act of 1934, as amended. (Exhibit
10.23 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
|
10.17
|
Aircraft
Lease Agreement dated as of December 5, 2003 between International
Lease
Finance Corporation, Inc., and Frontier Airlines, Inc., Lessee,
in respect
of 1 Airbus A319 Aircraft. Frontier has signed leases for
4 additional
Airbus 319 aircraft with this Lessor under Aircraft Lease
Agreements that
are substantially identical in all material respects to this
Exhibit.
Portions of this Exhibit have been omitted and filed separately
with the
Securities and Exchange Commission in a confidential treatment
request
under Rule 24b-2 of the Securities Exchange Act of 1934,
as amended.
(Exhibit
10.24 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
December 31, 2003).
|
|
|
+10.18
|
Frontier
Airlines 2004 Equity Incentive Plan. (Exhibit B to the Company’s 2004
Annual Meeting of Shareholders; filed July 26, 2004).
|
|
|
10.18
(a)
|
Amendment
to Frontier Airlines 2004 Equity Incentive Plan executed
March 30, 2006
and effective April 3, 2006.
|
|
|
+10.19
|
Executive
Bonus Plan for the Company’s fiscal year ending March 31, 2006 (Exhibit
10.21 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2005).
|
|
|
+10.20
|
Long
Term Incentive Plan for the Company’s fiscal year ending March 31, 2006
(Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year
ended March 31, 2005).
|
|
|
+10.21
|
Form
of Stock Appreciation Rights Agreement for issuance of stock
appreciation
rights pursuant to the Frontier Airlines 2004 Equity Incentive
Plan to
plan participants, including named executive officers (Exhibit
10.23 to
the Company’s Annual Report on Form 10-K for the year ended March 31,
2005).
|
|
|
+10.22
|
Form
of Incentive Stock Option Agreement for issuance on incentive
stock
options pursuant to the Frontier Airlines 2004 Equity Incentive
Plan to
plan participants, including named executive officers (Exhibit
10.24 to
the Company’s Annual Report on Form 10-K for the year ended March 31,
2005).
|
|
|
+10.23
|
Form
of Stock Unit Agreement for issuance of restricted stock
units pursuant to
the Frontier Airlines 2004 Equity Incentive Plan to plan
participants,
including named executive officers (Exhibit 10.25 to the
Company’s Annual
Report on Form 10-K for the year ended March 31, 2005).
|
|
|
+10.24
|
Form
of Non-Qualified Stock Option Agreement for issuance of non-qualified
stock options pursuant to the Frontier Airlines 2004 Equity
Incentive Plan
to qualifying members of the Company’s Board of Directors (Exhibit 10.26
to the Company’s Annual Report on Form 10-K for the year ended March 31,
2005).
|
|
|
+10.25
|
Summary
of Base Salary Compensation Arrangements with Named Executive
Officers
(Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year
ended March 31, 2005).
|
|
|
10.26
|
Underwriting
Agreement dated December 1, 2005, by and among Frontier
Airlines, Inc., Morgan Stanley & Co. Incorporated, and
Citigroup Global Markets, Inc. (Exhibit 1.1 to a Form 8-K filed on
December 7, 2005).
|
|
|
10.27
|
Indenture
dated December 7, 2005, by and between Frontier Airlines, Inc.
and U.S. Bank National Association, as Trustee (Exhibit 4.1 to
Amendment No. 1 to Frontier's Registration Statement on
Form S-3, File No. 333-128407, filed on November 23,
2005).
|
|
|
10.28
|
First
Supplemental Indenture dated December 7, 2005, by and between
Frontier Airlines, Inc. and U.S. Bank National Association, as
Trustee (Exhibit 4.2 to a Form 8-K filed on December 7,
2005).
|
10.29
|
Second
Supplemental Indenture dated April 3, 2006, by and among
Frontier
Airlines, Inc., Frontier Airlines Holdings, Inc., and U.S.
Bank National
Association, as Trustee. (Exhibit 10.29 to the Company’s Annual Report on
Form 10-K for the year ended March 31, 2006).
|
|
|
10.30
|
Purchase
Agreement dated September 1, 2006 between Bombardier, Inc.
and Frontier
Airlines Holdings, Inc., relating to the purchase of Bombardier
Q400
aircraft. 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 10.30 to the
Company’s
Quarterly Report on Form 10-Q for the quarter ended September
30,
2006).
|
|
|
10.31*
|
Airline
Service Agreement between Frontier Airlines Holdings, Inc.
and Republic
Airlines, Inc. dated January 11, 2007.
|
|
|
21.1*
|
List
of Subsidiaries
|
Exhibit
23 - Consents of Experts:
23.1*
|
Consent
of KPMG LLP.
|
Exhibit
31 - Certifications
31.1*
|
Section
302 certification of President and Chief Executive Officer, Jeffery
S.
Potter.
|
|
|
31.2*
|
Section
302 certification of Chief Financial Officer, Paul H.
Tate.
|
Exhibit
32 - Certifications
32.1**
|
Section
906 certifications of President and Chief Executive Officer, Jeffery
S.
Potter
|
|
|
32.2**
|
Section
906 certifications of Chief Financial Officer, Paul H. Tate
|
*
|
Filed
herewith.
|
**
|
Furnished
herewith.
|
+
|
Management
contract or compensatory plan or
arrangement.
|
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:
May 24, 2007
|
By:
/s/
Jeffery S. Potter
|
|
Jeffery
S. Potter, Chief Executive Officer and
Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
FRONTIER
AIRLINES HOLDINGS, INC. |
|
|
|
|
Date:
May 24, 2007
|
By:
/s/
Paul H. Tate
|
|
Paul
H. Tate, Vice President and
|
|
Chief
Financial Officer
|
|
|
Date:
May 24, 2007
|
By:
/s/
Elissa A. Potucek
|
|
Elissa
A. Potucek, Vice President, Controller,
|
|
Treasurer
and Principal Accounting Officer
|
|
|
Date:
May 24, 2007
|
By:
/s/
Samuel D. Addoms
|
|
Samuel
D. Addoms, Director
|
|
|
Date:
May 24, 2007
|
By:
/s/
D. Dale Browning
|
|
D.
Dale Browning, Director
|
|
|
Date:
May 24, 2007
|
By:
/s/
Rita M. Cuddihy
|
|
Rita
M. Cuddihy, Director
|
|
|
Date:
May 24, 2007
|
By:
/s/
Paul Stephen Dempsey
|
|
B.
Paul Stephen Dempsey, Director
|
|
|
Date:
May 24, 2007
|
By:
/s/
Patricia A. Engels
|
|
D.
Patricia A. Engels, Director
|
|
|
Date:
May 24, 2007
|
By:
/s/
LaRae Orullian
|
|
LaRae
Orullian, Director
|
|
|
Date:
May 24, 2007
|
By:
/s/
James B. Upchurch
|
|
James
B. Upchurch, Director
|
|
|
Date:
May 24, 2007
|
By:
/s/
Robert D. Taylor
|
|
Robert
D. Taylor, Director
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Frontier
Airlines Holdings, Inc.:
We
have
audited the accompanying consolidated balance sheets of Frontier Airlines
Holdings, Inc. and subsidiaries as of March 31, 2007 and 2006, and the
related consolidated statements of operations, stockholders’ equity and other
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended March 31, 2007. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Frontier Airlines Holdings,
Inc. and subsidiaries as of March 31, 2007 and 2006, and the results of their
operations and its cash flows for each of the years in the three-year period
ended March 31, 2007, in conformity with U.S. generally accepted accounting
principles.
As
discussed in note 1 to the accompanying consolidated financial statements
effective, April 1, 2006, the Company adopted SFAS No. 123(R),
Share-Based
Payment.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Frontier Airlines
Holdings, Inc.’s internal control over financial reporting as of March 31, 2007,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated May 24, 2007, expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
KPMG
LLP
Denver,
Colorado
May
24,
2007
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Frontier
Airlines Holdings, Inc.:
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Frontier Airlines
Holdings, Inc. maintained effective internal control over financial reporting
as
of March 31, 2007, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the
Treadway Commission (COSO). Frontier Airlines Holdings, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Frontier Airlines Holdings, Inc.
maintained effective internal control over financial reporting as of March
31,
2007, is fairly stated, in all material respects, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, Frontier
Airlines Holdings, Inc. maintained, in all material respects, effective internal
control over financial reporting as of March 31, 2007, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Frontier
Airlines Holdings, Inc., and subsidiaries as of March 31, 2007 and 2006, and
the
related consolidated statements of operations, stockholders’ equity and other
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended March 31, 2007, and our report dated May 24, 2007
expressed an unqualified opinion on those financial statements.
KPMG
LLP
Denver,
Colorado
May
24,
2007
FRONTIER
AIRLINES HOLDINGS, INC.
Consolidated
Balance Sheets
March
31, 2007 and 2006
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006 |
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
$
|
202,981
|
|
|
|
|
$
|
272,840
|
|
Restricted
investments
|
|
|
|
|
|
|
|
|
|
42,844
|
|
|
|
|
|
35,297
|
|
Receivables,
net of allowance for doubtful accounts of $632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
$1,261 at March 31, 2007 and 2006, respectively
|
|
|
|
|
|
|
|
|
|
50,691
|
|
|
|
|
|
41,691
|
|
Prepaid
expenses and other assets
|
|
|
|
|
|
|
|
|
|
26,163
|
|
|
|
|
|
23,182
|
|
Inventories,
net of allowance of $329 and $378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
March 31, 2007 and 2006, respectively
|
|
|
|
|
|
|
|
|
|
15,685
|
|
|
|
|
|
6,624
|
|
Assets
held for sale (note 3)
|
|
|
|
|
|
|
|
|
|
2,041
|
|
|
|
|
|
3,543
|
|
Deferred
tax asset (note 10)
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
7,780
|
|
Total
current assets
|
|
|
|
|
|
|
|
|
|
340,405
|
|
|
|
|
|
390,957
|
|
Property
and equipment, net (note 4)
|
|
|
|
|
|
|
|
|
|
605,131
|
|
|
|
|
|
510,428
|
|
Security
and other deposits (note 7)
|
|
|
|
|
|
|
|
|
|
20,850
|
|
|
|
|
|
19,597
|
|
Aircraft
pre-delivery payments
|
|
|
|
|
|
|
|
|
|
52,453
|
|
|
|
|
|
40,449
|
|
Restricted
investments
|
|
|
|
|
|
|
|
|
|
2,845
|
|
|
|
|
|
481
|
|
Deferred
loan fees and other assets
|
|
|
|
|
|
|
|
|
|
21,184
|
|
|
|
|
|
8,520
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
$
|
1,042,868
|
|
|
|
|
$
|
970,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
$
|
52,001
|
|
|
|
|
$
|
44,955
|
|
Air
traffic liability
|
|
|
|
|
|
|
|
|
|
183,754
|
|
|
|
|
|
153,662
|
|
Other
accrued expenses (note 6)
|
|
|
|
|
|
|
|
|
|
80,324
|
|
|
|
|
|
67,683
|
|
Current
portion of long-term debt (note 9)
|
|
|
|
|
|
|
|
|
|
26,847
|
|
|
|
|
|
22,274
|
|
Deferred
revenue and other liabilities (note 5)
|
|
|
|
|
|
|
|
|
|
16,400
|
|
|
|
|
|
12,437
|
|
Total
current liabilities
|
|
|
|
|
|
|
|
|
|
359,326
|
|
|
|
|
|
301,011
|
|
Long-term
debt related to aircraft notes (note 9)
|
|
|
|
|
|
|
|
|
|
359,908
|
|
|
|
|
|
313,482
|
|
Convertible
notes (note 9)
|
|
|
|
|
|
|
|
|
|
92,000
|
|
|
|
|
|
92,000
|
|
Deferred
tax liability (note 10)
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
12,733
|
|
Deferred
revenue and other liabilities (note 5)
|
|
|
|
|
|
|
|
|
|
22,138
|
|
|
|
|
|
22,430
|
|
Total
liabilities
|
|
|
|
|
|
|
|
|
$
|
833,372
|
|
|
|
|
$
|
741,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (notes 2, 7, 9, 12, 13 and 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 36,627,455 and 36,589,705 shares issued and
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at March 31, 2007 and March 31, 2006, respectively
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
37
|
|
Treasury
stock, stated at cost (note 13)
|
|
|
|
|
|
|
|
|
|
(1,838
|
)
|
|
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
|
193,943
|
|
|
|
|
|
192,936
|
|
Unearned
ESOP shares (note 13)
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
(2,094
|
)
|
Accumulated
other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
151
|
|
Retained
earnings
|
|
|
|
|
|
|
|
|
|
17,376
|
|
|
|
|
|
37,746
|
|
Total
stockholders' equity
|
|
|
|
|
|
|
|
|
|
209,496
|
|
|
|
|
|
228,776
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
$
|
1,042,868
|
|
|
|
|
$
|
970,432
|
|
See
accompanying notes to the consolidated financial statements.
FRONTIER
AIRLINES HOLDINGS, INC.
Consolidated
Statements of Operations
Years
Ended March 31, 2007, 2006 and 2005
(In
thousands, except per share amounts)
|
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- mainline
|
|
|
|
|
$
|
1,037,302
|
|
|
|
|
$
|
878,681
|
|
|
|
|
$
|
731,822
|
|
Passenger
- regional partner
|
|
|
|
|
|
94,164
|
|
|
|
|
|
92,826
|
|
|
|
|
|
84,269
|
|
Cargo
|
|
|
|
|
|
6,880
|
|
|
|
|
|
5,677
|
|
|
|
|
|
4,958
|
|
Other
|
|
|
|
|
|
32,603
|
|
|
|
|
|
24,338
|
|
|
|
|
|
16,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
|
|
|
1,170,949
|
|
|
|
|
|
1,001,522
|
|
|
|
|
|
837,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight
operations
|
|
|
|
|
|
161,544
|
|
|
|
|
|
141,316
|
|
|
|
|
|
132,022
|
|
Aircraft
fuel
|
|
|
|
|
|
343,082
|
|
|
|
|
|
281,906
|
|
|
|
|
|
185,821
|
|
Aircraft
lease
|
|
|
|
|
|
108,623
|
|
|
|
|
|
94,229
|
|
|
|
|
|
87,096
|
|
Aircraft
and traffic servicing
|
|
|
|
|
|
166,525
|
|
|
|
|
|
138,492
|
|
|
|
|
|
129,470
|
|
Maintenance
|
|
|
|
|
|
87,978
|
|
|
|
|
|
77,238
|
|
|
|
|
|
76,679
|
|
Promotion
and sales
|
|
|
|
|
|
115,536
|
|
|
|
|
|
89,751
|
|
|
|
|
|
80,407
|
|
General
and administrative
|
|
|
|
|
|
56,019
|
|
|
|
|
|
48,979
|
|
|
|
|
|
48,350
|
|
Operating
expenses - regional partner
|
|
|
|
|
|
108,355
|
|
|
|
|
|
106,866
|
|
|
|
|
|
92,481
|
|
Aircraft
lease and facility exit costs (note 8)
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
3,414
|
|
|
|
|
|
-
|
|
(Gains)
losses on sales of assets, net
|
|
|
|
|
|
(656
|
)
|
|
|
|
|
(1,144
|
)
|
|
|
|
|
85
|
|
Impairments
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
5,123
|
|
Depreciation
|
|
|
|
|
|
34,702
|
|
|
|
|
|
28,372
|
|
|
|
|
|
26,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
|
|
1,181,651
|
|
|
|
|
|
1,009,419
|
|
|
|
|
|
864,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
interruption insurance proceeds (note 16)
|
|
|
|
868
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
|
|
|
(9,834
|
)
|
|
|
|
|
(7,897
|
)
|
|
|
|
|
(26,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
14,982
|
|
|
|
|
|
9,366
|
|
|
|
|
|
3,757
|
|
Interest
expense
|
|
|
|
|
|
(29,899
|
)
|
|
|
|
|
(21,758
|
)
|
|
|
|
|
(13,184
|
)
|
Other,
net
|
|
|
|
|
|
(245
|
)
|
|
|
|
|
(179
|
)
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonoperating income (expense), net
|
|
|
|
|
|
(15,162
|
)
|
|
|
|
|
(12,571
|
)
|
|
|
|
|
(9,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax benefit
|
|
|
|
|
|
(24,996
|
)
|
|
|
|
|
(20,468
|
)
|
|
|
|
|
(35,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (note 10)
|
|
|
|
|
|
(4,626
|
)
|
|
|
|
|
(6,497
|
|
|
|
|
|
(12,408
|
)
|
Net
loss
|
|
|
|
|
$
|
(20,370
|
)
|
|
|
|
$
|
(13,971
|
)
|
|
|
|
$
|
(23,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (note 14)
|
|
|
|
|
$
|
(0.56
|
)
|
|
|
|
$
|
(0.39
|
)
|
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
|
|
|
36,608
|
|
|
|
|
|
36,167
|
|
|
|
|
|
35,641
|
|
See
accompanying notes to the consolidated financial statements.
FRONTIER
AIRLINES HOLDINGS, INC.
Consolidated
Statements of Stockholders’ Equity and Other Comprehensive Income
(Loss)
Years
Ended March 31, 2007, 2006 and 2005
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Unearned
|
|
other
|
|
|
|
Total
|
|
|
|
Common
|
|
Treasury
|
|
paid-in
|
|
ESOP
|
|
comprehensive
|
|
Retained
|
|
stockholders’
|
|
|
|
Stock
|
|
Stock
|
|
capital
|
|
shares
|
|
income
(loss)
|
|
earnings
|
|
equity
|
|
Balances,
March 31, 2004
|
|
$
|
36
|
|
$
|
-
|
|
$
|
185,078
|
|
$
|
(2,183
|
)
|
$
|
(137
|
)
|
$
|
75,147
|
|
$
|
257,941
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(23,430
|
)
|
|
(23,430
|
)
|
Other
comprehensive loss -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized
gain on derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments,
net of tax of $246,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
409
|
|
|
-
|
|
|
409
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,021
|
)
|
Exercise
of common stock options
|
|
|
-
|
|
|
-
|
|
|
337
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
337
|
|
Tax
benefit from exercises of stock options
|
|
|
-
|
|
|
-
|
|
|
(289
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(289
|
)
|
Contribution
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
employee stock ownership plan
|
|
|
-
|
|
|
-
|
|
|
3,028
|
|
|
(3,028
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of employee stock compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,940
|
|
|
-
|
|
|
-
|
|
|
2,940
|
|
Capital
contribution
|
|
|
-
|
|
|
-
|
|
|
12
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12
|
|
Balances,
March 31, 2005
|
|
|
36
|
|
|
-
|
|
|
188,166
|
|
|
(2,271
|
)
|
|
272
|
|
|
51,717
|
|
|
237,920
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,971
|
)
|
|
(13,971
|
)
|
Other
comprehensive income -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized
loss on derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments,
net of tax of $74,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(121
|
)
|
|
-
|
|
|
(121
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,092
|
)
|
Exercise
of common stock options
|
|
|
-
|
|
|
-
|
|
|
1,551
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,551
|
|
Tax
benefit from exercises of stock options
|
|
|
-
|
|
|
-
|
|
|
281
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
281
|
|
Contribution
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
employee stock ownership plan
|
|
|
1
|
|
|
-
|
|
|
2,791
|
|
|
(2,792
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of employee stock compensation
|
|
|
-
|
|
|
-
|
|
|
147
|
|
|
2,969
|
|
|
-
|
|
|
-
|
|
|
3,116
|
|
Balances,
March 31, 2006
|
|
|
37
|
|
|
-
|
|
|
192,936
|
|
|
(2,094
|
)
|
|
151
|
|
|
37,746
|
|
|
228,776
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(20,370
|
)
|
|
(20,370
|
)
|
Other
comprehensive loss -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized
loss on derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments,
net of tax of $40,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(151
|
)
|
|
-
|
|
|
(151
|
)
|
Impact
of adoption of SFAS 158,
net
of tax of $14,000 (note 13)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(22
|
)
|
|
-
|
|
|
(22
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,543
|
)
|
Exercise
of common stock options
|
|
|
-
|
|
|
-
|
|
|
162
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162
|
|
Purchase
of treasury shares - 300,000 shares
|
|
|
-
|
|
|
(1,838
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,838
|
)
|
Amortization
of employee stock compensation
|
|
|
-
|
|
|
-
|
|
|
845
|
|
|
2,094
|
|
|
-
|
|
|
-
|
|
|
2,939
|
|
Balances,
March 31, 2007
|
|
$
|
37
|
|
$
|
(1,838
|
)
|
$
|
193,943
|
|
$
|
-
|
|
$
|
(22
|
)
|
$
|
17,376
|
|
$
|
209,496
|
|
See
accompanying notes to the consolidated financial statements.
FRONTIER
AIRLINES HOLDINGS, INC.
Consolidated
Statements of Cash Flows
Years
ended March 31, 2007, 2006, and 2005
(In
thousands)
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
$
|
(20,370
|
)
|
|
|
|
$
|
(13,971
|
)
|
|
|
|
$
|
(23,430
|
)
|
Adjustments
to reconcile net loss to net cash and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
equivalents provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense under long-term incentive plans
and
employee stock ownership plans
|
|
|
3,409
|
|
|
|
|
|
3,115
|
|
|
|
|
|
2,940
|
|
Depreciation
and amortization
|
|
|
|
|
|
36,219
|
|
|
|
|
|
29,439
|
|
|
|
|
|
27,124
|
|
Impairment
recorded on property and equipment
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
3,860
|
|
Provisions
recorded on inventories and assets beyond
economic
repair
|
|
|
1,409
|
|
|
|
|
|
86
|
|
|
|
|
|
1,661
|
|
(Gains)
losses on disposal of equipment and other, net
|
|
|
(656
|
)
|
|
|
|
|
(1,144
|
)
|
|
|
|
|
85
|
|
Mark
to market derivative (gains) losses, net
|
|
|
|
|
|
(12,753
|
)
|
|
|
|
|
2,163
|
|
|
|
|
|
(2,837
|
)
|
Deferred
tax expense
|
|
|
|
|
|
(4,883
|
)
|
|
|
|
|
(6,551
|
)
|
|
|
|
|
(12,515
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
investments
|
|
|
|
|
|
(9,161
|
)
|
|
|
|
|
3,326
|
|
|
|
|
|
(7,916
|
)
|
Receivables
|
|
|
|
|
|
(9,000
|
)
|
|
|
|
|
(3,943
|
)
|
|
|
|
|
(11,178
|
)
|
Security
and other deposits
|
|
|
|
|
|
(269
|
)
|
|
|
|
|
96
|
|
|
|
|
|
(305
|
)
|
Prepaid
expenses and other assets
|
|
|
|
|
|
(2,981
|
)
|
|
|
|
|
(4,442
|
)
|
|
|
|
|
(5,647
|
)
|
Inventories
|
|
|
|
|
|
(9,012
|
)
|
|
|
|
|
405
|
|
|
|
|
|
(2,701
|
)
|
Other
assets
|
|
|
|
|
|
(936
|
)
|
|
|
|
|
640
|
|
|
|
|
|
1,151
|
|
Accounts
payable
|
|
|
|
|
|
7,046
|
|
|
|
|
|
7,714
|
|
|
|
|
|
6,073
|
|
Air
traffic liability
|
|
|
|
|
|
30,091
|
|
|
|
|
|
40,974
|
|
|
|
|
|
29,349
|
|
Other
accrued expenses
|
|
|
|
|
|
12,135
|
|
|
|
|
|
12,346
|
|
|
|
|
|
11,032
|
|
Deferred
revenue and other liabilities
|
|
|
|
|
|
2,939
|
|
|
|
|
|
9,389
|
|
|
|
|
|
2,494
|
|
Net
cash provided by operating activities
|
|
|
23,227
|
|
|
|
|
|
79,642
|
|
|
|
|
|
19,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
lease and purchase deposits
|
|
|
|
|
|
(47,933
|
)
|
|
|
|
|
(36,117
|
)
|
|
|
|
|
(21,436
|
)
|
Aircraft
lease and purchase deposits applied to aircraft
|
|
|
34,946
|
|
|
|
|
|
19,513
|
|
|
|
|
|
23,008
|
|
Decrease
in restricted investments
|
|
|
|
|
|
-
|
|
|
|
|
|
2,034
|
|
|
|
|
|
3,482
|
|
Decrease
in short-term investments
|
|
|
|
|
|
-
|
|
|
|
|
|
3,000
|
|
|
|
|
|
57,600
|
|
Proceeds
from the sale of property and equipment and
assets
held for sale
|
|
|
43,947
|
|
|
|
|
|
9,843
|
|
|
|
|
|
80,963
|
|
Capital
expenditures
|
|
|
|
|
|
(172,270
|
)
|
|
|
|
|
(93,775
|
)
|
|
|
|
|
(128,776
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(141,310
|
)
|
|
|
|
|
(95,502
|
)
|
|
|
|
|
14,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock and warrants
|
|
|
162
|
|
|
|
|
|
1,551
|
|
|
|
|
|
349
|
|
Purchase
of treasury shares
|
|
|
|
|
|
(1,838
|
)
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Payment
to bank for compensating balance
|
|
|
|
|
|
(750
|
)
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
-
|
|
(Payments)
proceeds from short-term borrowings
|
|
|
|
-
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
|
5,000
|
|
Proceeds
from long-term borrowings
|
|
|
|
|
|
74,438
|
|
|
|
|
|
146,700
|
|
|
|
|
|
22,000
|
|
Principal
payments on long-term borrowings
|
|
|
|
|
|
(23,439
|
)
|
|
|
|
|
(19,959
|
)
|
|
|
|
|
(18,373
|
)
|
Payment
of financing fees
|
|
|
|
|
|
(349
|
)
|
|
|
|
|
(4,387
|
)
|
|
|
|
|
(1,271
|
)
|
Net
cash provided by financing activities
|
|
|
|
48,224
|
|
|
|
|
|
116,905
|
|
|
|
|
|
7,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(69,859
|
)
|
|
|
|
|
101,045
|
|
|
|
|
|
41,786
|
|
Cash
and cash equivalents, beginning of year
|
|
|
|
|
|
272,840
|
|
|
|
|
|
171,795
|
|
|
|
|
|
130,009
|
|
Cash
and cash equivalents, end of year
|
|
|
|
|
$
|
202,981
|
|
|
|
|
$
|
272,840
|
|
|
|
|
$
|
171,795
|
|
See
accompanying notes to the consolidated financial statements.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements
March
31, 2007
1.
Nature of Business and Summary of Significant Accounting
Policies
Nature
of Business
Frontier
Airlines Holdings, Inc. (“Frontier Holdings” or the “Company”) provides air
transportation for passengers and freight through its wholly-owned subsidiaries.
On April 3, 2006, Frontier Airlines, Inc. (“Airlines”) completed its corporate
reorganization (the “Reorganization”) and as a result, Airlines became a
wholly-owned subsidiary of Frontier Airlines Holdings, Inc., a Delaware
corporation. Airlines was incorporated in the State of Colorado on February
8,
1994 and commenced operations on July 5, 1994. In September 2006, the Company
formed a new subsidiary, Lynx Aviation, Inc. (“Lynx Aviation”). Airlines, in
conjunction with its regional
jet partners, operating under the Frontier JetExpress brand (“Frontier
JetExpress”), operates
routes linking from its Denver, Colorado hub to 46 cities coast to coast, eight
cities in Mexico and one city in Canada as of March 31, 2007. Airlines also
provides service from other non-hub cities including service from ten non-hub
cities to Mexico. As of March 31, 2007, Airlines operates a fleet of 49 Airbus
A319 aircraft, eight Airbus A318 aircraft and seven CRJ 700 aircraft (operated
by Horizon Air Industries, Inc.) and two Embraer 170 aircraft (operated by
Republic Airlines, Inc.) from its base in Denver, and had approximately 5,200
employees.
The
Company operates in one business segment that provides transportation to
passengers and cargo and includes mainline operations and a regional
partner.
Lynx
Aviation
Lynx
Aviation intends to assume 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 September 2007 with ten aircraft in service
by the end of January 2008. At this time, Frontier and Lynx Aviation are the
only 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 it has not yet commenced
operations.
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 will begin on March 4, 2007 and replaces the CRJ
700
aircraft operated by 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
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
operated
by the regional partner based on miles flown and are included in passenger
revenues - regional partner. Expenses directly related to the flights flown
by
the regional partner are included in operating expenses - regional partner.
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 Air Industries,
Inc. (“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.
Preparation
of Financial Statements and Use of Estimates
The
preparation of financial statements in conformity with U.S. 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.
Reclassification
of Prior Year Amounts
Certain
prior year items have been reclassified to conform to the current year
presentation.
Cash
and Cash Equivalents
For
financial statement purposes, the Company considers cash and short-term
investments with an original maturity of three months or less to be cash
equivalents.
Short-term
investments consist of the following: (a) bond money market funds and commercial
paper with maturities of less than three months, classified as held-to-maturity
and are carried at amortized cost which approximates fair value and (b) money
market funds with maturities of less than three months, classified as available
for sale securities and stated at fair value. Held-to-maturity securities are
those securities in which the Company has the ability and intent to hold the
security until maturity. Interest income is recognized when earned. There were
no unrealized gains or losses on these investments for the years ended March
31,
2007, 2006 and 2005.
Restricted
Investments
Restricted
investments include certificates of deposit that secure certain letters of
credit issued primarily to companies which process credit card sale
transactions, workers compensation claim reserves and certain airport
authorities. Restricted investments are carried at cost, which management
believes approximates fair value. Maturities are for one year or less and the
Company intends to hold restricted investments until maturity.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
Valuation
and Qualifying Accounts
The
following table summarizes the Company’s valuation and qualifying accounts as of
March 31, 2007, 2006, and 2005, and the associated activity for the years then
ended.
|
|
|
|
Allowance
for
Doubtful
Accounts
|
|
|
|
Allowance
for
Inventory
|
|
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
Balance
at March 31, 2004
|
|
$
|
225
|
|
|
|
|
$
|
2,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
provisions
|
|
|
1,012
|
|
|
|
|
|
1,263
|
|
|
|
|
Deductions
(1)
|
|
|
(310
|
)
|
|
|
|
|
(281
|
)
|
|
|
|
Balance
at March 31, 2005
|
|
$
|
927
|
|
|
|
|
$
|
3,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
provisions
|
|
|
579
|
|
|
|
|
|
169
|
|
|
|
|
Deductions
(1)
|
|
|
(245
|
)
|
|
|
|
|
(165
|
)
|
|
|
|
Transfer
to assets held for sale
|
|
|
-
|
|
|
|
|
|
(3,599 |
)
|
Balance
at March 31, 2006
|
|
$
|
1,261
|
|
|
|
|
$
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
provisions
|
|
|
400
|
|
|
|
|
|
159
|
|
|
|
|
Deductions
(1)
|
|
|
(1,029
|
)
|
|
|
|
|
-
|
|
|
|
|
Transfer
to assets held for sale
|
|
|
-
|
|
|
|
|
|
(208
|
)
|
|
|
|
Balance
at March 31, 2007
|
|
$
|
632
|
|
|
|
|
$
|
329
|
|
|
|
|
(1)
Uncollectible accounts written off, net of recoveries, for the allowance of
doubtful accounts
The
allowance for doubtful accounts is primarily based on the specific
identification method.
Inventories
Inventories
consist of expendable aircraft spare parts, supplies and aircraft fuel and
are
stated at the lower of cost or market. Inventories are accounted for on a
first-in, first-out basis and are charged to expense as they are used. An
allowance for obsolescence on aircraft spare parts is provided over the
remaining useful life of the related aircraft to reduce the carrying costs
to
lower of cost or market.
Assets
held for sale
Assets
held for sale are valued at the lower of the carrying amount or the estimated
market value less selling costs. The Company monitors resale values for its
assets held for sale quarterly using an analysis of current sales and estimates
obtained from outside vendors.
Property
and Equipment
Property
and equipment are carried at cost. Major additions, betterments and renewals
are
capitalized. Depreciation is provided for on a straight-line basis to estimated
residual values over estimated depreciable lives as follows:
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
|
Description
|
|
Lives
|
Aircraft,
spare aircraft parts and flight equipment
|
|
7
-
25 years
|
Improvements
to leased aircraft
|
|
Life
of improvements or term of lease, whichever is less.
|
Capitalized
software
|
|
3
years
|
Ground
property; equipment and leasehold improvements
|
|
3
-
5 years or term of lease, which ever is
less
|
Residual
values for aircraft are at 25% of the aircraft cost and 10% for aircraft spare
parts.
Manufacturers’
and Lessor Credits
The
Company receives credits in connection with its purchase and lease of aircraft
for engines, auxiliary power units and other rotable parts. These credits are
deferred until the aircraft, engines, auxiliary power units and other rotable
parts are delivered and then applied as a reduction of the cost of the related
equipment. The Company also receives credits in connection with certain aircraft
lease agreements. These credits are recognized as a credit to lease expense
over
the lease term.
Deferred
Loan Fees
Deferred
loan fees are deferred and amortized over the term of the related debt
obligation.
Fair
Value of Financial Instruments
The
Company estimates the fair value of its monetary assets and liabilities based
upon existing interest rates related to such assets and liabilities compared
to
current rates of interest for instruments with a similar nature and degree
of
risk. The Company estimates that the carrying value of all of its monetary
assets and liabilities approximates fair value as of March 31, 2007 and 2006
with the exception of its fixed rate loans. The estimated fair value of the
Company’s fixed rate loans based on current rates available to the Company for
debt of the same remaining maturity was approximately $119,923,000 as compared
to the carrying amount of $126,314,000 at March 31, 2007. The estimated fair
value of the Company’s fixed rate loans based on current rates available to the
Company for debt of the same remaining maturity was approximately $125,981,000
as compared to the carrying amount of $129,100,000 at March 31, 2006.
Revenue
Recognition
Passenger,
cargo, and other revenues are recognized when the transportation is provided
or
after the tickets expire, one year after date of issuance, and are net of excise
taxes, passenger facility charges and security fees. Revenues that have
been deferred are included in the accompanying consolidated balance sheets
as
air traffic liability. Included in passenger revenue are
change fees which may be imposed on passengers for making schedule changes
to
non-refundable tickets. Change fees are recognized as revenue at the time
the change fees are collected from the passenger as they are a separate
transaction that occurs subsequent to the date of the original ticket
sale.
The
marketing component of the sale of the Company’s EarlyReturns
miles,
previously reported as a reduction of promotion and sales expense, have been
reclassified as other revenue in all periods presented. The marketing component
was $13,895,000, $7,249,000 and $3,945,000 for the years ended March 31, 2007,
2006 and 2005, respectively.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
Passenger
Traffic Commissions and Related Expenses
Passenger
traffic commissions and related expenses are expensed when the transportation
is
provided and the related revenue is recognized. Passenger traffic commissions
and related expenses not yet recognized are included as a prepaid
expense.
Aircraft
Maintenance
The
Company operates under an FAA-approved continuous inspection and maintenance
program. The Company accounts for maintenance activities on the direct expense
method. Under this method, major overhaul maintenance costs are recognized
as
expense as maintenance services are performed, as flight hours are flown for
nonrefundable maintenance payments required by lease agreements, and as the
obligation is incurred for payments made under service agreements. Routine
maintenance and repairs are charged to operations as incurred.
Effective
January 1, 2003, the Company and GE Engine Services, Inc. (“GE”) executed
an engine services agreement (the "Services Agreement") covering the scheduled
and unscheduled repair of Airbus engines, which was subsequently modified 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 agreement term coincides with the initial lease term of 12 years.
Under the terms of the Services Agreement, the Company agreed to pay GE a rate
per-engine-hour, and GE assumed the responsibility to overhaul the Company's
engines on Airbus aircraft as required during the term of the Services
Agreement, subject to certain exclusions. The Company believes the rate
per-engine hour approximates the periodic cost the Company would have incurred
to service those engines. Accordingly, these payments are expensed as the
obligation is incurred.
Advertising
Costs
The
Company expenses the costs of advertising as promotion and sales expense in
the
year incurred. Advertising expense was $12,904,000, $9,588,000 and $10,803,000
for the years ended March 31, 2007, 2006 and 2005, and the amount of expense
recognized related to advertising barter transactions were $3,814,000,
$2,104,000, and $2,051,000, respectively. During the years ended March 31,
2007,
2006 and 2005, the amount of revenue recognized related to advertising barter
transactions were $2,463,000, $1,511,000, and $2,324,000, respectively. Prepaid
barter expenses as of March 31, 2007 and 2006 were $1,038,000 and $799,000,
respectively.
Impairment
of Long-Lived Assets
The
Company records impairment losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the carrying amount
of
the assets. If an impairment occurs, the loss is measured by comparing the
fair
value of the asset to its carrying amount.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method. Under
that method, deferred income taxes are recognized for the tax consequences
of
“temporary differences” by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and
tax bases of existing assets and liabilities and net operating losses and tax
credit carryforwards. A valuation allowance is provided to the extent that
it is
more likely than not that deferred
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
tax
assets will not be realized. The effect on deferred taxes from a change in
tax
rates is recognized in income in the period that includes the enactment date.
Loss
Per Common Share
Basic
loss per common share excludes the effect of potentially dilutive securities
and
is computed by dividing income by the weighted-average number of common shares
outstanding for the period. Diluted earnings per common share reflects the
potential dilution of all securities that could share in earnings. Shares
outstanding include shares contributed to the Employee Stock Ownership
Plan.
Customer
Loyalty Program
The
Company offers EarlyReturns, a frequent flyer program to encourage travel on
its
airline and customer loyalty. The Company accounts for the EarlyReturns program
under the incremental cost method whereby travel awards are valued at the
incremental cost of carrying one passenger based on expected redemptions. Those
incremental costs are based on expectations of expenses to be incurred on a
per
passenger basis and include food and beverages, fuel, liability insurance,
and
ticketing costs. The incremental costs do not include allocations of overhead
expenses, salaries, aircraft cost or flight profit or losses.
The
Company does not record a liability for mileage earned by participants who
have
not reached the level to become eligible for a free travel award. The Company
does not record a liability for the expected redemption of miles for non-travel
awards since the cost of these awards to us is negligible.
As
of
March 31, 2007 and 2006, the Company estimated that approximately 324,000 and
193,000 round-trip flight awards, respectively, were eligible for redemption
by
EarlyReturns members who have mileage credits exceeding the 15,000-mile free
round-trip domestic ticket award threshold. As of March 31, 2007 and 2006,
the
Company had recorded a liability of approximately $4,249,000 and $2,776,000,
respectively, for these rewards.
The
Company also sells points in EarlyReturns to third parties. The portion of
the
sale that is for travel is deferred and recognized as passenger revenue when
the
Company estimates the transportation is provided. The remaining portion,
referred to as the marketing component, is recognized as other revenue in the
month received.
Co-Branded
Credit Card Arrangement
The
Company entered into a co-branded credit card arrangement with a MasterCard
issuing bank in March 2003. This affinity agreement provides that the Company
will receive a fixed fee for each new account, which varies based on the type
of
account, and a percentage of the annual renewal fees that the bank receives.
The
Company receives an increased fee for new accounts it solicits. The Company
also
receives fees for the purchase of frequent flier miles awarded to the credit
card customers.
The
Company accounts for all fees received under the co-branded credit card program
by allocating the fees between the portion that represents the estimated value
of the subsequent travel award to be provided, and the portion which represents
a marketing fee to cover marketing and other related costs to administer the
program. This latter portion (referred to as the marketing component) represents
the residual after determination of the value of the travel component. The
component representing travel is determined by reference to an equivalent
restricted fare, which is used as a proxy for the value of travel of a frequent
flyer mileage award. The travel component is deferred and recognized as revenue
over the estimated usage period of the frequent flyer mileage awards of 20
months. The Company has estimated the period over which the frequent flier
mileage awards will be used based on the history of usage of the frequent
flier
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
mileage
awards. The Company records the marketing component of the revenue earned under
this agreement as other revenue in the month received.
For
the
year ended March 31, 2007, the Company earned total fees of $36,917,000. Of
that
amount, $25,219,000 was initially deferred as the travel award component, and
the remaining marketing component of $11,698,000 was recognized as other
revenue. For the year ended March 31, 2006, the Company earned total fees of
$24,986,000 under the credit card agreement. Of that amount, $19,686,000 was
deferred as the travel award component, and the remaining marketing component
of
$5,300,000 was recognized as other revenue. For the year ended March 31, 2005,
the Company earned total fees of $12,227,000. Of that amount, $8,455,000 was
deferred as the travel award component, and the remaining marketing component
of
$3,772,000 was recognized as other revenue. Amortization of deferred revenue
recognized in earnings during the years ended March 31, 2007, 2006 and 2005
was
$20,158,000, $11,059,000 and $4,396,000, respectively.
Supplemental
Disclosure of Cash Flow Information
Cash
Paid During the Year for:
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
(In
thousands)
|
|
|
|
Interest
|
|
$
|
28,047
|
|
$
|
18,911
|
|
$
|
12,345
|
|
Taxes
|
|
$
|
176
|
|
$
|
7
|
|
$
|
161
|
|
Interest
incurred during the year ended March 31, 2007 was $31,948,000, of which
$2,050,000 was capitalized.
Derivative
Instruments
The
Company accounts for derivative financial instruments in accordance with the
provisions of Statement of Financial Accounting Standards No. 133, “Accounting
for Derivative Instruments and Hedging Activities”
(“SFAS
133”), as
amended and interpreted. SFAS 133 requires the Company to measure all
derivatives at fair value and to recognize them in the balance sheet as an
asset
or liability. For derivatives designated as cash flow hedges, changes in fair
value of the derivative are generally reported in other comprehensive income
(“OCI”) and are subsequently reclassified into earnings when the hedged item
affects earnings. Changes in fair value of derivative instruments not designated
as hedging instruments and ineffective portions of hedges are recognized in
earnings in the current period.
The
Company entered into a derivative transaction to hedge the interest payments
associated with a portion of its LIBOR-based borrowings and fuel purchases.
The
Company designated an interest rate swap, which expired on March 31, 2007,
as a
qualifying cash flow hedge. This transaction was accounted for as a cash flow
hedge under SFAS 133. As a result, the Company recorded this instrument at
fair
market value and recognized changes in the mark to market gain or loss in OCI,
net of taxes. The Company also enters into derivative transactions to reduce
exposure to the effect of fluctuations in fuel prices. These transactions are
accounted for as trading instruments under SFAS 133. As a result, the Company
records these instruments at fair market value and recognizes realized and
unrealized gains and losses in aircraft fuel expense.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
Self-Insurance
The
Company is self-insured for the majority of the group health insurance costs,
subject to specific retention levels. The Company records its liability for
health insurance claims based on its estimate of claims that have been incurred
but not reported.
The
Company is also self-insured for the majority of its workers’ compensation cost.
The liability for workers’ compensation claims is the estimated total cost of
the claims on a fully-developed basis, up to a maximum stop loss coverage,
based
on reserves for these claims that are established by a third-party
administrator.
Stock-Based
Compensation
Effective
April 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123(R),
Share-Based Payment,
and
related interpretations (“SFAS 123(R)”), to account for stock-based compensation
using the modified prospective transition method and therefore will not restate
prior period results. SFAS 123(R) supersedes Accounting Principles Board Opinion
No. 25,
Accounting for Stock Issued to Employees
(“APB
No. 25”), and revises guidance in SFAS 123,
Accounting for Stock-Based Compensation.
Among
other things, SFAS 123(R) requires that compensation expense be recognized
in
the financial statements for share-based awards based on the grant date fair
value of those awards. The modified prospective transition method applies to
both (1) unvested awards under the Company’s 2004 Equity Incentive Plan (“2004
Plan”) outstanding as of March 31, 2006, based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS 123 and (2) any
new share-based awards granted subsequent to March 31, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R). Additionally, stock-based compensation expense includes an estimate
for
pre-vesting forfeitures and is recognized over the requisite service periods
of
the awards on a straight-line basis, which is commensurate with the vesting
term. The Company's options are typically granted with graded vesting
provisions, and compensation cost is amortized over the service period using
the
straight-line method.
New
Accounting Standards Not Yet Adopted
In
July 2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, (“FIN 48”).
This
Interpretation prescribes a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. This Interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This Interpretation is effective for fiscal
years beginning after December 15, 2006. The Company has not yet reached a
final determination of the potential financial statement impact of the adoption
of FIN 48 but does not expect it to have a material impact on the Company’s
financial position, results of operations or cash flows.
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
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
choose
to
measure many financial instruments and certain other items at fair value,
following the provisions of SFAS No. 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.
2.
Derivative Instruments
Fuel
Hedging
In
November 2002, the Company 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, the Company receives the difference
between the fixed price and the spot price. If the index price is lower, the
Company pays the difference. A collar agreement has a cap price and a floor
price. When the hedged product’s index price is above the cap, the Company
receives the difference between the index and the cap. When the hedged product’s
index price is below the floor the Company pays 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 non-cash mark to market adjustments are
included in aircraft fuel expense. The results of operations for the year ended
March 31, 2007, 2006 and 2005 include non-cash mark to market derivative
gains/(losses) of $12,753,000, $(2,163,000) and $2,837,000, respectively. Cash
settlements for fuel derivatives contracts for the year ended March 31, 2007
was
net payments of $3,925,000, and were net receipts of $5,338,000 and $4,768,000
for the years ended March 31, 2006 and 2005, respectively.
The
Company had the following swap and collar agreements outstanding at March 31,
2007 and 2006, which had fair values resulting in assets of $13,729,000 and
$976,000, respectively:
March
31, 2007:
Date
|
Product
*
|
Notional
volume **
(barrels
per month)
|
Period
covered
|
Price
(per gallon or barrel)
|
January
2007
|
Jet
A
|
100,000
|
April
1, 2007 - June,
30,2007
|
$1.817
per gallon, with a floating price
|
January
2007
|
Crude
Oil
|
40,000
|
July
1, 2007- September
30, 2007
|
$64.70
per barrel cap, with a floor of $59.15
|
January
2007
|
Crude
Oil
|
80,000
|
October
1, 2007 - December
31, 2007
|
$65.90
per barrel cap, with a floor of $59.90
|
January
2007
|
Crude
Oil
|
80,000
|
April
1, 2007 - June,
30, 2007
|
$59.30
per barrel cap, with a floor of $49.30
|
January
2007
|
Crude
Oil
|
80,000
|
July
1, 2007- September
30, 2007
|
$60.75
per barrel cap, with a floor of $50.45
|
January
2007
|
Crude
Oil
|
80,000
|
October
1, 2007 - December
31, 2007
|
$62.00
per barrel cap, with a floor of $51.10
|
January
2007
|
Crude
Oil
|
80,000
|
January
1, 2008 - March
31, 2008
|
$62.60
per barrel cap, with a floor of
$52.10
|
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
March
31, 2006:
Contract
date
|
Product
*
|
Notional
volume **
(barrels
per month)
|
Period
covered
|
Price
(per gallon or barrel)
|
November
2005
|
Jet
A
|
50,000
|
April
1, 2006 - June
30, 2006
|
$1.83
per gallon, with a floor of
$1.6925
per gallon
|
*Jet
A is
Gulf Coast Jet A fuel. Crude oil is West Texas Intermediate crude
oil.
**
One
barrel is equal to 42 gallons.
Interest
Rate Hedging Program
In
March
2003, the Company entered into an interest rate swap agreement with a notional
amount of $27,000,000 to hedge the interest payments associated with a portion
of its LIBOR-based borrowings through March 31, 2007. Under the interest rate
swap agreement, the Company paid a fixed rate of 2.45% and received a variable
rate based on the three month LIBOR, which was reset quarterly. Interest expense
for the years ended March 31, 2007 and 2006 were reduced by $187,000 and
$216,000, respectively, for settlement payments received from the counter party
for the period. Interest expense for the year ended March 31, 2005 includes
$177,000 of settlement amounts paid to the counter party for the period. At
March 31, 2007 and 2006, the Company’s interest rate swap agreement had
estimated values of $0 and $105,000, respectively, and were included in deferred
loan fees and other assets.
Changes
in the fair value of interest rate swaps designated as hedging instruments
are
reported in accumulated other comprehensive income included in stockholders’
equity. Approximately $105,000 of mark to market gains are included in
accumulated other comprehensive income included in stockholders’ equity, net of
income taxes of $40,000, for the year ended March 31, 2007. Approximately
$194,000 of mark to market gains are included in accumulated other comprehensive
income included in stockholders’ equity, net of income taxes of $74,000, for the
year ended March 31, 2006. Approximately $655,000 of unrealized losses are
included in accumulated other comprehensive income included in stockholders’
equity, net of income taxes of $246,000, for the year ended March 31, 2005.
The
mark to market gains and losses have been reclassified into interest expense
as
a yield adjustment in the same period in which the related interest payments
on
the LIBOR-based borrowings effects earnings.
3. Assets
Held For Sale
In
April
2005, the Company retired its remaining Boeing aircraft and has classified
all
remaining Boeing aircraft rotable spare parts and expendable inventories as
“assets held for sale.” As such, these assets have been valued at the lower of
the carrying amount or the estimated market value less selling costs.
In
August
2004, the Company began selling Boeing spare parts and entered into agreements
with two vendors to sell these parts on a consignment basis. The Company
monitors resale values for Boeing parts quarterly using estimates obtained
from
outside vendors. During the year ended March 31, 2005, the Company recorded
total impairments on Boeing rotable spare parts and expendable inventories
of
$5,123,000 due to declines in the resale values of these parts. Based on the
current market prices and recent sales history, the Company has determined
that
there is currently no additional impairment required for the Boeing rotable
spare parts and expendable inventories for the years ending March 31, 2007
and
2006. During the years ended March 31, 2007 and 2006, the Company realized
net
gains of $1,203,000 and $1,333,000, respectively, on the sale of these assets.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
4.
Property and Equipment, Net
At
March
31, 2007 and 2006, property and equipment consisted of the
following:
|
|
|
|
|
|
2007
(In
thousands)
|
|
|
|
2006
(In
thousands)
|
|
|
|
|
|
|
|
Aircraft,
spare aircraft parts, and improvements to leased aircraft
|
|
|
|
|
$
|
667,364
|
|
|
|
|
$
|
555,574
|
|
Ground
property, equipment and leasehold improvements
|
|
|
|
|
|
42,301
|
|
|
|
|
|
35,937
|
|
Computer
software
|
|
|
|
|
|
10,234
|
|
|
|
|
|
6,585
|
|
Construction
in progress
|
|
|
|
|
|
5,191
|
|
|
|
|
|
1,597
|
|
|
|
|
|
|
|
725,090
|
|
|
|
|
|
599,693
|
|
Less
accumulated depreciation
|
|
|
|
|
|
(119,959
|
)
|
|
|
|
|
(89,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
|
$
|
605,131
|
|
|
|
|
$
|
510,428
|
|
Property
and equipment includes capitalized interest of $1,970,000 in 2007.
In
June
2006, the Company completed a sale-leaseback transaction for an Airbus 319
that
resulted in a gain of $733,000. This gain was deferred and is being amortized
over the 12-year lease term. In October 2004 and December 2005, the Company
completed sale-leaseback transactions for three Airbus 319 engines on the same
day the aircraft purchase transaction closed. As such, no gain or loss was
recorded on these transactions in fiscal years 2006 and 2005. The Company agreed
to lease these engines over 10-year terms.
5.
Deferred Revenue and Other Liabilities
|
At
March 31, 2007 and March 31, 2006, deferred revenue and other liabilities
consisted of the following:
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Deferred
revenue primarily related to co-branded credit card
|
|
$
|
19,047
|
|
|
|
|
$
|
15,185
|
|
Deferred
rent
|
|
|
18,861
|
|
|
|
|
|
19,093
|
|
Other
|
|
|
630
|
|
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred revenue and other liabilities
|
|
|
38,538
|
|
|
|
|
|
34,867
|
|
Less:
current portion
|
|
|
(16,400
|
)
|
|
|
|
|
(12,437
|
)
|
|
|
$
|
22,138
|
|
|
|
|
$
|
22,430
|
|
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
6.
Other Accrued Expenses
|
At
March 31, 2007 and March 31, 2006, other accrued expenses consisted
of the
following:
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Accrued
salaries and benefits
|
|
$
|
42,616
|
|
$
|
35,203
|
|
Federal
excise and other passenger taxes payable
|
|
|
26,914
|
|
|
23,715
|
|
Property
tax payable and income taxes payable
|
|
|
2,593
|
|
|
2,529
|
|
Other
|
|
|
8,201
|
|
|
6,236
|
|
|
|
|
|
|
|
|
|
Total
other accrued expenses
|
|
$
|
80,324
|
|
$
|
67,683
|
|
7.
Lease Commitments
Aircraft
Leases
At
March
31, 2007 and 2006, the Company operated 38 and 34 leased aircraft,
respectively, which are accounted for under operating lease agreements with
initial terms of 12 years. Security deposits related to leased aircraft and
future leased aircraft deliveries at March 31, 2007 and 2006 totaled $18,205,000
and $16,984,000, respectively, and are reported in the consolidated balance
sheets in security and other deposits.
In
addition to scheduled future minimum lease payments, the
Company is required to make supplemental rent payments to cover the cost of
major scheduled maintenance overhauls of these aircraft.
These
supplemental rentals are
based
on the number of flight hours flown and/or flight departures and are included
in
maintenance expense.
The
lease agreements require the Company to pay taxes, maintenance, insurance,
and
other operating expenses applicable to the leased property. During the years
ended March 31, 2007, 2006 and 2005, supplemental rent payments were
$26,187,000, $24,933,000 and $25,974,000, respectively.
Other
Leases
The
Company leases office and hangar space, spare engines and office equipment
for
its headquarters, reservation facilities, airport facilities, and certain other
equipment. The Company also leases certain airport gate facilities on a
month-to-month basis.
For
leases that contain escalations, the Company records the total rent payable
during the lease term on a straight-line basis over the term of the lease and
records the difference between the rent paid and the straight-line rent as
a
deferred rent liability.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
At
March
31, 2007, commitments under non-cancelable operating leases (excluding aircraft
supplemental rent requirements) with terms in excess of one year were as
follows:
|
|
Aircraft
|
|
Other
|
|
Total
|
|
|
|
(In
thousands)
|
|
2008
|
|
$
|
139,457
|
|
$
|
24,525
|
|
$
|
163,982
|
|
2009
|
|
|
148,958
|
|
|
23,023
|
|
|
171,981
|
|
2010
|
|
|
160,404
|
|
|
21,187
|
|
|
181,591
|
|
2011
|
|
|
160,404
|
|
|
7,960
|
|
|
168,364
|
|
2012
|
|
|
160,404
|
|
|
6,081
|
|
|
166,485
|
|
Thereafter
|
|
|
822,643
|
|
|
15,295
|
|
|
837,938
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
$
|
1,592,270
|
|
$
|
98,071
|
|
$
|
1,690,341
|
|
Rental
expense under operating leases, including month-to-month leases, for the years
ended March 31, 2007, 2006 and 2005 was $159,206,000, $138,911,000, and
$130,205,000, respectively.
8.
Aircraft Lease and Facility Exit Costs
During
the year ended March 31, 2006, the Company ceased using three of its Boeing
737-300 leased aircraft with original lease termination dates in June 2005,
August 2005 and May 2006. The Company negotiated an early return and one-time
payment for the one aircraft with an original lease termination date of May
2006. This resulted in a charge of $3,312,000, representing the estimated fair
value of the remaining lease payments and a negotiated one-time termination
payment. During the year ended March 31, 2006, the Company also recorded
$102,000 of facility lease exit costs related to a property in which a sublease
was not obtained in a period originally estimated for an airport exited in
fiscal year 2005. This reflects the Company’s revised estimated future payments
on this lease. These charges are reported in the consolidated statements of
operations as aircraft and facility lease exit costs.
A
summary
of the activity charged to the aircraft and property lease termination
liabilities is as follows:
|
|
Aircraft
|
|
Facility
|
|
Total
|
|
|
|
(In
thousands)
|
|
Balance,
March 31, 2005
|
|
$
|
933
|
|
$
|
250
|
|
$
|
1,183
|
|
Additions
|
|
|
3,312
|
|
|
102
|
|
|
3,414
|
|
Lease
payments
|
|
|
(4,245
|
)
|
|
(142
|
)
|
|
(4,387
|
)
|
Balance,
March 31, 2006
|
|
$
|
-
|
|
$
|
210
|
|
$
|
210
|
|
Lease
payments
|
|
|
-
|
|
|
(153
|
)
|
|
(153
|
)
|
Reversals
|
|
|
-
|
|
|
(57
|
)
|
|
(57
|
)
|
Balance,
March 31, 2007
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
9.
Long-term Debt
Long-term
debt at March 31, 2007 and 2006 consisted of the following:
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Debt
|
|
|
|
|
|
|
|
|
|
|
Convertible
Notes, fixed interest rate of 5.0% (1)
|
|
$
|
92,000
|
|
|
|
|
$
|
92,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Secured by Aircraft
|
|
|
|
|
|
|
|
|
|
|
Aircraft
notes payable,
fixed interest rates with a 6.62%
|
|
|
|
|
|
|
|
|
|
|
weighted
average interest rate (2)
|
|
|
34,314
|
|
|
|
|
|
37,100
|
|
Aircraft
notes payable, variable interest rates based on LIBOR
plus a margin, for an overall weighted average rate of
7.18% and 6.51% at March 31, 2007 and March 31, 2006,
respectively(3)
|
|
|
348,426
|
|
|
|
|
|
294,042
|
|
Aircraft
junior note payable, variable interest rate based on LIBOR plus a
margin, with a rate of 9.13% and 8.38% at March 31, 2007 and March
31,
2006, respectively (4)
|
|
|
4,015
|
|
|
|
|
|
4,614
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Debt
|
|
|
478,755
|
|
|
|
|
|
427,756
|
|
Less:
current maturities
|
|
|
(26,847
|
)
|
|
|
|
|
(22,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
451,908
|
|
|
|
|
$
|
405,482
|
|
Maturities
of long-term debt, including balloon payments, are as follows (In
thousands):
|
2008
|
|
$
|
26,847
|
|
|
2009
|
|
|
28,443
|
|
|
2010
|
|
|
30,139
|
|
|
2011
|
|
|
31,932
|
|
|
2012
|
|
|
51,004
|
|
|
Thereafter
|
|
|
310,390
|
|
|
|
|
|
|
|
|
|
|
$
|
478,755
|
|
(1)
Convertible
Notes due 2025
On
December 7, 2005, the Company completed the sale of $92,000,000 aggregate
principal amount of 5.0% Convertible Notes due 2025 (“Convertible Notes”) in a
public offering pursuant to the Company’s shelf registration statement. Interest
is payable semi-annually, beginning on June 15, 2006. The Convertible Notes
are
unsecured and rank effectively junior in right of payment to existing and future
secured debt, including the Company’s Credit Facility and aircraft notes. At any
time on or after
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
December
20, 2010, the Company may redeem any of the Convertible Notes for cash at a
redemption price of 100% of the principal amount plus accrued interest. Holders
may require the Company to repurchase the Convertible Notes for cash at a
repurchase price of 100% of the principal amount plus accrued interest on
December 15, 2010, 2015 and 2020.
The
Convertible Notes are convertible, at the option of the holders, into shares
of
the Company’s common stock at a conversion rate of 96.7352 shares per principal
amount of notes (representing a conversion price of approximately $10.34 per
share), subject to certain adjustments, at any time prior to maturity. Upon
conversion, the Company will have the right to deliver a combination of cash
and
shares of common stock. In addition, holders of the Convertible Notes have
the
right to require the Company to repurchase the notes upon the occurrence of
a
specified designated event at a price of 100% of the principal amount plus
accrued interest. Upon the occurrence of a specified designated event prior
to
December 15, 2010, the conversion rate will be increased by a specified number
of shares for a maximum of 2,224,910 additional shares issued.
The
Company incurred and capitalized $3,241,000 in fees in connection with the
sale
of the Convertible Notes, which are included in deferred loan fees and other
assets. The debt issuance costs will be amortized using the effective interest
rate method over the shortest period in which the note holders may require
the
Company to repurchase the notes, which is five-years.
(2)
Secured
Aircraft Notes payable - fixed interest rates
During
the year ended March 31, 2002, the Company entered into a credit agreement
to
borrow up to $72,000,000 for the purchase of three Airbus aircraft with a
maximum borrowing of $24,000,000 per aircraft. During the year ended March
31,
2003, the Company entered into a sale-leaseback transaction for one of these
purchased aircraft and repaid the loan with the proceeds of the sale. The two
remaining aircraft loans have a term of 10 years and are payable in equal
monthly installments, including interest, payable in arrears. The remaining
loans require monthly principal and interest payments of $218,000 and $215,000,
respectively, bear interest with rates of 6.71% and 6.54%, with maturities
in
May and August 2011, at which time a balloon payment totaling $10,200,000 is
due
with respect to each loan.
(3)
Secured
Aircraft Notes payable - variable interest rates
During
the years ended March 31, 2003 through March 31, 2007, the Company borrowed
$415,838,000 for the purchase of 17 Airbus aircraft. These loans have terms
of
12 years with floating interest rates adjusted based on three and six month
LIBOR rates plus a margin. These loans bear interest at rates of 6.63% to 7.99%
at March 31, 2007 with maturities in May 2014 to August 2018. At the end of
the
terms there are balloon payments ranging from $2,640,000 to $9,215,000.
(4)
Junior
Secured Aircraft Notes payable - variable interest rates
During
the year ended March 31, 2006, the Company borrowed $4,900,000 for the purchase
of an Airbus aircraft. This junior loan has a seven-year term with quarterly
installments currently of $250,000. The loan bears interest at a floating
interest rate adjusted quarterly based on LIBOR plus a margin, which was 9.13%
at March 31, 2007.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
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 us to issue letters of credit
up to
$5,000,000. As of March 31, 2007, the Company has utilized $4,821,000 under
this
agreement for standby letters of credit that provide credit support for certain
facility leases, which reduced the amount available for borrowings to $929,000.
A cash compensating balance of $2,750,000 and $2,000,000 were required to
be
maintained and to secure the letters of credit, as of March 31, 2007 and
2006,
respectively, 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. Letters of credit available is 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 agreement 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 March 31, 2007
was
$16,500,000, which was reduced by letters of credit issued of $11,300,000.
The
amount available for borrowings under the Credit Facility based on the current
market value of the pledged eligible spare parts at March 31, 2006 was
$11,299,000, which was reduced by letters of credit issued of
$9,500,000.
At
March
31, 2007, the Company was in compliance with the covenants for all debt and
lease agreements.
10.
Income Taxes
Income
tax expense (benefit) for the years ended March 31, 2007, 2006, and 2005
is
presented below:
|
|
Current
|
|
Deferred
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Year
ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended March 31, 2007:
|
|
$ |
-
|
|
$ |
(4,177 |
) |
$ |
(4,177 |
) |
U.S.
federal
|
|
|
257
|
|
|
(706 |
) |
|
(449 |
) |
State
and local
|
|
$ |
257 |
|
$ |
(4,883 |
) |
$ |
(4,626 |
) |
|
|
|
|
|
|
|
|
|
|
|
Year
ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
U.S.
federal
|
|
$
|
-
|
|
$
|
(6,410
|
)
|
$
|
(6,410
|
)
|
State
and local
|
|
|
54
|
|
|
(141
|
)
|
|
(87
|
)
|
|
|
$
|
54
|
|
$
|
(6,551
|
)
|
$
|
(6,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended March 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
U.S.
federal
|
|
$
|
-
|
|
$
|
(11,823
|
)
|
$
|
(11,823
|
)
|
State
and local
|
|
|
107
|
|
|
(692
|
)
|
|
(585
|
)
|
|
|
$
|
107
|
|
$
|
(12,515
|
)
|
$
|
(12,408
|
)
|
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
The
differences between the Company’s effective rate for income taxes and the
federal statutory rate of 35% are shown in the following table:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Income
tax benefit at the statutory rate
|
|
$ |
(8,749 |
) |
$ |
(7,164 |
) |
$ |
(12,543 |
) |
State
and local income tax, net of federal income tax benefit
|
|
|
(667 |
) |
|
(579 |
) |
|
(932 |
) |
State
net operating loss adjustment
|
|
|
(63 |
) |
|
-
|
|
|
-
|
|
Valuation
allowance
|
|
|
3,980
|
|
|
273 |
|
|
262 |
|
Nondeductible
expenses
|
|
|
777
|
|
|
732
|
|
|
650
|
|
Adjustment
to deferred taxes
|
|
|
(176
|
)
|
|
76
|
|
|
-
|
|
Other,
net
|
|
|
272
|
|
|
165
|
|
|
155
|
|
|
|
$
|
(4,626
|
)
|
$
|
(6,497
|
)
|
$
|
(12,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
18.5
|
%
|
|
31.7
|
%
|
|
34.6
|
%
|
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets (liabilities) at March 31, 2007 and 2006 are presented
below:
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
(In
thousands)
|
|
Accrued
vacation
|
|
$ |
4,058 |
|
$ |
3,495 |
|
Accrued
workers compensation liability
|
|
|
2,704
|
|
|
1,973
|
|
Deferred
rent
|
|
|
7,105
|
|
|
7,223
|
|
Provision
recorded on inventory and impairments of fixed assets
|
|
|
1,657
|
|
|
2,188
|
|
Start-up/organizational
costs
|
|
|
1,173
|
|
|
-
|
|
Stock-based
compensation
|
|
|
214
|
|
|
-
|
|
Net
operating loss carryforwards
|
|
|
121,618
|
|
|
95,012
|
|
Alternative
minimum tax credit carryforward
|
|
|
1,757
|
|
|
1,757
|
|
Accruals
|
|
|
2,456
|
|
|
2,340
|
|
Deferred
loan fees and other assets
|
|
|
208
|
|
|
48
|
|
Other
|
|
|
341
|
|
|
226
|
|
Deferred
tax assets
|
|
|
143,291
|
|
|
114,262
|
|
Valuation
allowance
|
|
|
(4,521
|
)
|
|
(536
|
)
|
Net
deferred tax assets
|
|
|
138,770
|
|
|
113,726
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
(132,367
|
)
|
|
(117,235
|
)
|
Prepaid
commissions
|
|
|
(1,198
|
)
|
|
(805
|
)
|
Other
|
|
|
(5,205
|
)
|
|
(639
|
)
|
Total
gross deferred tax liabilities
|
|
|
(138,770
|
)
|
|
(118,679
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax liability
|
|
$
|
-
|
|
$
|
(4,953
|
)
|
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
The
net
deferred tax assets (liabilities) are reflected in the accompanying consolidated
balance sheets as
follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Current
deferred tax assets
|
|
$
|
-
|
|
$
|
7,780
|
|
Non-current
deferred tax liabilities
|
|
|
-
|
|
|
(12,733
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax liability
|
|
$
|
-
|
|
$
|
(4,953
|
)
|
During
the year ended March 31, 2007, the Company recorded a valuation allowance
against net deferred tax asset. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that
some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation
of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies
in
making this assessment. The Company acquired a significant number of new
aircraft over the past six years in conjunction with their fleet transition
plan. New aircraft purchases are depreciated for tax purposes over seven
years compared to book depreciation of 25 years, resulting in significant
deferred tax liabilities that will reverse over their seven year tax life.
The net operating losses that have been generated over the past six years
are
due in large part to the accelerated depreciation over a shorter useful life
for
tax purposes. While the Company continues to take delivery of new
aircraft, they expect their fleet acquisitions to be substantially complete
by
fiscal 2009. Since the Company’s net operating losses do not begin to
expire until 2023, the Company expects these net operating looses to be
available in future periods when tax depreciation is at minimal levels, and
taxable income is high. Based upon the level of historical book losses, the
Company provided a valuation allowance during the year ended March 31, 2007
for
the net deferred tax asset. Based upon the projections for future
taxable income over the periods in which the deferred tax assets become
deductible, and available tax planning strategies, management believes it
is
more likely than not that the Company will realize the benefits of the
deductible differences, net of the existing valuation allowances at March
31,
2007. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced. The Company has included in the total
valuation allowance, a valuation allowance for state net operating loss
carryforwards expected to expire unused which totaled $583,000 and $273,000
at
March 31, 2007 and 2006, respectively.
As
of
March 31, 2007, the Company had federal net operating loss carryforwards
totaling $318,100,000, expiring as follows: $45,600,000 in 2023,
$59,000,000 in 2024, $92,300,000 in 2025, $51,800,000 in 2026 and $69,500,000
estimated for 2007 which would expire in 2027.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
11.
Stockholders’ Equity
Warrants
and Stock Purchase Rights
In
February 2003, the Company issued warrants to purchase 3,833,946 shares of
common stock at $6.00 per share to the Air Transportation Stabilization Board
(“ATSB”) and to two other guarantors which were exercisable immediately. The
warrants had an estimated fair value of $9,283,000 when issued and expire
seven
years after issuance. The fair value for these options was estimated at the
date
of grant using a Black-Scholes option pricing model. These warrants were
subsequently repriced in September 2003 as a result of the Company’s secondary
public offering and again in December 2005 as a result of the Company’s
convertible debt offering to $5.87 per share. In May 2006, the ATSB transferred
the ownership of all its outstanding warrants to seven institutional investors
and one other guarantor transferred ownership of its outstanding warrants
in
December 2003.
Treasury
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.
12.
Equity Based Compensation Plans
On
September 9, 2004, the shareholders of Frontier approved the 2004 Plan. Frontier
Holdings assumed all of the outstanding options and awards under the 2004
Plan
effective upon the closing of the Reorganization. The 2004 Plan, which includes
stock options issued since 1994 under a previous equity incentive plan, allows
the Compensation Committee of the Board of Directors to grant stock options,
stock appreciation rights payable only in stock (“SARs”), and restricted stock
units, (“RSUs”), any or all of which may be made contingent upon the achievement
of service or performance criteria. Eligible participants include members
of the
Company’s Board of Directors, all full-time director and officer level employees
of the Company, and such other employees as may be identified by the
Compensation Committee from time to time who are legally eligible to
participate. Subject to plan limits, the Compensation Committee has the
discretionary authority to determine the size and timing of an award and
the
vesting requirements related to the award. The 2004 Plan expires September
12,
2009. The 2004 Plan allows up to a maximum of 2,500,000 shares for option
grants
and 500,000 shares for RSUs, subject to adjustment only to reflect stock
splits
and similar recapitalization events. The Company issues new shares of common
stock for stock option and SARs exercised and settlement of vested restricted
units. With certain exceptions, stock options and SARs issued under the 2004
Plan generally vest in equal installments over a five-year period from the
date
of grant and expire ten years from the grant date. RSUs cliff vest on the
third
or fifth anniversary of the date of grant. As of March 31, 2007, the Company
had
1,777,000 shares available for future grants.
SFAS
123(R) requires the Company to estimate pre-vesting option forfeitures at
the
time of grant and periodically revise those estimates in subsequent periods
if
actual forfeitures differ from those estimates. The Company records stock-based
compensation expense only for those awards expected to vest using an estimated
forfeiture rate based on its historical pre-vesting forfeiture data.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
Previously,
the Company accounted for forfeitures as
they occurred under the pro forma disclosure provisions of SFAS 123 for periods
prior to April 1, 2006.
The
Company has recorded $845,000 of stock-based compensation expense, net of
estimated forfeitures, during the year ended March 31, 2007, as a result
of its
adoption of SFAS 123(R). Unrecognized stock-based compensation expense related
to unvested options and RSU awards outstanding as of March 31, 2007 was
approximately $3,293,000, and will be recorded over the remaining vesting
periods of one to five years, which at March 31, 2007, was a weighted average
remaining recognition period of 1.7 years for options and 3.4 years for RSU
awards, respectively.
SFAS
123(R) requires the benefits associated with tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow rather
than
as an operating cash flow as previously required. For the year ended March
31,
2007, the Company did not record any excess tax benefit generated from option
exercises.
Prior
to
April 1, 2006, the Company accounted for stock-based compensation in accordance
with APB No. 25 and related interpretations. Accordingly, compensation expense
for a stock option grant was recognized only if the exercise price was less
than
the market value of the Company’s common stock on the grant date. The accounting
for stock-based compensation for restricted stock units did not change with
the
adoption of SFAS 123(R). Prior to the Company’s adoption of SFAS 123(R), as
required under the disclosure provisions of SFAS 123, as amended, the Company
provided pro forma net loss and loss per common share for each period as
if the
Company had applied the fair value method to stock option grants, amortized
on a
straight-line basis, to measure stock-based compensation expense.
The
following table illustrates the effect on the net loss and loss per common
share
for the years ended March 31, 2006 and 2005 as if the Company had applied
the
fair value method to measure stock-based compensation, as required under
the
disclosure provisions of SFAS 123:
|
|
2006
|
|
2005
(1)
|
|
|
|
(In
thousands, except per share amounts)
|
|
Net
loss as reported
|
|
$
|
(13,971
|
)
|
$
|
(23,430
|
)
|
Add:
stock-based compensation expense
|
|
|
|
|
|
|
|
included
in reported net loss, net of tax
|
|
|
91
|
|
|
-
|
|
Less:
total compensation expense determined
|
|
|
|
|
|
|
|
under
fair value method, net of tax
|
|
|
(533
|
)
|
|
(4,202
|
)
|
Pro
forma net income (loss)
|
|
$
|
(14,413
|
)
|
$
|
(27,632
|
)
|
|
|
|
|
|
|
|
|
Loss
per share, basic and diluted:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.39
|
)
|
$
|
(0.66
|
)
|
Pro
forma
|
|
$
|
(0.40
|
)
|
$
|
(0.78
|
)
|
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
The
table
below summarizes the impact on the Company’s results of operations for the years
ended March 31, 2007 of outstanding stock options, stock appreciation rights
(“SARs”) and restricted stock units (“RSUs”) issued under the 2004 Plan as
recognized under the provisions of SFAS 123(R):
|
|
2007
|
|
|
|
|
|
(In
thousands)
|
|
Stock-based
compensation expense:
|
|
|
|
|
Stock
options and SARs
|
|
$
|
630
|
|
RSUs
|
|
|
215
|
|
Income
tax benefit
|
|
|
(213
|
)
|
Net
increase to net loss
|
|
$
|
632
|
|
|
|
|
|
|
Increase
to loss per share:
|
|
|
|
|
Basic
and diluted
|
|
$
|
0.02
|
|
(1)
|
In
September and October 2004, when the price of the Company’s stock was
$8.21 and $7.63, respectively, the Company’s Board of Directors approved
that certain of the Company’s stock options with exercise prices in excess
of the stock’s current market price be modified to accelerate vesting. The
purpose of the accelerated vesting was to enable the Company
to avoid
recognizing stock-based compensation expense in its statement
of
operations associated with these options in future periods upon
adoption
of SFAS No. 123(R). As a result, a total of 671,500 options became
immediately vested. These options originally vested between October
2004
and March 2009. Exercise prices for these options ranged from
$8.00 to
$24.17 per share. There were 35 employees affected by the modification.
The total accelerated pro forma expense as a result of the modification
was approximately $2,997,000, net of taxes, and is included in
the fiscal
year 2005 pro forma numbers presented in the table above.
|
Stock
Options and SARs
The
Company utilizes a Black-Scholes-Merton option pricing model to estimate
the
fair value of share-based awards under SFAS 123(R), which is the same valuation
technique the Company previously used for pro forma disclosures under SFAS
123. The Black-Scholes-Merton option pricing model incorporates various
and subjective assumptions, including expected term and expected
volatility.
The
Company estimates the expected term of options and SARs granted using its
historical exercise patterns, which the Company believes are representative
of
future exercise behavior. The Company estimates volatility of its common
stock
using the historical closing prices of its common stock for the period equal
to
the expected term of the options, which the Company believes is representative
of the future behavior of the common stock. The Company’s risk-free interest
rate assumption is determined using the Federal Reserve nominal rates for
U.S.
Treasury zero-coupon bonds with maturities similar to those of the expected
term
of the award being valued. The Company has never paid any cash dividends
on its
common stock and the Company does not
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
anticipate
paying any cash dividends in the foreseeable future. Therefore, the Company
assumed an expected dividend yield of zero. Stock options and SARs are
classified as equity awards.
The
following table shows the Company’s assumptions used to compute the stock-based
compensation expense and pro forma information for stock option and SAR grants
issued during the years ended March 31, 2007, 2006 and 2005:
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
Assumptions:
|
|
|
|
|
|
Risk-free
interest rate
|
4.85%
|
|
4.06%
|
|
3.35%
|
Dividend
yield
|
0%
|
|
0%
|
|
0%
|
Volatility
|
70.76%
|
|
74.41%
|
|
73.88%
|
Expected
life (years)
|
5
|
|
5
|
|
7
|
The
per
share weighted-average grant-date fair value of SARs granted during fiscal
year
2007 was $4.61 using the above weighted-average assumptions.
A
summary
of the stock option and SARs activity and related information for the year
ended
March 31, 2007 is as follows:
|
|
|
|
Weighted-
|
|
|
|
Options
|
|
Average
|
|
|
|
and
|
|
Exercise
|
|
|
|
SARs
|
|
Price
|
|
Outstanding,
March 31, 2006
|
|
|
2,564,787
|
|
$
|
11.07
|
|
Granted
|
|
|
178,907
|
|
$
|
7.43
|
|
Exercised
|
|
|
(35,750
|
)
|
$
|
4.51
|
|
Surrendered
|
|
|
(293,351
|
)
|
$
|
15.13
|
|
Outstanding,
March 31, 2007
|
|
|
2,414,593
|
|
$
|
10.41
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
1,969,780
|
|
$
|
10.88
|
|
Exercise
prices for options and SARs outstanding under the 2004 Plan as of March 31,
2007
ranged from $2.13 per share to $24.17 per share. The weighted-average remaining
contractual life of these equity awards is 5.0 years. The aggregate intrinsic
value of vested options and SARs was $484,777 as of March 31, 2007 and the
intrinsic value of options exercised during the year ended March 31, 2007
was
$108,000.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
A
summary
of the outstanding and exercisable options and SARs at March 31, 2007,
segregated by exercise price ranges, is as follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Options
|
|
|
|
Average
|
|
Exercisable
|
|
|
|
|
|
and
|
|
Weighted-
|
|
Remaining
|
|
Options
|
|
Weighted-
|
|
Exercise
Price
|
|
SARs
|
|
Average
|
|
Contractual
|
|
and
|
|
Average
|
|
Range
|
|
Outstanding
|
|
Exercise
Price
|
|
Life
(in years)
|
|
SARs
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.13
- $5.42
|
|
|
473,500
|
|
$
|
4.95
|
|
|
2.5
|
|
|
451,500
|
|
$
|
4.94
|
|
$5.80
- $7.77
|
|
|
484,840
|
|
$
|
7.14
|
|
|
6.8
|
|
|
215,500
|
|
$
|
6.96
|
|
$8.00
- $10.06
|
|
|
410,194
|
|
$
|
9.32
|
|
|
5.8
|
|
|
294,129
|
|
$
|
9.06
|
|
$10.12
- $12.95
|
|
|
411,759
|
|
$
|
11.07
|
|
|
5.1
|
|
|
374,351
|
|
$
|
10.94
|
|
$13.59
- $17.93
|
|
|
462,500
|
|
$
|
15.92
|
|
|
5.1
|
|
|
462,500
|
|
$
|
15.92
|
|
$18.26
- $24.17
|
|
|
171,800
|
|
$
|
20.85
|
|
|
4.7
|
|
|
171,800
|
|
$
|
20.85
|
|
|
|
|
2,414,593
|
|
$
|
10.41
|
|
|
5.0
|
|
|
1,969,780
|
|
$
|
10.88
|
|
Restricted
Stock Units
SFAS
123R
requires that the grant-date fair value of RSUs be equal to the market price
of
the share on the date of grant if vesting is based on a service condition.
The
grant-date fair value of RSU awards are being expensed over the vesting period.
RSUs are classified as equity awards. As of March 31, 2007, the Company had
outstanding RSUs with service conditions and vesting periods that range from
three to five years.
A
summary
of the activity for RSUs for the twelve months ended March 31, 2007 is as
follows:
|
|
RSUs
|
|
|
|
|
Number
of
RSUs
|
|
|
Weighted-
Average
Grant
Date
Market
Value
|
|
Outstanding,
March 31, 2006
|
|
|
75,604
|
|
$
|
10.15
|
|
Granted
|
|
|
136,139
|
|
$
|
7.36
|
|
Surrendered
|
|
|
(14,797
|
)
|
$
|
8.50
|
|
Released
|
|
|
(2,000
|
)
|
$
|
7.03
|
|
Outstanding,
March 31, 2007
|
|
|
194,946
|
|
$
|
8.36
|
|
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
13.
Retirement Plans
ESOP
The
Company has established an ESOP which is for the benefit of each employee
of the
Company, except those employees covered by a collective bargaining agreement
that does not provide for participation in the ESOP. Company contributions
to
the ESOP are discretionary and may vary from year to year. In order for an
employee to receive an allocation of Company common stock from the ESOP,
the
employee must be employed on the last day of the ESOP’s plan year, with certain
exceptions. The Company’s annual contribution to the ESOP, if any, is allocated
among the eligible employees of the Company as of the end of each plan year
in
proportion to the relative compensation (as defined in the ESOP) earned that
plan year by each of the eligible employees. The ESOP does not provide for
contributions by participating employees. Employees vest in contributions
made
to the ESOP based upon their years of service with the Company. A year of
service is an ESOP plan year during which an employee has at least 1,000
hours
of service. Vesting generally occurs at the rate of 20% per year, beginning
after the first year of service, so that a participating employee will be
fully
vested after five years of service. Distributions from the ESOP will not
be made
to employees during employment. However, upon termination of employment with
the
Company, each employee will be entitled to receive the vested portion of
his or
her account balance. Forfeitures are reallocated among active participants.
In
November 2005, the Company negotiated a new union contract in which employees
covered by the contract became immediately vested in their accounts and received
stock certificates for the balance in their account.
In
March
2007, the Company’s Board of Directors approved the purchase of 300,000 shares
of its common stock. These shares were used to fund the 2007 ESOP contribution.
The shares were contributed in April 2007. During the year ended March 31,
2006
and 2005, the Company issued and contributed 400,000 and 346,400 shares,
respectively, to the ESOP. Total Company contributions to the ESOP from
inception total 2,888,000 shares, including the 300,000 shares contributed
in
April 2007.
The
Company recognized compensation expense during the years ended March 31,
2007, 2006 and 2005 of $2,564,000, $2,969,000, and $2,940,000, respectively,
related to its contributions to the ESOP. Compensation expense under the
ESOP is
determined by multiplying the number of the shares contributed by the fair
market value of the shares on the date contributed, or the purchase price
of the
shares. The fair value of the unearned ESOP shares contributed to the ESOP,
which is what the Company paid for the shares, was $1,838,000. The fair value
of
the unearned ESOP shares on March 31, 2007 was $1,803,000.
Retirement
Savings Plans
The
Company has established a Retirement Savings Plan under section 401(k) of
the
Internal Revenue Code (“401(k) Plan”). Participants may contribute from 1% to
60% of their pre-tax annual compensation up the maximum amount allowed under
the
Internal Revenue Code. Participants are immediately vested in their voluntary
contributions. The Company’s Board of Directors has elected to match 50% of
participant contributions up to 10% of salaries from May 2000 through December
2007 for the participants of the 401(k) Plan. During the years ended March
31,
2007, 2006, and 2005, the Company recognized compensation expense associated
with the matching contributions to the 401(k) Plan totaling $5,107,000,
$4,201,000, and $3,924,000, respectively. Future matching contributions,
if any,
will be determined annually by the Board of Directors. In order to receive
the
matching contribution, participants must be employed on the last day of the
plan
year. Participants vest in employer contributions made to the 401(k) Plan
based
upon their years of service with the Company. A year of service is a plan
year
during which a participant has at least 1,000 hours of service. Vesting
generally occurs at the rate of 20% per year,
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
beginning
after the first year of service, so that a participant will be fully vested
after five years of service. Upon termination of employment with the Company,
each participant will be entitled to receive the vested portion of his or
her
account balance.
On
March
2, 2007, the Company established the Frontier Airlines, Inc. Pilots Retirement
Plan (“the FAPA Plan”) for pilots covered under the collective bargaining
agreement with the Frontier Airlines Pilots’ Association. The FAPA Plan is a
defined contribution retirement plan. The Company contributes up to 6% of
each
eligible and active participant’s compensation. Contributions begin after a
pilot has reached two years of service and the contributions vest immediately.
Participants are entitled to begin receiving distributions of all vested
amounts
beginning at age 59 ½. During the year ended March 31, 2007, the Company
recognized compensation expense associated with the contributions to the
FAPA
Plan of $238,000.
Retirement
Health Plans
In
conjunction with the Company’s collective bargaining agreement with its pilots,
retired pilots and their dependents, they may retain medical benefits under
the
terms and conditions of the Health and Welfare Plan for Employees of Frontier
Airlines, Inc. (the “Retirement Health Plan”) until age 65. The cost of retiree
medical benefits are continued under the same contribution schedule as active
employees.
On
March
31, 2007, the Company adopted the recognition and disclosure provisions of
SFAS
158. SFAS 158 required the Company to recognized the funded status (i.e.,
the
difference between the fair value of plan assets and the projected benefit
obligations) of its benefit plans in the March 31, 2007 consolidated balance
sheet, with a corresponding adjustment to accumulated other comprehensive
income, net of tax. The net adjustment to other comprehensive income at adoption
was $36,000, ($22,000 net of tax) and represents the net unrecognized actuarial
losses and unrecognized prior service costs. The effects of adopting the
provisions of SFAS 158 on the Company’s consolidated balance sheet at March 31,
2007, are presented in the following table.
The
following table provides a reconciliation of the changes in the benefit
obligations under the Retirement Health Plan for the years ended March 31,
2007
and 2006:
Reconciliation
of benefit obligation:
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Obligation
at beginning of period
|
|
$
|
5,130
|
|
$
|
4,575
|
|
Service
cost
|
|
|
992
|
|
|
954
|
|
Interest
cost
|
|
|
318
|
|
|
271
|
|
Benefits
paid
|
|
|
(17
|
)
|
|
(117
|
)
|
Net
actuarial gain
|
|
|
(633
|
)
|
|
(553
|
)
|
Obligation
at end of period
|
|
$
|
5,790
|
|
$
|
5,130
|
|
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
The
following is a statement of the funded status as of March 31, 2007 and
2006:
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Funded
status
|
|
$
|
(5,790
|
)
|
$
|
(5,130
|
)
|
Unrecognized
net actuarial loss
|
|
|
36
|
|
|
680
|
|
SFAS
158 adjustment
|
|
|
(36
|
)
|
|
-
|
|
Accrued
benefit liability
|
|
$
|
(5,790
|
)
|
$
|
(4,450
|
)
|
Net
periodic benefit cost of the Retirement Health Plan for the years ended
March
31, 2007, 2006 and 2005 include the following components.
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
(In
thousands)
|
|
|
|
Service
cost
|
|
$
|
992
|
|
$
|
954
|
|
$
|
933
|
|
Interest
cost
|
|
|
318
|
|
|
271
|
|
|
218
|
|
Recognized
net actuarial loss
|
|
|
11
|
|
|
61
|
|
|
89
|
|
Net
periodic benefit cost
|
|
$
|
1,321
|
|
$
|
1,286
|
|
$
|
1,240
|
|
Assumed
healthcare cost trend rates have a significant effect on the amounts reported
for the other post-retirement benefit plans. A 1% change in the healthcare
cost
trend rate used in measuring the accumulated post-retirement benefit obligation
(“APBO”) at March 31, 2007 would have the following effects:
|
|
1%
increase
|
|
1%
decrease
|
|
|
|
(In
thousands)
|
|
Increase
(decrease) in total service and interest cost
|
|
$
|
160
|
|
$
|
(159
|
)
|
Increase
(decrease) in the APBO
|
|
$
|
705
|
|
$
|
(611
|
)
|
The
measurement dates used to determine the benefit measurements for the plan
are
March 31, 2007, 2006 and 2005. The Company used the following actuarial
assumptions, which were based upon information available as of the beginning
of
the fiscal year, to account for this post-retirement benefit plan:
|
2007
|
2006
|
2005
|
|
|
|
|
Weighted
average discount rate
|
6.10%
|
6.25%
|
6.00%
|
Assumed
healthcare cost trend (1)
|
9.00%
|
9.50%
|
9.50%
|
|
(1)
|
Trend
rates were assumed to reduce until 2015 when an ultimate rate
of 5.00% is
reached.
|
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
The
estimated benefit payments expected to be paid by the Retirement Health
Plan,
and funded by the Company, for the next ten years are as follows (In
thousands):
|
|
Fiscal
year 2008
|
|
$
|
124
|
|
Fiscal
year 2009
|
|
$
|
246
|
|
Fiscal
year 2010
|
|
$
|
317
|
|
Fiscal
year 2011
|
|
$
|
373
|
|
Fiscal
year 2012
|
|
$
|
455
|
|
Fiscal
year 2013 - 2017
|
|
$
|
3,376
|
|
Certain
other union employees are included in a multi-employer pension plan to
which the
Company makes contributions in accordance with the union contract. Such
contributions are made on a monthly basis in accordance with the requirements
of
the union contract. Contributions to multi-employer pension plans were
$558,000,
$537,000 and $471,000 for the years ended March 31, 2007, 2006 and 2005,
respectively.
14.
Loss Per Share
The
Company accounts for earnings per share in accordance with SFAS No. 128,
Earnings
per Share.
Basic
net income (loss) per share is computed by dividing net income by the weighted
average number of common shares outstanding during the periods presented.
Diluted net income per share reflects the potential dilution that could
occur if
outstanding stock option and warrants were exercised. In addition, diluted
convertible securities are included in the denominator while interest on
convertible debt, net of tax and capitalized interest, is added back to
the
numerator.
During
the years ended March 31, 2007 and 2006, interest on the Convertible Notes
of
$1,947,000 and $1,027,000, respectively, net of tax and capitalized interest,
and shares of 8,900,000 and 2,804,000, respectively that would be issued
upon
assumed conversion of the Convertible Notes, were excluded from the calculation
of diluted earnings per share because they were anti-dilutive. For the
years
ended March 31, 2007, 2006 and 2005, the common stock equivalents of the
weighted average options, SARS, RSUs, and warrants outstanding of 830,000,
1,884,000 and 1,706,000, respectively, were excluded from the calculation
of
diluted earnings per share because they were anti-dilutive. For the years
ended
March 31, 2007, 2006 and 2005, the weighted average options, SARs, and
RSUs
outstanding of 2,116,000, 1,560,750 and 1,633,000, respectively, were excluded
from the calculation of diluted earnings per share because the exercise
prices
were greater than the average market price of the common shares.
15.
Concentration of Credit Risk
The
Company does not believe it is subject to any significant concentration
of
credit risk relating to receivables. At March 31, 2007 and 2006, 63.9%
and 53.4%
of the Company’s receivables related to tickets sold to individual passengers
through the use of major credit cards, travel agencies approved by the
Airlines
Reporting Corporation, tickets sold by other airlines and used by passengers
on
Company flights, manufactures’ credits and the Internal Revenue Service.
Receivables related to tickets sold are short-term, generally being settled
shortly after sale or in the month following ticket usage.
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
16.
Commitments and Contingencies
Legal
Proceedings and Insurance
From
time
to time, the Company is engaged in routine litigation incidental to our
business. The Company believes there are no legal proceedings pending in
which
the Company is a party or of which any of our property may be subject to
that
are not adequately covered by insurance maintained by us, or which, if
adversely
decided, would have a material adverse affect upon its business or financial
condition.
During
the year ended March 31, 2007, the Company recorded insurance proceeds
of
$868,000. These insurance proceeds were a result of final settlements of
business interruption claims that covered lost profits when the Company’s
service to Cancun, Mexico and New Orleans, Louisiana was disrupted by hurricanes
during the fiscal year ended March 31, 2006.
Recently,
the Company’s services to and from Denver, Colorado were disrupted by two major
snowstorms that impacted the Company’s service levels, revenues and operating
costs. The Company maintains business interruption insurance to cover lost
profits and has made claims to recover lost profits related to these events.
The
Company has not recorded any anticipated recoveries because a final settlement
of the claims has not been reached.
Purchase
Commitments
As
of
March 31, 2007, the Company has remaining firm purchase commitments for
23
additional aircraft and one spare Airbus engine, which have scheduled delivery
dates continuing through August 2010.
Under
the terms of the purchase agreement, the Company is required to make scheduled
pre-delivery payments for these aircraft. These payments are non-refundable
with
certain exceptions. As of March 31, 2007, the Company had made pre-delivery
payments on future deliveries totaling $52,453,000 to secure these aircraft,
of
which $14,833,000 related to aircraft for which the Company has not yet
secured
financing and $37,620,000 related to aircraft for which the Company has
secured
financing.
The
Company has aggregate additional amounts due under these purchase commitments
and estimated amounts for buyer-furnished equipment, spare parts for purchased
aircraft and to equip the aircraft with LiveTV. The
Company is not under any contractual obligations with respect to spare
parts.
In
addition, the Company has commercial commitments under an agreement with
SabreSonic™
for its
SabreSonic passenger solution to power the reservations and check-in
capabilities. The estimated aggregate amount for these purchase commitments
is
$721,788,000; $353,463,000 which is due in fiscal year 2008. The Company
has
obtained financing for all of its aircraft deliveries through February
2008.
Fuel
Consortia
The
Company participates 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
FRONTIER
AIRLINES HOLDINGS, INC.
Notes
to the Consolidated Financial Statements, continued
of
March 31, 2007, approximately $562,757,000 principal amount of such bonds
were secured by fuel facility leases at major hubs in which the Company
participates, as to which each of the signatory airlines has provided indirect
guarantees of the debt. The Company’s exposure is approximately $24,412,000
principal amount of such bonds based on our most recent consortia participation.
The Company’s exposure could increase if the participation of other carriers
decreases of if other carriers default. The Company can exit all of their
fuel
consortia agreements with limited penalties and
certain advance notice requirements. The guarantees will expire when the
tax-exempt bonds are paid in full, which ranges from 2011 to 2033. The
Company
has not recorded a liability on our consolidated balance sheets related
to these
indirect guarantees.
Employees
As
of
March 31, 2007, the Company had 5,200 employees, of which approximately
22% are
represented by unions. Of those employees covered by collective bargaining
agreements, approximately 3% presently have contracts under negotiation
or
becoming amendable in fiscal year 2008. The Company believes that mutually
acceptable agreements can be reached with such employees, although the
ultimate
outcome of the negotiations is unknown at this time.
17.
Selected
Quarterly Financial Data (Unaudited)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
304,808
|
|
$
|
312,470
|
|
$
|
271,253
|
|
$
|
282,418
|
|
Operating
expenses
|
|
$
|
294,127
|
|
$
|
309,381
|
|
$
|
289,719
|
|
$
|
288,424
|
|
Net
income (loss)
|
|
$
|
3,957
|
|
$
|
509
|
|
$
|
(14,406
|
)
|
$
|
(10,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
$
|
0.01
|
|
$
|
(0.39
|
)
|
$
|
(0.29
|
)
|
Diluted
|
|
$
|
0.10
|
|
$
|
0.01
|
|
$
|
(0.39
|
)
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
237,577
|
|
$
|
259,953
|
|
$
|
249,002
|
|
$
|
254,990
|
|
Operating
expenses
|
|
$
|
238,800
|
|
$
|
246,318
|
|
$
|
260,666
|
|
$
|
263,635
|
|
Net
income (loss)
|
|
$
|
(2,733
|
)
|
$
|
6,905
|
|
$
|
(10,290
|
)
|
$
|
(7,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
$
|
0.19
|
|
$
|
(0.28
|
)
|
$
|
(0.22
|
)
|
Diluted
|
|
$
|
(0.08
|
)
|
$
|
0.18
|
|
$
|
(0.28
|
)
|
$
|
(0.22
|
)
|
F-35