Item 2: Managements Discussion and Analysis of
Financial Condition and Results of Operations
Special Note About
Forward-Looking Statements
.
This report contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 (the Exchange Act) that describe the business and prospects of Frontier
Airlines Holdings, Inc. and the expectations of our company and management. All
statements included in this report that address activities, events or
developments that we expect, believe, intend or anticipate will or may occur in
the future, are forward-looking statements. When used in this document, the
words estimate, anticipate, intend, project, believe and similar
expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted with accuracy and some of which might not
even be anticipated. These risks and
uncertainties include, but are not limited to:
the timing of and expense associated wit, 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 to accommodate the expansion of our
operations; the inability to successfully lease or build a new maintenance
hanger prior to a potential lease termination of our primary maintenance hanger
located at DIA that is currently on a month-to-month sublease with Continental
Airlines; general economic factors and behavior of the fare-paying public and
its potential impact on our liquidity; terrorist attacks or other incidents
that could cause the public to question the safety and/or efficiency of air
travel; hurricanes and other natural forces and their impact on air
transportation and oil production; operational disruptions, including weather;
industry consolidation; the impact of labor disputes; enhanced security
requirements; changes in the governments 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 the operating efficiency and dependability of the
selected aircraft and a new regional jet partner, and various risk factors to
our business discussed elsewhere in this report. Forward-looking statements include the
statements in Outlook below. Because
our business, like that of the airline industry generally, is characterized by
high fixed costs relative to revenues, small fluctuations in our revenue per
available seat mile (RASM) or cost per available seat mile (CASM) can
significantly affect operating results
. Additional information regarding these and other
factors may be contained in our SEC filings, including without limitation, our
Form 10-K for the year ended March 31, 2007.
These risks and factors are not exclusive, and we undertake no
obligation to update or revise any forward-looking statements to reflect events
or circumstances that may arise after the date of this filing.
Our Business
Now in our 14th year of
operations, we are a low cost, affordable fare airline operating primarily in a
hub and spoke fashion connecting cities coast to coast through our hub at
Denver International Airport (DIA). In
this report, references to us, we, or the company refer to the
consolidated results of Frontier Airlines Holdings, Inc. (Frontier Holdings)
unless the context requires otherwise.
We are the second largest jet service carrier at DIA based on
departures. In January 2007, we became a
major carrier as designated by the DOT.
As of October 25, 2007, we, in conjunction with Regional Partners
Horizon Air Industries, Inc. (Horizon) and Republic Airlines, Inc. (Republic),
operate routes linking our Denver hub to 53 U.S. cities spanning the nation
from coast to coast, seven cities in Mexico and two cities in Canada. We also provide service to Mexico from 9
non-hub cities
.
We were organized in February
1994, and we began flight operations in July 1994 with two leased Boeing
737-200 jets. We have since expanded our
fleet in service to 60 jets as of October 25, 2007 (38 of
13
which we lease and 22 of which we own),
consisting of 49 Airbus A319s and 11 Airbus A318s. During the quarters ended September 30, 2007
and 2006, we increased year-over-year mainline capacity by 11.9% and 14.7%,
respectively, and we increased year-over-year mainline passenger traffic by
22.3% and 15.4%, respectively. We intend to continue our growth strategy and to
expand to new markets and add frequency to existing markets that we believe are
underserved, but at a lower growth rate than in the past two years.
On January 11, 2007, we
signed an agreement with Republic under which Republic will operate up to 17
Embraer 170 aircraft with capacity of 76-seats.
The contract is for an 11-year period from the in-service date of the
last aircraft, which is scheduled for December 2008. The service began on March 4, 2007 and
replaces the CRJ 700 aircraft operated by Horizon, which will expire on return
of the last aircraft in December 2007.
We control the routing, scheduling and ticketing of this service. We compensate Republic for its services based
on its operating expenses plus a margin on certain of its expenses. The agreement provides for financial
incentives and penalties based on the performance of Republic.
In September 2006, we formed
a new subsidiary, Lynx Aviation, Inc. (Lynx Aviation). Frontier Holdings
entered into a purchase agreement with Bombardier, Inc. for ten Q400 turboprop
aircraft, each with a seating capacity of 74, with the option to purchase ten
additional aircraft. This agreement has
been assumed by Frontier and we intend to have Lynx Aviation assume this
agreement upon FAA certification of Lynx Aviation. The aircraft will be purchased and operated
by Lynx Aviation under a separate operating certificate. Lynx Aviation is
currently in the process of obtaining FAA authorization to provide scheduled
air transportation service. Lynx
Aviation submitted its application to the Department of Transportation (DOT)
in January 2007, has received a conditional Certificate of Public Convenience
of Necessity from the DOT, and is currently in the process of securing the
appropriate Federal Aviation Administration (FAA) operating approval.
Lynx Aviation plans to commence
revenue service as soon as it receives FAA certification, which may occur as
early as December 2007. As of October
25, 2007, Lynx Aviation has taken delivery of five Q400 aircraft and plans to
take delivery of five additional aircraft by the end of December 2007.
Lynx
Aviation plans to have all ten aircraft in service by March 2008.
In September 2007, we signed a limited-term contract
with ExpressJet Airlines, Inc. (ExpressJet) to operate two to four 50-seat
Embraer 145XR jets on routes intended to be serviced by Lynx Aviation. These routes will be serviced by Lynx
Aviation as soon as FAA certification of Lynx Aviation is completed. Until the certification occurs, we plan on
using ExpressJet aircraft to service the following destinations: Billings,
Montana; Wichita, Kansas; Rapid City, South Dakota; Albuquerque, New Mexico; El
Paso, Texas; and Oklahoma City, Oklahoma.
It is anticipated that this service will be provided between November
15, 2007 and January 15, 2008.
Following is a list of routes
that we have started serving or have announced our intention to serve from
April 1, 2007 through October 25, 2007:
Destination
|
|
Commencement
Date
|
|
Operated
By
|
|
|
|
|
|
DIA to Louisville, Kentucky
|
|
April 1, 2007
|
|
Regional Partners
|
DIA to Vancouver, British
Colombia, Canada
|
|
May 5, 2007
|
|
Frontier Mainline service
|
DIA to Memphis, Tennessee
|
|
May 12, 2007
|
|
Frontier Mainline service
|
DIA to Jacksonville,
Florida
|
|
June 15, 2007
|
|
Frontier Mainline service
|
DIA to Baton Rouge,
Louisiana
|
|
August 15, 2007
|
|
Regional Partners
|
DIA to Wichita, Kansas
|
|
October 1, 2007
|
|
Lynx Aviation**
|
DIA to Sioux City, Iowa
|
|
October 5, 2007
|
|
Lynx Aviation**
|
DIA to Rapid City, South
Dakota
|
|
October 5, 2007
|
|
Lynx Aviation**
|
DIA to Palm Beach
International Airport (PBI
)
|
|
November 15, 2007
|
|
Frontier Mainline service
|
DIA to San Jose, Costa Rica
|
|
November 30, 2007
|
|
Frontier Mainline service
|
|
|
|
|
|
Memphis to Las Vegas,
Nevada
|
|
May 12, 2007
|
|
Frontier Mainline service
|
Memphis to Orlando, Florida
|
|
May 12, 2007
|
|
Frontier Mainline service
|
Memphis to Ft. Lauderdale,
Florida
|
|
November 15, 2007
|
|
Frontier Mainline service
|
Dallas/Fort Worth, Texas to
Mazatlan, Mexico
|
|
June 7, 2007
|
|
Frontier Mainline service
|
Milwaukee, Wisconsin to
Cancun, Mexico
|
|
December 15, 2007
|
|
Frontier Mainline service
|
Albuquerque, New Mexico to
Puerto Vallarta, Mexico
|
|
December 15, 2007
|
|
Frontier Mainline service
|
**
|
Lynx Aviation service is
contingent on FAA certification and these cities will be serviced by a
combination of Embraer 170 aircraft operated by Republic and Embraer 145XR
aircraft operated by ExpressJet until certification is obtained.
|
14
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. We
terminated these scheduled routes effective July 10, 2007. In July 2007, we
announced that we will no longer provide service to Reno, Nevada effective
September 5, 2007.
We
applied for DOT approval to start seasonal once-a-week flights from San Diego
to Mazatlan, Mexico, with Airbus A319 planes from December 15 to July 5
annually. We have since determined not
to provide this service at this time. We
also have applied for permission to start seasonal service from San Jose,
California to Puerto Vallarta, Mexico and flights from Sacramento, California
to Puerto Vallarta Mexico. These routes are to be flown by Republic starting
December 15, 2007.
As of October 25, 2007, our Regional Partners
provided service to Billings, Montana; El Paso, Texas; Little Rock, Arkansas;
Louisville, Kentucky; Oklahoma City, Oklahoma; Tulsa, Oklahoma, and Calgary,
Alberta, Canada and supplement our mainline service to Albuquerque, New Mexico;
Boise, Idaho; Dayton, Ohio; Omaha, Nebraska; Spokane, Washington; and Tucson,
Arizona.
We currently lease 21 gates on Concourse A at
DIA on a preferential basis and one international gate on Concourse A on a
subordinated preferential basis. We use
these 22 gates and share use of up to seven common use regional jet parking
positions to operate approximately 284 daily mainline flight departures and
arrivals and 63 Regional Partner daily system flight departures and
arrivals. To support future growth, we
are working with DIA to identify additional gates and expansion projects to
accommodate the mainline growth as well as the additional aircraft to be
operated by Lynx Aviation and the growth in the aircraft fleet operated by our
Regional Partners.
Our corporate
headquarters are located at 7001 Tower Road, Denver, Colorado 80249. Our administrative office telephone number is
720-374-4200 and our reservations telephone number is 800-432-1359.
15
Overview
We intend to continue our focused growth strategy while keeping our
operating costs low. One of the key elements to keeping our costs low was
the completion of the transition from a Boeing fleet to an all Airbus fleet in
April 2005. This strategy produced cost savings because crew training was
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 mainline operating costs low by operating only two types of Airbus
aircraft with 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 Regional Partner operation will allow us to add routes to
under-served markets in Colorado and elsewhere in the Rocky Mountain region
using the economically correct gauge of equipment and operating
performance. We are hopeful that that Lynx Aviation will begin revenue
service in December 2007.
As of October 25,
2007, we had remaining firm purchase commitments for ten Airbus 320 aircraft
from Airbus and five Q400 aircraft from Bombardier. Our contract with Republic also calls for an
additional 11 Embraer 170 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.
The airline
industry continues to operate in an intensely competitive market. We expect competition will remain intense, as
over-capacity in the industry continues to exist. Business and leisure
travelers continue to reevaluate their travel budgets and remain highly price
sensitive. Increased competition has
prompted aggressive strategies from competitors through discounted fares and
sales promotions. Additionally, the
intense competition has created financial hardship for some of our competitors
that have been forced to reduce capacity or have been forced into bankruptcy.
Highlights from the Quarter
Sean Menke
returned to Frontier Holdings and was appointed President and Chief Executive
Officer, replacing Jeff Potter who resigned effective September 6, 2007. Jeff Potter will remain as a member of the
Board of Directors
D. Dale Browning
was appointed Chairman of the Board on September 6, 2007 replacing Sam Addoms
upon his retirement.
We achieved
record load factors during the months of July, August, and September 2007.
We took delivery
of two Bombardier Q400 aircraft.
Outlook
In
December 2006, the Board approved a plan to replace all of its Airbus aircraft
seats with leather seats that have light weight composite material. The lighter
seats are expected to produce fuel savings from an estimated at 4.5 gallons per
block hour reduction in our burn rate. The new seats will also have a new design
allowing for more legroom. We also will be adding four seats per aircraft
starting in November 2007 with the project scheduled for completion in July
2008. We have installed the new leather
seats on 18 of our Airbus aircraft to date.
We have accelerated the depreciation on our old seats on our owned
aircraft which increased depreciation by $2,874,000 for the six months ended
September 30, 2007. We anticipate
additional accelerated depreciation expense of approximately $810,000 for the
remainder of fiscal year 2008 and $115,000 in fiscal year 2009. The costs to purchase these additional
aircraft seats are included in the Contractual Obligations Table in the Liquidity
and Capital Resources section.
During
the six-months ended September 30, 2007 we have incurred $5,058,000 of start-up
costs related to our new subsidiary Lynx Aviation. We anticipate additional start-up costs of
approximately
16
$5,000,000 to be incurred in
our third fiscal quarter ended December 31, 2007. Costs will continue to increase when
certification is obtained and revenue operations begin.
We
expect our mainline full-year available seat mile capacity for fiscal year 2008
to increase by approximately 14% over fiscal year 2007, which includes the
delivery of two Airbus 320 aircraft in February and March 2008. While the
industry revenue environment remains extremely competitive, our passenger
mainline RASM is expected to increase again in our fiscal 2008 third quarter
particularly because last years quarterly passenger revenue was adversely
affected by two significant snowstorms. Additionally, we have seen an
increase in our revenue from connecting traffic as we grow our network through
adding new cities and adding capacity in existing markets through the
acquisition of new aircraft. Also, recently our largest competitor has
implemented capacity reductions at DIA.
We
expect our third quarter of our 2008 fiscal year mainline CASM to increase as
compared to our second quarter of fiscal year 2008 due to higher fuel costs,
Lynx Aviation start-up costs, accelerated seat deprecation charges and slightly
higher operating costs per ASM. Fuel
costs have continued to rise sharply during this fiscal years third quarter,
and on October 26, 2007, crude oil crossed $92 a barrel on mideast tensions and
supply worries.
We
had hedged 46% and 30% of our fuel purchases during the quarters ended June 30,
2007 and September 30, 2007, respectively, with realized hedging gains of
$4,337,000 and $4,792,000, respectively.
For the three months ended December 31, 2007 and three months ended
March 31, 2008, we currently have 40% and 19% of estimated fuel purchases
hedged, respectively. Based on current
levels of fuel prices, we do not expect to be profitable in the third and
fourth quarters of fiscal year 2008.
17
Quarter in Review
Frontier Holdings includes the following operations as of September 30,
2007; our mainline operations which consisted of 60 Airbus aircraft; our
Regional Partner operations operated by Horizon and Republic using six CRJ 700
aircraft and six Embraer ERJ-170 aircraft (Regional Partners); and Lynx
Aviation, which is in its start-up phase of operations. Lynx Aviation may begin
revenue service as early as December 2007.
Lynx Aviation and our Regional Partners services are separate and apart
from our mainline operations. The
break-out of our mainline, Regional Partners and Lynx Aviation operations from
our consolidated statement of operations for the three months ended September
30, 2007 are as follows (in thousands):
|
|
Mainline
|
|
Regional Partners
|
|
Lynx Aviation
|
|
Consolidated
|
|
|
|
Three months ended
September 30,
|
|
Three months ended September 30,
|
|
Three months ended
September 30,
|
|
Three months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger -
mainline
|
|
$
|
327,369
|
|
$
|
277,720
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
327,369
|
|
$
|
277,720
|
|
Passenger -
regional partner
|
|
|
|
|
|
32,927
|
|
25,132
|
|
|
|
|
|
32,927
|
|
25,132
|
|
Cargo
|
|
1,653
|
|
1,962
|
|
|
|
|
|
|
|
|
|
1,653
|
|
1,962
|
|
Other
|
|
11,017
|
|
7,656
|
|
|
|
|
|
|
|
|
|
11,017
|
|
7,656
|
|
Total revenues
|
|
340,039
|
|
287,338
|
|
32,927
|
|
25,132
|
|
|
|
|
|
372,966
|
|
312,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight operations
|
|
44,515
|
|
39,144
|
|
|
|
|
|
1,417
|
|
4
|
|
45,932
|
|
39,148
|
|
Aircraft fuel
|
|
107,350
|
|
101,450
|
|
|
|
|
|
22
|
|
|
|
107,372
|
|
101,450
|
|
Aircraft lease
|
|
28,247
|
|
27,326
|
|
|
|
|
|
|
|
|
|
28,247
|
|
27,326
|
|
Aircraft and
traffic servicing
|
|
42,022
|
|
39,117
|
|
|
|
|
|
142
|
|
3
|
|
42,164
|
|
39,120
|
|
Maintenance
|
|
26,861
|
|
22,064
|
|
|
|
|
|
512
|
|
4
|
|
27,373
|
|
22,068
|
|
Promotion and
sales
|
|
36,073
|
|
28,851
|
|
|
|
|
|
8
|
|
3
|
|
36,081
|
|
28,854
|
|
General and
administrative
|
|
14,067
|
|
14,676
|
|
|
|
|
|
628
|
|
743
|
|
14,695
|
|
15,419
|
|
Operating
expenses - regional partner
|
|
|
|
|
|
36,666
|
|
28,033
|
|
|
|
|
|
36,666
|
|
28,033
|
|
Loss (gain) on
sales of assets, net
|
|
26
|
|
(341
|
)
|
|
|
|
|
|
|
|
|
26
|
|
(341
|
)
|
Depreciation
|
|
11,762
|
|
8,304
|
|
|
|
|
|
101
|
|
|
|
11,863
|
|
8,304
|
|
Total operating
expenses
|
|
310,923
|
|
280,591
|
|
36,666
|
|
28,033
|
|
2,830
|
|
757
|
|
350,419
|
|
309,381
|
|
Insurance
proceeds
|
|
300
|
|
868
|
|
|
|
|
|
|
|
|
|
300
|
|
868
|
|
Operating income
(loss)
|
|
$
|
29,416
|
|
$
|
7,615
|
|
$
|
(3,739
|
)
|
$
|
(2,901
|
)
|
$
|
(2,830
|
)
|
$
|
(757
|
)
|
$
|
22,847
|
|
$
|
3,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Our mainline passenger yield per revenue passenger
mile (RPM) was 11.87¢ and 12.31¢ for the quarters ended September 30, 2007
and 2006, respectively, a decrease of 3.6%.
Our mainline average fare was $103.39 for the quarter ended September
30, 2007 as compared to $104.20 for the quarter ended September 30, 2006, a
decrease of 0.8%. Our length of haul was
944 and 922 miles for the quarters ended September 30, 2007 and 2006,
respectively, an increase of 2.4%. Our
mainline load factor was 84.7% for the quarter ended September 30, 2007 as
compared to 77.5% for the quarter ended September 30, 2006, an increase of 7.2
points. Our mainline passenger RASM for
the quarter ended September 30, 2007 and 2006 was 10.06¢ and 9.54¢,
respectively, an increase of 5.5%.
We have relatively low mainline operating expenses
excluding fuel because we operate only two similar types of aircraft in a
single class of service with high utilization rates. Our mainline CASM for the quarters ended
September 30, 2007 and 2006 was 9.62¢ and 9.71¢, respectively, a decrease of
0.9%. Our mainline CASM excluding fuel
for the quarter ended September 30, 2007 was 6.30¢ compared to 6.20¢ for the
comparable period last year, an increase of 1.6%. The increase in our mainline CASM excluding
fuel is primarily due to our seat replacement project, which increased
depreciation expense, and an increase in maintenance expense due to one
unscheduled engine maintenance event.
An airlines mainline break-even load factor is the passenger
load factor that will result in operating revenues being equal to operating
expenses, assuming constant revenue per passenger mile and expenses. For the quarter ended September 30, 2007, our
mainline break-even load factor was 78.5% compared to our achieved passenger
load factor of 84.7%. Our mainline
break-even load factor for the quarter ended September 30, 2006 was 76.3%
compared to our achieved passenger load factor of 77.5%. Our mainline break-even load factor increased
from the prior comparable period as a result of a decrease in our total yields
of 3.2% from 12.83¢ during the period ended September 30, 2006 as compared to
12.42¢ during the period ended September 30, 2007, partially offset by a
decrease in our mainline CASM of 0.9%.
Small fluctuations in our RASM or CASM can
significantly affect operating results because we, like other airlines, have
high fixed costs in relation to revenues. Airline operations are highly
sensitive to various factors, including the actions of competing airlines and
general economic factors, which can adversely affect our liquidity, cash flows
and results of operations.
19
Results
of Operations
We had a
consolidated net income of $17,317,000 or 39¢ per diluted share for the quarter
ended September 30, 2007, as compared to net income of $509,000 or 1¢ per
diluted share for the quarter ended September 30, 2006. Included in our net income for the quarter
ended September 30, 2007 was a non-cash mark to market derivative gain which
decreased fuel expense by $1,566,000.
Also included in net income for the quarter ended September 30, 2007 was
$2,831,000 of start-up costs for Lynx Aviation and $1,515,000 in accelerated
depreciation for our seat replacement project.
These items decreased our net income by 6¢ per share for the quarter
ended September 30, 2007. Included in
our net income for the quarter ended September 30, 2006 was a non-cash mark to
market derivative loss which increased fuel expense by $3,515,000 and $757,000
of start-up costs for Lynx Aviation, offset by gains on sale of assts of
$341,000. These items, net of income
taxes and bonuses, decreased our net income by 6¢ per share for the quarter
ended September 30, 2006.
The following table
provides certain of our financial and operating data for the three and six
months ended September 30, 2007 and 2006.
Mainline and combined data exclude the results of Lynx Aviation. We anticipate Lynx Aviation to start revenue
service during our third quarter of fiscal year 2008.
|
|
Quarters Ended
September 30,
|
|
|
|
Six Months Ended
September 30,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
Selected
Operating Data - Mainline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue
(000s) (1)
|
|
$
|
327,369
|
|
$
|
277,720
|
|
17.9
|
%
|
$
|
631,049
|
|
$
|
546,084
|
|
15.6
|
%
|
Revenue
passengers carried (000s)
|
|
2,901
|
|
2,428
|
|
19.5
|
%
|
5,623
|
|
4,832
|
|
16.4
|
%
|
Revenue passenger
miles (RPMs) (000s) (2)
|
|
2,738,605
|
|
2,238,946
|
|
22.3
|
%
|
5,329,511
|
|
4,523,498
|
|
17.8
|
%
|
Available seat
miles (ASMs) (000s) (3)
|
|
3,232,320
|
|
2,888,964
|
|
11.9
|
%
|
6,418,382
|
|
5,678,077
|
|
13.0
|
%
|
Passenger load
factor (4)
|
|
84.7
|
%
|
77.5
|
%
|
7.2 pts.
|
|
83.0
|
%
|
79.7
|
%
|
3.3 pts.
|
|
Break-even load
factor (5)
|
|
78.5
|
%
|
76.3
|
%
|
2.2 pts.
|
|
79.3
|
%
|
77.6
|
%
|
1.7 pts.
|
|
Block hours (6)
|
|
66,785
|
|
59,603
|
|
12.0
|
%
|
133,003
|
|
116,621
|
|
14.0
|
%
|
Departures
|
|
27,143
|
|
25,297
|
|
7.3
|
%
|
53,976
|
|
48,787
|
|
10.6
|
%
|
Average seats per
departure
|
|
128.7
|
|
129.7
|
|
(0.8
|
)%
|
128.9
|
|
129.6
|
|
(0.5
|
)%
|
Average stage
length
|
|
925
|
|
881
|
|
5.0
|
%
|
923
|
|
898
|
|
2.8
|
%
|
Average length of
haul
|
|
944
|
|
922
|
|
2.4
|
%
|
948
|
|
936
|
|
1.3
|
%
|
Average daily
block hour utilization (7)
|
|
12.1
|
|
12.0
|
|
0.8
|
%
|
12.3
|
|
12.1
|
|
1.7
|
%
|
Passenger yield
per RPM (cents) (8)
|
|
11.87
|
|
12.31
|
|
(3.6
|
)%
|
11.76
|
|
11.99
|
|
(1.9%
|
)
|
Total yield per
RPM (cents) (9), (10)
|
|
12.42
|
|
12.83
|
|
(3.2
|
)%
|
12.31
|
|
12.49
|
|
(1.4%
|
)
|
Passenger yield
per ASM (RASM) (cents) (11)
|
|
10.06
|
|
9.54
|
|
5.5
|
%
|
9.76
|
|
9.55
|
|
2.2
|
%
|
Total yield per
ASM (cents) (12)
|
|
10.52
|
|
9.95
|
|
5.7
|
%
|
10.22
|
|
9.95
|
|
2.7
|
%
|
Cost per ASM
(cents) (CASM)
|
|
9.62
|
|
9.71
|
|
(0.9
|
)%
|
9.62
|
|
9.60
|
|
0.2
|
%
|
Fuel expense per
ASM (cents)
|
|
3.32
|
|
3.51
|
|
(5.4
|
)%
|
3.30
|
|
3.38
|
|
(2.4
|
)%
|
Cost per ASM
excluding fuel (cents) (13)
|
|
6.30
|
|
6.20
|
|
1.6
|
%
|
6.32
|
|
6.22
|
|
1.6
|
%
|
Average fare (14)
|
|
$
|
103.39
|
|
$
|
104.20
|
|
(0.8
|
)%
|
$
|
102.44
|
|
$
|
103.22
|
|
(0.8
|
)%
|
Average aircraft
in service
|
|
60.0
|
|
54.1
|
|
10.9
|
%
|
59.2
|
|
52.7
|
|
12.3
|
%
|
Aircraft in
service at end of period
|
|
60
|
|
55
|
|
9.1
|
%
|
60
|
|
55
|
|
9.1
|
%
|
Average age of
aircraft at end of period (years)
|
|
3.6
|
|
2.8
|
|
28.6
|
%
|
3.6
|
|
2.8
|
|
28.6
|
%
|
Average fuel cost
per gallon (15)
|
|
$
|
2.26
|
|
$
|
2.43
|
|
(7.0
|
)%
|
$
|
2.27
|
|
$
|
2.36
|
|
(3.8
|
)%
|
Fuel gallons
consumed (000s)
|
|
47,439
|
|
41,679
|
|
13.8
|
%
|
93,514
|
|
81,400
|
|
14.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Quarters Ended
September 30,
|
|
|
|
Six Months Ended
September 30,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data - Regional Partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue
(000s) (1)
|
|
$
|
32,927
|
|
$
|
25,132
|
|
31.0
|
%
|
$
|
61,749
|
|
$
|
52,461
|
|
17.7
|
%
|
Revenue
passengers carried (000s)
|
|
330
|
|
242
|
|
36.4
|
%
|
621
|
|
506
|
|
22.7
|
%
|
Revenue passenger
miles (RPMs) (000s) (2)
|
|
210,462
|
|
146,784
|
|
43.4
|
%
|
388,396
|
|
317,234
|
|
22.4
|
%
|
Available seat
miles (ASMs) (000s) (3)
|
|
269,246
|
|
200,643
|
|
34.2
|
%
|
512,990
|
|
415,524
|
|
23.5
|
%
|
Passenger load
factor (4)
|
|
78.2
|
%
|
73.2
|
%
|
5.0 pts.
|
|
75.7
|
%
|
76.3
|
%
|
(0.6 pts.
|
)
|
Passenger yield
per RPM (cents) (8)
|
|
15.65
|
|
17.12
|
|
(8.6
|
)%
|
15.90
|
|
16.54
|
|
(3.9
|
)%
|
Passenger yield
per ASM (cents) (11)
|
|
12.23
|
|
12.53
|
|
(2.4
|
)%
|
12.04
|
|
12.63
|
|
(4.7
|
)%
|
Cost per ASM
(cents) (CASM)
|
|
13.62
|
|
13.97
|
|
(2.5
|
)%
|
13.84
|
|
13.84
|
|
0.0
|
%
|
Average fare
|
|
$
|
99.65
|
|
$
|
103.95
|
|
(4.1
|
)%
|
$
|
99.50
|
|
$
|
103.71
|
|
(4.1
|
)%
|
Aircraft in
service at end of period
|
|
12
|
|
9
|
|
33.3
|
%
|
12
|
|
9
|
|
33.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
|
|
Six Months Ended
September 30,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
Selected
Operating Data - Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue
(000s) (1)
|
|
$
|
360,296
|
|
$
|
302,852
|
|
19.0
|
%
|
$
|
692,798
|
|
$
|
598,545
|
|
15.7
|
%
|
Revenue
passengers carried (000s)
|
|
3,231
|
|
2,670
|
|
21.0
|
%
|
6,244
|
|
5,338
|
|
17.0
|
%
|
Revenue passenger
miles (RPMs) (000s) (2)
|
|
2,949,067
|
|
2,385,730
|
|
23.6
|
%
|
5,717,907
|
|
4,840,732
|
|
18.1
|
%
|
Available seat
miles (ASMs) (000s) (3)
|
|
3,501,566
|
|
3,089,607
|
|
13.3
|
%
|
6,931,372
|
|
6,093,601
|
|
13.7
|
%
|
Passenger load
factor (4)
|
|
84.2
|
%
|
77.2
|
%
|
7.0 pts.
|
|
82.5
|
%
|
79.4
|
%
|
3.1 pts.
|
|
Passenger Yield
per RPM (cents) (8)
|
|
12.14
|
|
12.60
|
|
(3.7
|
)%
|
12.04
|
|
12.29
|
|
(2.0
|
)%
|
Total yield per
RPM (cents) (9), (10)
|
|
12.65
|
|
13.10
|
|
(3.4
|
)%
|
12.55
|
|
12.75
|
|
(1.6
|
)%
|
Yield per ASM
(cents) (11)
|
|
10.22
|
|
9.73
|
|
5.0
|
%
|
9.93
|
|
9.76
|
|
1.7
|
%
|
Total yield per
ASM (cents) (12)
|
|
10.65
|
|
10.11
|
|
5.3
|
%
|
10.35
|
|
10.13
|
|
2.2
|
%
|
Cost per ASM
(cents)
|
|
9.93
|
|
9.99
|
|
0.6
|
%
|
9.93
|
|
9.89
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Passenger revenue includes revenues for reduced
rate stand-by passengers, charter revenues, administrative fees, and revenue
recognized for unused tickets that are greater than one year from issuance
date. The incremental revenue from passengers connecting from regional
flights to mainline flights is included in our mainline passenger revenue.
|
(2)
|
Revenue passenger miles, or RPMs, are determined by
multiplying the number of fare-paying passengers carried by the distance
flown. This represents the number of miles flown by revenue paying
passengers.
|
(3)
|
Available seat miles, or ASMs, are determined by
multiplying the number of seats available for passengers by the number of
miles flown.
|
(4)
|
Passenger load factor is determined by dividing
revenue passenger miles by available seat miles. This represents the
percentage of aircraft seating capacity that is actually utilized.
|
(5)
|
Break-even load factor is the passenger load factor
that will result in operating revenues being equal to operating expenses,
assuming constant revenue per passenger mile and expenses.
|
21
A reconciliation of the
components of the calculation of mainline break-even load factor is as follows:
|
|
Quarters
Ended
September 30,
|
|
Six
Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
(In
thousands)
|
|
Net income
|
|
$
|
(17,317
|
)
|
$
|
(509
|
)
|
$
|
(13,834
|
)
|
$
|
(4,466
|
)
|
Income tax
(expense) benefit
|
|
|
|
160
|
|
|
|
(3,731
|
)
|
Passenger revenue
|
|
327,369
|
|
277,720
|
|
631,049
|
|
546,084
|
|
Regional partner
expense
|
|
(36,666
|
)
|
(28,033
|
)
|
(71,023
|
)
|
(57,516
|
)
|
Regional partner
revenue
|
|
32,927
|
|
25,132
|
|
61,749
|
|
52,461
|
|
Lynx Aviation
start-up expenses
|
|
(2,831
|
)
|
(757
|
)
|
(5,059
|
)
|
(757
|
)
|
Charter revenue
|
|
(2,301
|
)
|
(2,216
|
)
|
(4,496
|
)
|
(3,605
|
)
|
Passenger revenue
- mainline (excluding charter and regional partner revenue) required to break
even
|
|
$
|
301,181
|
|
$
|
271,497
|
|
$
|
598,386
|
|
$
|
528,470
|
|
|
|
Quarters Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Calculation of
mainline break-even load factor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue- mainline (excluding charter) required to break even ($000s)
|
|
$
|
301,181
|
|
$
|
271,497
|
|
$
|
598,386
|
|
$
|
528,470
|
|
Mainline yield
per RPM (cents)
|
|
11.87
|
|
12.31
|
|
11.76
|
|
11.99
|
|
|
|
|
|
|
|
|
|
|
|
Mainline RPMs
(000s) to break even assuming constant yield per RPM
|
|
2,537,329
|
|
2,205,500
|
|
5,088,316
|
|
4,407,590
|
|
Mainline ASMs
(000s)
|
|
3,232,320
|
|
2,888,964
|
|
6,418,382
|
|
5,678,077
|
|
Mainline
break-even load factor
|
|
78.5
|
%
|
76.3
|
%
|
79.3
|
%
|
77.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) Mainline block hours represent the time between aircraft gate
departure and aircraft gate arrival.
(7) Mainline average daily block hour utilization represents the
total block hours divided by the number of aircraft days in service, divided by
the weighted average of aircraft in
our fleet during that period. The number
of aircraft includes all aircraft on our operating certificate, which includes scheduled
aircraft, as well as aircraft out of service for maintenance and operational
spare aircraft, and excludes aircraft removed permanently from revenue service
or new aircraft not yet placed in revenue service. This represents the amount of time that our
aircraft spend in the air carrying passengers.
(8) Yield per RPM is determined by dividing passenger revenues
(excluding charter revenue) by revenue passenger miles.
(9) For purposes of these yield calculations, charter revenue is
excluded from passenger revenue. These
figures may be deemed non-GAAP financial measures under regulations issued by
the Securities and Exchange Commission.
We believe that presentation of yield excluding charter revenue is
useful to investors because charter flights are not included in RPMs or ASMs. Furthermore, in preparing operating plans and
forecasts, we rely on an analysis of yield exclusive of charter revenue. Our presentation of non-GAAP financial
measures should not be viewed as a substitute for our financial or statistical
results based on GAAP. The
reconciliation of passenger revenue excluding charter revenue is as follows:
|
|
Quarters
Ended
September 30,
|
|
Six
Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
(In
thousands
)
|
|
Passenger
revenues - mainline, as reported
|
|
$
|
327,369
|
|
$
|
277,720
|
|
$
|
631,049
|
|
$
|
546,084
|
|
Less: charter
revenue
|
|
2,301
|
|
2,216
|
|
4,496
|
|
3,605
|
|
Passenger
revenues - mainline excluding charter
|
|
325,068
|
|
275,504
|
|
626,553
|
|
542,479
|
|
Add: Passenger
revenues - regional partner
|
|
32,927
|
|
25,132
|
|
61,749
|
|
52,461
|
|
Passenger
revenues, system combined
|
|
$
|
357,995
|
|
$
|
300,636
|
|
$
|
688,302
|
|
$
|
594,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
(10) Total yield per RPM is determined by dividing
total revenues by revenue passenger miles.
This represents the average amount one passenger pays to fly one mile.
(11) Passenger yield per ASM or RASM is
determined by dividing passenger revenues (excluding charter revenue) by
available seat miles.
(12) Total yield per ASM is determined by dividing
total revenues by available seat miles.
(13) This may be deemed a non-GAAP financial measure
under regulations issued by the Securities and Exchange Commission. We believe the presentation of financial
information excluding fuel expense is useful to investors because we believe
that fuel expense tends to fluctuate more than other operating expenses. Excluding fuel from the cost of mainline
operations facilitates the comparison of results of operations between current
and past periods and enables investors to forecast future trends in our
operations. Furthermore, in preparing
operating plans and forecasts, we rely, in part, on trends in our historical
results of operations excluding fuel expense.
However, our presentation of non-GAAP financial measures should not be
viewed as a substitute for our financial results determined in accordance with
GAAP.
(14) Mainline average fare excludes revenue
included in passenger revenue for charter and reduced rate stand-by passengers,
administrative fees, and revenue recognized for unused tickets that are greater
than one year from issuance date.
(15) Average fuel cost per gallon includes a
non-cash mark to market derivative gain of $1,566,000 and a loss of $2,177,000
for the three and six months ended September 30, 2007, respectively. Average fuel
cost per gallon for the three and six months ended September 30, 2006 includes
a non-cash mark to market derivative losses of $3,515,000 and $3,700,000,
respectively.
23
The following table provides our operating revenues
and expenses for our mainline operations expressed as cents per total mainline
ASMs and as a percentage of total mainline operating revenues, as rounded, for
the three and six months ended September 30, 2007 and 2006. Regional Partners and Lynx Aviation revenues,
expenses and ASMs were excluded from this table to provide comparable amounts
to the prior period presented.
|
|
Three
Months Ended
September 30,
|
|
Six
Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
Revenue/
|
|
%
|
|
Revenue/
|
|
%
|
|
Revenue/
|
|
%
|
|
Revenue/
|
|
%
|
|
|
|
cost Per
|
|
of Total
|
|
cost Per
|
|
of Total
|
|
cost Per
|
|
of Total
|
|
cost Per
|
|
of Total
|
|
|
|
ASM
|
|
Revenue
|
|
ASM
|
|
Revenue
|
|
ASM
|
|
Revenue
|
|
ASM
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger - mainline
|
|
10.13
|
|
96.3
|
%
|
9.61
|
|
96.7
|
%
|
9.83
|
|
96.2
|
%
|
9.62
|
|
96.7
|
%
|
Cargo
|
|
0.05
|
|
0.5
|
%
|
0.07
|
|
0.7
|
%
|
0.05
|
|
0.5
|
%
|
0.06
|
|
0.6
|
%
|
Other
|
|
0.34
|
|
3.2
|
%
|
0.27
|
|
2.6
|
%
|
0.34
|
|
3.3
|
%
|
0.27
|
|
2.7
|
%
|
Total revenues
|
|
10.52
|
|
100.0
|
%
|
9.95
|
|
100.0
|
%
|
10.22
|
|
100.0
|
%
|
9.95
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight operations
|
|
1.38
|
|
13.1
|
%
|
1.36
|
|
13.6
|
%
|
1.40
|
|
13.7
|
%
|
1.39
|
|
14.0
|
%
|
Aircraft fuel
expense
|
|
3.32
|
|
31.6
|
%
|
3.51
|
|
35.3
|
%
|
3.30
|
|
32.3
|
%
|
3.38
|
|
34.0
|
%
|
Aircraft lease
expense
|
|
0.87
|
|
8.3
|
%
|
0.95
|
|
9.5
|
%
|
0.88
|
|
8.6
|
%
|
0.94
|
|
9.4
|
%
|
Aircraft and
traffic servicing
|
|
1.30
|
|
12.4
|
%
|
1.35
|
|
13.6
|
%
|
1.35
|
|
13.2
|
%
|
1.36
|
|
13.6
|
%
|
Maintenance
|
|
0.83
|
|
7.9
|
%
|
0.76
|
|
7.7
|
%
|
0.80
|
|
7.8
|
%
|
0.75
|
|
7.6
|
%
|
Promotion and
sales
|
|
1.12
|
|
10.6
|
%
|
1.00
|
|
10.0
|
%
|
1.10
|
|
10.7
|
%
|
1.02
|
|
10.3
|
%
|
General and
administrative
|
|
0.44
|
|
4.1
|
%
|
0.51
|
|
5.1
|
%
|
0.45
|
|
4.4
|
%
|
0.49
|
|
4.9
|
%
|
Loss (gains) on
sales of assets, net
|
|
|
|
|
|
(0.02
|
)
|
(0.1
|
)%
|
|
|
|
|
(0.01
|
)
|
(0.1
|
)%
|
Depreciation
|
|
0.36
|
|
3.4
|
%
|
0.29
|
|
2.9
|
%
|
0.34
|
|
3.4
|
%
|
0.28
|
|
2.8
|
%
|
Total operating
expenses
|
|
9.62
|
|
91.4
|
%
|
9.71
|
|
97.6
|
%
|
9.62
|
|
94.1
|
%
|
9.60
|
|
96.5
|
%
|
Three
months ended September 30, 2007 as compared to three months ended September 30,
2006
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 $327,369,000 for the quarter ended
September 30, 2007 compared to $277,720,000 for the quarter ended September 30,
2006, an increase of 17.9%. 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 passenger
tickets flown generated 91.6% of our mainline passenger revenues and increased
$46,909,000 or 18.5% over the prior year.
The increase in flown ticket sales resulted from a 11.9% increase in
ASMs, or $30,074,000, an increase of 7.2 points in load factor, or $26,396,000,
offset by a decrease of 3.1% in our yields from ticket sales, or
$9,561,000. The percentage of revenues
generated from other
24
sources compared to total
mainline passenger revenue are as follows: Administrative fees were 2.9%;
revenue recognized for tickets that were not used within one year from issuance
were 2.7%, charter revenues were 0.7% and revenue from our co-branded credit
card were 1.9%. These sources of revenue
increased total mainline passenger revenues by $4,720,000 as compared to prior
year. This increase is primarily due to our 19.5% increase in passengers and
the increased usage of our co-branded credit card.
Other Revenues
.
Other revenues, comprised principally of the revenues 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 $11,017,000 and $7,656,000 for the quarter ended September 30, 2007 and
September 30, 2006, respectively, an increase of 43.9% and were 3.2% and 2.6%
and of total mainline operating revenues for the quarters ended September 30,
2007 and 2006, respectively. The
increase in other revenues was primarily due to the increase in the revenues
earned from the marketing component of our co-branded credit card agreement and
other partnership agreements.
Mainline
Operating Expenses
Total mainline operating expenses were $310,923,000
and $280,591,000 for the quarters ended September 30, 2007 and 2006,
respectively, and represented 91.4% and 97.6% of total mainline revenues,
respectively. Mainline operating
expenses decreased as a percentage of mainline revenues during the quarter
ended September 30, 2007 largely a result of the 0.9% decrease in mainline CASM
and 5.5% increase in RASM as compared to the quarter ended September 30, 2006.
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 10.5% to $68,476,000 compared to $61,984,000, and were 20.1%
and 21.6% of total mainline revenues for the quarters ended September 30, 2007
and 2006, respectively. Salaries, wages
and benefits increased over the prior comparable periods largely as a result of
an increase in the number of full-time equivalent employees to support our
continued capacity growth. Our full-time equivalent employee count increased
17.0% from approximately 4,400 at September 30, 2006 to 5,150 at September 30,
2007. The increase in salaries, wages and benefits is to support the 11.9%
increase in mainline capacity and also increased due to a one-time charge
related to management changes. These
were offset by lower benefit costs as compared to the same period last year.
Flight
Operations.
Flight operations expenses
increased 13.7% to $44,515,000 as compared to $39,144,000, and were 13.1% and
13.6% of total mainline revenues for the quarters ended September 30, 2007 and
2006, respectively. Flight operations
expenses increased due to an increase in mainline block hours from 59,603 for
the quarter ended September 30, 2006 to 66,785 for the quarter ended September
30, 2007, an increase of 12.0%. 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 12.0% to $25,583,000 compared to
$22,851,000, and were 7.8% and 8.2% of passenger mainline revenues for the
quarters ended September 30, 2007 and 2006, respectively. We employed approximately 1,680 pilots and
flight attendants at September 30, 2007 as compared to 1,470 at September 30,
2006, an increase of 14.3%. We increased
the number of pilots and flight attendants over the prior year to support the
12.0% increase in block hours and the 10.9% increase in the average aircraft in
service. Pilot salaries also increased
during the quarter ended September 30, 2007 due to accelerated training
incurred during the quarter ended September 30, 2007 to prepare for increases
in block hours and due to higher attrition rates.
Aircraft insurance expenses totaled
$2,172,000 (0.6% of total mainline revenues) and $2,700,000 (0.9% of total
mainline revenues) for the quarters ended September 30, 2007 and 2006,
respectively. Aircraft insurance expenses
were $0.75 and $1.11 per passenger for the quarters ended September 30, 2007
and 2006, respectively. Our aircraft
hull and liability coverage renewed on January 1, 2006 to December 31, 2006 at
rates that were reduced by 9.9%. Our rates
were further reduced by 33.4% for the policy that covers January 1, 2007 to
December 31, 2007. In December
2002, through authority granted under the Homeland Security Act of
25
2002, the U.S. government expanded its insurance program to enable
airlines to elect either the governments 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 December 31, 2007. We do not know whether the government will extend
the coverage beyond December 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 expenses include both the direct cost of fuel including taxes as well as
the cost of delivering fuel into the aircraft.
Aircraft fuel expense also includes cash settlements and non-cash mark
to market hedge adjustments related to our fuel hedging activities. Aircraft fuel expenses of $107,350,000 for
47,439,000 gallons used and $101,450,000 for 41,679,000 gallons used resulted
in an average fuel cost of $2.26 and $2.43 per gallon for the quarters ended
September 30, 2007 and 2006, respectively, a decrease of 7.0%. Aircraft fuel expenses represented 31.6% and
35.3% of total mainline revenues for the quarters ended September 30, 2007 and
2006, respectively. Fuel prices are
subject to change weekly, as we purchase a very small portion in advance for
inventory. Fuel consumption for the
quarters ended September 30, 2007 and 2006 averaged 710 and 699 gallons per
block hour, respectively, an increase of 1.6%.
The fuel burn increased largely a result of the 7.2 point increase in
our load factor during the quarter ended September 30, 2007 which was partially
offset by the delivery of four more fuel efficient A318 aircraft flown as
compared to the same period last year.
Aircraft fuel expenses,
excluding realized fuel hedging gains and non-cash mark to market derivative
gains and losses, were $2.40 and $2.35 per gallon for the quarters ended
September 30, 2007 and 2006, respectively.
Our aircraft fuel expenses for the quarter ended September 30, 2007
include a non-cash mark to market derivative gain of $1,566,000 recorded as a
decrease to fuel expense and cash receipts of $4,792,000 received from a
counter-party recorded as a decrease in fuel expense. Our aircraft fuel expenses for the quarter
ended September 30, 2006 include a non-cash mark to market derivative loss of
$3,515,000 recorded as an increase to fuel expense and cash settlements of
$277,000 paid to a counter-party recorded as an increase in fuel expense.
Aircraft and Engine Lease.
Aircraft lease expenses totaled $28,247,000 (8.3% of total mainline revenues) and
$27,326,000 (9.5% of total mainline revenues) for the quarters ended September 30,
2007 and 2006, respectively, an increase of 3.4%. The increase in lease expense is due to an
increase in the average number of leased aircraft from 37.0 to 38.0, or 2.7%,
and increases in lease rates for our spare engines and four of our aircraft
that have variable rents based on LIBOR.
Aircraft
and Traffic Servicing.
Aircraft and traffic servicing expenses were
$42,022,000 and $39,117,000, for the quarters ended September 30, 2007 and
2006, respectively, an increase of 7.4%,, and represented 12.4% and 13.6% of
total mainline revenues. Aircraft and
traffic servicing expenses include all expenses incurred at airports including
landing fees, facilities rental, station labor, ground handling expenses, and
interrupted trip expenses associated with delayed or cancelled flights. Interrupted trip expenses are amounts paid to
other airlines to protect passengers on cancelled flights as well as hotel,
meal and other incidental expenses.
Aircraft and traffic servicing expenses will increase with the addition
of new cities to our route system. As of
September 30, 2007, we served 43 mainline-only cities compared to 39
mainline-only cities as of September 30, 2006, an increase of 10.3%. During the quarter ended September 30, 2007,
our departures increased to 27,143 from 25,297, an increase of 7.3%. Aircraft and traffic servicing expenses were
$1,548 per departure for the quarter ended September 30, 2007 as compared to
$1,546 per departure for the quarter ended September 30, 2006, or an increase
of 0.1%. This increase was primarily due
to rent increases for the additional six gates at DIA offset by a reduction in
costs due to the discontinuation of the shuttle service of five daily
frequencies between Los Angeles, California and San Francisco, California.
Maintenance.
Maintenance expenses of $26,861,000 and $22,064,000 were 7.9% and 7.7%
of total mainline revenues for the quarters ended September 30, 2007 and 2006,
respectively, and increased by 21.7% in the current period as compared to last
year. Maintenance expenses include all
labor, parts and supplies expenses related to the maintenance of the
aircraft. Maintenance cost per block
hour was $402 and $370 for the
26
quarters ended
September 30, 2007 and 2006, respectively, an increase of 8.6%. During the quarter ended September 30, 2007,
we had one major unscheduled engine maintenance event which was not covered by
our maintenance agreements, which increased expense by $565,000. Maintenance expenses will increase as the
average age of our aircraft increases and our aircraft require more scheduled
maintenance events. The number of our
aircraft over five years old was five as of September 30, 2006 as compared to
12 as of September 30, 2007.
Promotion
and Sales
.
Promotion and sales expenses totaled
$36,073,000 and $28,851,000 and were 10.6% and 10.0% of total mainline revenues
for the quarters ended September 30, 2007 and 2006, respectively, and increased
by 25.0% in the current period as compared to the quarter ended September 30,
2006. These expenses include advertising
expenses, telecommunications expenses, wages and benefits for reservation
agents and related supervisors and marketing management and sales personnel,
credit card fees, travel agency commissions and computer reservations costs. During the quarter ended September 30, 2007,
promotion and sales expenses per mainline passenger increased to $12.43 from
$11.88 for the quarter ended September 30, 2006. Promotion and sales expenses increased
primarily due to an increase in travel agency commissions paid per passenger
due to a higher percentage of connecting traffic booked on external websites
that cost more per booking than through our reservation centers or website.
General and
Administrative.
General and
administrative expenses for the quarters ended September 30, 2007 and 2006
totaled $14,067,000 and $14,676,000, respectively, and were 4.1% and 5.1% of
total mainline revenues, respectively, a decrease of 4.1%. General and administrative expenses include
the salaries and benefits for our executive officers and various other
administrative personnel including legal, accounting, information technology,
corporate communications, training and human resources and other expenses
associated with these departments.
General and administrative expenses also include employee health
benefits, accrued vacation, and general insurance expenses including workers
compensation for all of our employees. General and administrative expenses
decreased primarily due to decreases in our workers compensation expenses, our
health insurance expenses and profit sharing expenses as compared to the prior
period.
Depreciation.
Depreciation expenses were $11,762,000 and $8,304,000 and were
approximately 3.4% and 2.9% of total mainline revenues for the quarters ended
September 30, 2007 and 2006, respectively, an increase of 41.6%. 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 of 22.0 during the quarter ended September 30, 2007 as
compared to 17.6 purchased aircraft in service for the quarter ended September
30, 2006, an increase of 25.0%. The increase in depreciation expenses is also
due to accelerated depreciation of $1,515,000 on our Airbus aircraft seats,
which we are replacing over the remainder of the year to be completed in July
2008, and to investments in rotable aircraft components, aircraft improvements
and ground equipment to support our capacity growth.
Consolidated
Nonoperating Expenses
Nonoperating Income (Expense).
Net nonoperating expense totaled
$5,530,000 and $3,608,000 for the quarters ended September 30, 2007 and 2006,
respectively. These are comprised primarily
of interest income and expense.
Interest income decreased to $3,649,000 during the
quarter ended September 30, 2006 from $4,203,000 during the quarter ended
September 30, 2007 as a result of a decrease in our average cash position as
compared to the prior comparable period.
Interest expense increased to
$9,170,000 for the quarter ended September 30, 2007 from $7,840,000 for the
quarter ended September 30, 2006, an increase of 17.0%. Debt related to aircraft increased from
$377,198,000 as of September 30, 2006 to $473,974,000 as of September 30, 2007
with an increase in the average weighted interest rate from 7.20% as of
September 30, 2006 to 7.31% as of September 30, 2007, respectively.
Income Tax Benefit.
There was
no provision for income taxes for the quarter ended September 30, 2007 due to
accumulated losses for which valuation allowances have been recorded. We will
assess the ongoing
27
utilization of
accumulated losses and the related valuation allowance each quarter. We recorded an income tax benefit of
$160,000 during the three months ended September 30, 2006 as a true-up of a
year-to-date tax provision based on an annualized expected tax rate.
Regional
Partners
Regional
partner revenues are derived from flights 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 Horizon and Republic flights plus payments
of performance bonuses if earned under the contract. Certain expenses such as aircraft lease,
maintenance and crew costs are included in the operating agreements with
Horizon and Republic in which we reimburse these expenses plus a margin. Operating expenses also include other direct
costs incurred for which we do not pay a margin. These expenses are primarily composed of
fuel, airport facility expenses and passenger related expenses.
Passenger Revenues Regional Partners
.
Regional partner revenues, consisting of revenues from Horizon and
Republic operations, totaled $32,927,000 for the quarter ended September 30,
2007 and $25,132,000 for the quarter ended September 30, 2006, a 31.0%
increase. The increase in revenue is due
to a 36.4% increase in passengers offset by a decrease in the average fare to
$99.65 from $103.95, a decrease of 4.1%.
The decrease in average fare is largely due to the increase in
connecting traffic over the September 30, 2006 quarter, which results in a
lower fare than local traffic.
Regional
Partners Expenses.
Regional partner expenses for the quarter ended September 30, 2007 and
2006 totaled $36,666,000 and $28,033,000, respectively, and were 111.4% and
111.5% of total regional partner revenues, respectively, an increase of
30.8%. Regional partner expenses include
all direct costs associated with Horizon and Republic. The
increase in regional partner expenses as compared to revenues was primarily
related to the transition of our regional jet service from Horizon to Republic
which caused both airlines to operate with a sub-optimal number of aircraft
during the quarter.
Lynx
Aviation
Lynx Aviation
is in the start-up phase of operations and is currently in the process of
obtaining FAA authorization to provide scheduled air transportation service
using Bombardier Q400 aircraft. Start-up
costs for the quarter ended September 30, 2007 were $2,830,000 as compared to
$757,000 for the quarter ended September 20, 2006.
During the quarter ended September 30, 2007,
$1,417,000 of flight operation expenses primarily related to pilot salaries and
training and aircraft induction costs were incurred for the two aircraft
delivered during the quarter.
Maintenance expenses of $512,000 related to salaries and wages for
material specialists personnel, line maintenance performed on aircraft and
training for our Lynx Aviation mechanics.
General and administrative costs of $628,000 primarily related to costs
of constructing our internal manual and procedures to FAA standards and the FAA
certification process.
During the quarter ended September 30, 2006,
$757,000 of start-up costs primarily related to consulting and legal expenses
incurred in conjunction with signing the purchase agreement with Bombardier,
Inc. for Q400 aircraft in September 2006 and the formation of the subsidiary.
28
Six Months ended September 30, 2007 as compared to
the Six Months ended September 30, 2006
Summary
We had
consolidated net income of $13,834,000 or 33¢ per diluted share for the six
months ended September 30, 2007, as compared to consolidated net income of
$4,466,000 or 12¢ per diluted share for the six months ended September 30,
2006. Included in our consolidated net
income for the six months ended September 30, 2007 was a non-cash mark to
market derivative loss of $2,177,000.
Also included in consolidated net income for the six months ended
September 30, 2007 was $5,058,000 of start-up costs for Lynx Aviation and
$2,874,000 in accelerated depreciation for our seat replacement project. These items decreased our consolidated net
income by 22¢ per share. Included in our
net income for the six months ended September 30, 2006 were the following items
before the effect of income taxes: start-up costs for Lynx Aviation of
$757,000, gains of $647,000 related to the sale of Boeing parts held for sale
and other assets and a non-cash mark to market derivative loss on fuel hedges
of $3,700,000. These items, net of income taxes and bonuses, decreased our
consolidated net income by 6¢ per share.
Our mainline
passenger yield per RPM was 11.76¢ and 11.99¢ for the six months ended
September 30, 2007 and 2006, respectively, a decrease of 1.9%. Our mainline average fare was $102.44 for the
six months ended September 30, 2007 as compared to $103.22 for the six months
ended September 30, 2006, a decrease of 0.8%.
Our length of haul was 948 and 936 miles for the six months ended
September 30, 2007 and 2006, respectively, an increase of 1.3%. Our mainline load factor was 83.0% for the
six months ended September 30, 2007 as compared to 79.7% for the six months
ended September 30, 2006, an increase of 3.3 points. Our RASM for the six months ended September
30, 2007 and 2006 was 9.76¢ and 9.55¢, respectively, an increase of 2.2%.
Our mainline CASM for the six months ended September
30, 2007 and 2006 was 9.62¢ and 9.60¢, respectively, an increase of 0.2%. Fuel expense per ASM was 3.30¢ per ASM as
compared to 3.38¢ per ASM for the periods ending September 30, 2007 and 2006,
respectively, a decrease of 2.4%.
Mainline CASM excluding fuel was 6.32¢ per ASM as compared to 6.22¢ per
ASM for the periods ending September 30, 2007 and 2006, respectively, an
increase of 1.6%.
For the six months ended September 30, 2007, our
mainline break-even load factor was 79.3% compared to our achieved passenger
load factor of 83.0%. Our mainline
break-even load factor for the six months ended September 30, 2006, was 77.6%
compared to our achieved passenger load factor of 79.7%. Our mainline break-even load factor increased
from the prior comparable period as a result of an increase in our mainline
CASM of 0.2% and a decrease in our mainline passenger yields of 1.9%.
29
The break-
out
of our mainline, Regional
Partners and Lynx Aviation operations from our consolidated statement of operations
is as follows (in thousands):
|
|
Mainline
|
|
Regional Partners
|
|
Lynx Aviation
|
|
Consolidated
|
|
|
|
Six months ended
September 30,
|
|
Six months ended
September 30
|
|
Six months ended
September 30
|
|
Six months ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger -
mainline
|
|
$
|
631,049
|
|
$
|
546,084
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
631,049
|
|
$
|
546,084
|
|
Passenger -
regional partner
|
|
|
|
|
|
61,749
|
|
52,461
|
|
|
|
|
|
61,749
|
|
52,461
|
|
Cargo
|
|
3,163
|
|
3,581
|
|
|
|
|
|
|
|
|
|
3,163
|
|
3,581
|
|
Other
|
|
21,775
|
|
15,152
|
|
|
|
|
|
|
|
|
|
21,775
|
|
15,152
|
|
Total revenues
|
|
655,987
|
|
564,817
|
|
61,749
|
|
52,461
|
|
|
|
|
|
717,736
|
|
617,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight operations
|
|
89,742
|
|
78,980
|
|
|
|
|
|
2,514
|
|
4
|
|
92,256
|
|
78,984
|
|
Aircraft fuel
|
|
212,062
|
|
191,864
|
|
|
|
|
|
22
|
|
|
|
212,084
|
|
191,864
|
|
Aircraft lease
|
|
56,577
|
|
53,208
|
|
|
|
|
|
|
|
|
|
56,577
|
|
53,208
|
|
Aircraft and
traffic servicing
|
|
86,613
|
|
77,105
|
|
|
|
|
|
189
|
|
3
|
|
86,802
|
|
77,108
|
|
Maintenance
|
|
51,231
|
|
42,660
|
|
|
|
|
|
940
|
|
4
|
|
52,171
|
|
42,664
|
|
Promotion and
sales
|
|
70,368
|
|
58,272
|
|
|
|
|
|
10
|
|
3
|
|
70,378
|
|
58,275
|
|
General and
administrative
|
|
28,801
|
|
27,970
|
|
|
|
|
|
1,226
|
|
743
|
|
30,027
|
|
28,713
|
|
Operating
expenses - regional partner
|
|
|
|
|
|
71,023
|
|
57,516
|
|
|
|
|
|
71,023
|
|
57,516
|
|
Aircraft lease
and facility exit costs
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Gains on sales of
assets, net
|
|
4
|
|
(647
|
)
|
|
|
|
|
|
|
|
|
4
|
|
(647
|
)
|
Depreciation
|
|
22,107
|
|
15,836
|
|
|
|
|
|
157
|
|
|
|
22,264
|
|
15,836
|
|
Total operating
expenses
|
|
617,505
|
|
545,234
|
|
71,023
|
|
57,516
|
|
5,058
|
|
757
|
|
693,586
|
|
603,507
|
|
Insurance
proceeds
|
|
300
|
|
868
|
|
|
|
|
|
|
|
|
|
300
|
|
868
|
|
Operating income
(loss)
|
|
$
|
38,782
|
|
$
|
20,451
|
|
$
|
(9,274
|
)
|
$
|
(5,055
|
)
|
$
|
(5,058
|
)
|
$
|
(757
|
)
|
$
|
24,450
|
|
$
|
14,639
|
|
30
Mainline
Revenues
Mainline Passenger Revenue
s.
Mainline passenger revenues totaled $631,049,000 for the six months
ended September 30, 2007 compared to $546,084,000 for the six months ended
September 30, 2006, an increase of 15.6%.
We carried 5,623,000 mainline revenue passengers during the six months
ended September 30, 2007 compared to 4,832,000 mainline revenue passengers
during the six months ended September 30, 2006, an increase of 16.4%.
Revenues from passenger
tickets sales generated 91.3% of our mainline passenger revenues and increased
$77,348,000 or 15.5% over the prior year.
The increase in ticket sales resulted from a 13.0% increase in ASMs, or
$65,026,000, an increase of 3.3 points in load factor, or $23,842,000, which
was offset by a decrease of 1.9% in our yields from ticket sales, or
$11,519,000. The percentage of revenues
generated from other sources compared to total mainline revenue are as follows:
Administrative fees were 2.8%; revenue recognized for tickets that were not
used within one year from issuance were 2.9%, charter revenues were 0.7% and
revenue from our co-branded credit card were 2.0%. These sources of revenue increased total
mainline passenger revenue by $10,053,000 as compared to prior year. The
increase is primarily due to our 16.4% increase in passengers and the increased
usage of our co-branded credit card.
Other Revenues
.
Other revenues, comprised principally of the revenue from the marketing
component of our co-branded credit card, interline and ground handling fees,
liquor sales, LiveTV sales, pay-per-view movies and excess baggage fees,
totaled $21,775,000 and $15,152,000 and were 3.3% and 2.7% of total mainline
operating revenues for the six months ended September 30, 2007 and 2006,
respectively, an increase of 43.7%. The
increase in other revenues was primarily due to the increase in the revenues
earned from the marketing component of our co-branded agreement and other
partnership agreements.
Mainline
Operating Expenses
Total mainline operating expenses were $617,505,000
and $545,234,000 for the six months ended September 30, 2007 and 2006,
respectively, and represented 94.1% and 96.5% of total mainline revenues,
respectively. Operating expenses
decreased as a percentage of revenues during the six months ended September 30,
2007 largely a result of an increase of 2.2% in our RASM and an increase in our
load factor of 3.3 points as compared to the prior comparable period. This was partially offset by an increase in
our CASM of 0.2% as compared to the prior comparable period.
Salaries, Wages and
Benefits
.
Salaries, wages and benefits increased 12.4%
to $135,891,000 for the six months ended September 30, 2007 compared to
$120,891,000 for the six months ended September 30, 2006, and were
20.7% and 21.4% of total mainline revenues for the six months ended September
30, 2007 and 2006, respectively.
Salaries, wages and benefits increased over the prior comparable period
largely as a result of a 17.0% increase in the employee count, general wage
increases, increases in workers compensation insurance and additional
stock-based compensation expense.
Flight Operations.
Flight operations expenses increased 13.6% to $89,742,000 as compared to
$78,980,000, and were 13.7% and 14.0% of total mainline revenues for the six
months ended September 30, 2007 and 2006, respectively. Flight operations expenses increased due to
an increase in mainline block hours from 116,621 for the six months ended
September 30, 2006 to 133,003 for the six months ended September 30, 2007, an
increase of 14.0%.
Pilot and flight attendant salaries before
payroll taxes and benefits increased 14.0% to $51,963,000 compared to
$45,585,000, and were 8.2% and 8.3% of passenger mainline revenues for the six
months ended September 30, 2007 and 2006, respectively. The increase is due to the fact that we
employed 14.3% more pilot and flight attendants as compared to the comparable
period last year.
Aircraft insurance expenses totaled
$4,309,000 (0.7% of total mainline revenues) and $5,411,000 (1.0% of total
mainline revenues) for the six months ended September 30, 2007 and 2006,
respectively. Aircraft insurance
expenses were 77¢ and $1.12 per passenger for the six months ended September
30, 2007 and 2006, respectively.
31
Aircraft Fuel.
Aircraft fuel costs were $212,062,000 for
93,514,000 gallons used and $191,864,000 for 81,400,000 gallons used for the
six months ended September 30, 2007 and 2006, respectively, and resulted in an
average fuel cost of $2.27 and $2.36 per gallon, a decrease of 3.8%. Aircraft fuel costs, excluding unrealized
hedging losses and gains, were $2.24 and $2.31 per gallon for the six months
ended September 30, 2007 and 2006, respectively. Aircraft fuel expenses represented 32.3% and
34.0% of total mainline revenue for the six months ended September 30, 2007 and
2006, respectively. The results of
operations for the six months ended September 30, 2007 include non-cash mark to
market derivative losses of $2,177,000 recorded as an increase in fuel and net
gains of $9,129,000 in cash settlements received from a counter-party recorded
as a decrease in fuel expense. The results of operations for the six months
ended September 30, 2006 include non-cash mark to market derivative losses of
$3,700,000 as an increase in fuel and net gains of $1,274,000 in cash
settlements received from a counter-party recorded as a decrease in fuel
expense. Fuel consumption for the six
months ended September 30, 2007 and 2006 averaged 703 and 698 gallons per block
hour, respectively, an increase of 0.7% due to our increase in passenger load
factors.
Aircraft
Lease.
Aircraft lease expenses totaled $56,577,000
(8.6% of total mainline revenues) and $53,208,000 (9.4% of total mainline
revenues) for
the six months ended September 30, 2007 and 2006, respectively, an increase of
6.3%. The increase in aircraft lease
expenses is due to an increase in the average number of leased aircraft (an
increase from 36.2 to 38.0, or 5.0%), 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
$86,613,000 and $77,105,000, an increase of 12.3%, for the six months ended
September 30, 2007 and 2006, respectively, and represented 13.2% and 13.6% of
total mainline revenue. During the six
months ended September 30, 2007, our departures increased to 53,976 from
48,787, an increase of 10.6%. Aircraft
and traffic servicing expenses were $1,605 per departure for the six months
ended September 30, 2007 as compared to $1,580 per departure for the six months
ended September 30, 2006, an increase of 1.6%.
This increase was primarily due to rent increases for the additional six
gates at DIA and approximately $1,000,000 of additional glycol expenses
incurred during the six months ended September 30, 2007.
Maintenance.
Maintenance expenses of $51,231,000 and $42,660,000 were 7.8% and 7.6%
of total mainline revenues for the six months ended September 30, 2007 and
2006, respectively, and increased by 20.1% in the current period as compared to
last year. Maintenance cost per block
hour was $385 and $366 for the six months ended September 30, 2007 and 2006,
respectively, an increase of 5.2%. During
the six months ended September 30, 2007, we had two major unscheduled maintenance
events that were not covered by maintenance agreements which increased expense
by $1,315,000, or $10 per block hour.
Promotion
and Sales
.
Promotion and sales expenses totaled
$70,368,000 and $58,272,000 and were 10.7% and 10.3% of total mainline revenues
for the six months ended September 30, 2007 and 2006, respectively, an increase
of 20.8%. During the six months ended
September 30, 2007, promotion and sales expenses per mainline passenger
increased to $12.51 from $12.06 for the six months ended September 30, 2006.
General and
Administrative.
General and
administrative expenses for the six months ended September 30, 2007 and 2006
totaled $28,801,000 and $27,970,000, respectively, and were 4.4% and 4.9% of
total mainline revenues, respectively, an increase of 3.0%. The increase in general and administrative
expenses primarily related to increased wages and information technology
consulting fees offset by decreases in workers compensation expense, bonus accruals
and health insurance expense.
Depreciation.
Depreciation expenses of $22,107,000 and $15,836,000 and were
approximately 3.4% and 2.8% of total mainline revenues for the six months ended
September 30, 2007 and 2006, respectively, an increase of 39.6%. Depreciation expense increased over the prior
comparable period as a result of $2,874,000 in accelerated depreciation
recorded during the six months ended September 30, 2007 for our seat
replacement project and an increase in the average number of aircraft owned to
21.2 during the six months ended September 30, 2007 as compared to 17.2 during
the six months ended September 30, 2006, an increase of 23.3%.
32
Consolidated
Nonoperating Expenses
Nonoperating Expense.
Net nonoperating expense totaled
$10,616,000 for the six months ended September 30, 2007 as compared to net
nonoperating expense of $6,442,000 for the six months ended September 30, 2006,
an increase of 64.8%
Interest income decreased to $7,196,000 from
$8,156,000 during the six months ended September 30, 2007 from the prior
comparable period as a result of a decrease in our average cash position and
lower rates earned on investments.
Interest expense
increased to $17,637,000 for the six months ended September 30, 2007 from $14,672,000
for the six months ended September 30, 2006.
The increase in interest expense was due to additional debt for to the
increase in the average number of owned aircraft during the period from 17.2 to
21.2 and an increase in the weighted average borrowing rate. Aircraft debt increased from $377,198,000 as
of September 30, 2006 to $473,974,000 as of September 30, 2007.
Income Tax
Expense.
There was no provision for income taxes
for the six months ended September 30, 2007 due to accumulated losses for which
valuation allowances have been recorded.
We will assess the ongoing utilization for accumulated losses and the
related valuation allowance each quarter.
We recorded an income tax
expense of $3,731,000 during the six months ended September 30, 2006 at
a 45.5% rate.
Regional Partners
Passenger Revenues
Regional Partners
. Regional
partner revenues, which consist of revenues from Horizon and Republic, totaled
$61,749,000 for the six months ended September 30, 2007 and $52,461,000 for the
six months ended September 30, 2006, a 17.7% increase. The increase in revenue is due to a 22.7%
increase in passengers offset by a decrease in the average fare to $99.50 from
$103.71, a decrease of 4.1%. The
decrease is largely due to the increase in connecting traffic over the
September 30, 2006 quarter which obtains a lower fare than local traffic and
the low fares obtained from the Los Angeles, California to San Francisco,
California shuttle which we discontinued in July 2007.
Operating
Expenses
Regional
Partners.
Regional partner expenses for the six months
ended September 30, 2007 and 2006 totaled $71,023,000 and $57,516,000,
respectively, and were 115.0% and 109.6% of total regional partner revenues,
respectively.
Lynx
Aviation
Lynx Aviation
is in the start-up phase of operations and is currently in the process of
obtaining FAA authorization to provide scheduled air transportation service
using Bombardier Q400 aircraft. Start-up
costs for the six months ended September 30, 2007 were $5,058,000 as compared
to $757,000 for the six months ended September 30, 2006.
During the six months ended September 30, 2007,
$2,514,000 of flight operation expenses primarily related to pilot salaries and
training and aircraft induction costs.
Maintenance expenses of $940,000 salaries and wages for material
specialists personnel, line maintenance performed on aircraft and training for
our Lynx Aviation mechanics. General and
administrative costs of $1,226,000 primarily related to costs of constructing
our internal manual and procedures to FAA standards and the FAA certification
process.
33
Liquidity
and Capital Resources
Our liquidity depends to a large extent on the number
of passengers who fly with us, the fares they pay, our operating and capital
expenditures, our financing activities, and the cost of fuel. Our liquidity will be negatively impacted by
the record high price of fuel, which crossed $92 a barrel on October 26, 2007. We depend on lease or mortgage-style
financing to acquire all of our aircraft, including ten additional Airbus
aircraft that are scheduled for delivery through November 2011 and eight
Bombardier aircraft scheduled for delivery through December 2007.
We
had cash and cash equivalents of $181,103,000 and $202,981,000 at September 30,
2007 and March 31, 2007, respectively.
At September 30, 2007, total current assets were $352,218,000 as
compared to $421,516,000 of total current liabilities, resulting in negative
working capital of $69,298,000. At March
31, 2007, total current assets were $340,405,000 as compared to $359,326,000 of
total current liabilities, resulting in negative working capital of
$18,921,000. The decrease in working
capital is primarily due to two Lynx Aviation aircraft loans in the amount of
$31,817,000 which are classified as current due to the short-term nature of the
financing agreements and capital expenditures including the additional
pre-delivery payments for future aircraft deliveries.
Operating activitie
s.
Cash provided by operating activities
for the six months ended September 30, 2007 was $36,879,000 as compared to cash
used by operating activities of $9,550,000 for the six months ended September
30, 2006. The increase in operating cash flows was primarily due to increased
profits as compared to the same period last year and a lower usage of cash from
working capital.
Investing
Activities
. Cash used in investing activities for the six
months ended September 30, 2007 was $145,269,000. Capital expenditures were $155,861,000 for
the six months ended September 30, 2007 which included the purchase of three
Airbus A318 and two Bombardier Q400 aircraft, new leather seat sets for 14
aircraft, the purchase of LiveTV equipment, rotable aircraft components, aircraft
improvements, information technology enhancements, and ground equipment.
Purchase deposits applied to the purchase of three Airbus A318 aircraft, two
Bombardier Q400 aircraft and LiveTV equipment aircraft totaled $28,206,000. Aircraft lease and purchase deposits made for
future aircraft deliveries during the period were $18,054,000. We also received proceeds of $440,000
primarily from the sale of aircraft parts that are held for sale.
Cash used in
investing activities for the six months ended September 30, 2006 was
$82,614,000. Capital expenditures were
$129,083,000 for the six months ended September 30, 2006 which included the
purchase of three Airbus A319 aircraft and one spare engine, the purchase of
LiveTV equipment, rotable aircraft components, aircraft improvements,
information technology enhancements, and ground equipment. We received $43,316,000 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 $23,369,000, including $9,335,000
for pre-delivery payments on Bombardier Q400 aircraft, which was offset by
pre-delivery payments and deposits totaling $26,522,000 applied against the
purchase of three Airbus A319 aircraft, one spare engine and LiveTV equipment.
Financing Activities
.
Cash received
from financing activities for the six months ended September 30, 2007 was
$86,512,000. During the six months ended
September 30, 2007, we borrowed $101,481,000 for the purchase of three Airbus
A318 and two Bombardier Q400 aircraft offset by debt principal payments of
$14,263,000 on 22 of our owned aircraft and $738,000 in financing fees.
Cash provided by
financing activities for the six months ended September 30, 2006 was
$40,566,000. During the six months ended
September 30, 2006, we paid $10,957,000 of debt principal payments on 18 owned
aircraft and we borrowed $52,400,000 for two additional Airbus A319
aircraft. We also were required to
increase our compensating balance at a bank by $750,000 to secure letters of
credit.
34
Other Items that Impact our
Liquidity
We continue to assess our liquidity position in light of our aircraft
purchase commitments and other capital requirements, the economy, our
competition, and other uncertainties surrounding the airline industry. In September 2005, we filed a shelf registration
statement with the SEC, which will enable us to periodically sell up to
$250,000,000 in equity and debt. In
December 2005, in the first offering under this shelf registration statement,
we issued $92,000,000 of 5% convertible notes due 2025. We intend to continue to examine domestic or
foreign bank aircraft financing, bank lines of credit, aircraft
sale-leasebacks, and other transactions as necessary to support our capital and
operating needs. For further information
on our financing plans, activities and commitments, see Contractual
Obligations and Commercial Commitments and Off Balance Sheet Arrangements
below.
Our purchase rights for 17 Airbus aircraft expired
on July 1, 2007. We have options to
purchase ten Bombardier aircraft, the last of which expires in July 2010,
subject to additional extension rights.
We have obtained financing for all of our planned Airbus aircraft
deliveries up to our February 2009 delivery and eight Bombardier aircraft for
which we have firm purchase commitments and expect to have adequate liquidity to
cover our contractual obligations. We
intend to place all Bombardier aircraft financing with Lynx Aviation with
Frontier Holdings and Frontier as guarantors.
However, we cannot predict future trends or predict whether current
trends and conditions will continue. Our
future liquidity and capital resources may be impacted by many factors,
including Risk Factors in Item 1A of our annual report on Form 10-K for the
year ended March 31, 2007.
We currently sublease
approximately one-half 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 for the facility expired in February 2007, and
we are currently on a month-to-month lease. We are moving forward with the
design and construction of a line maintenance facility at DIA. Design has been completed but the project
remains contingent on the ability to offer reasonably priced special facility
bonds to finance the project and to negotiate the related lease document with
DIA. If successful, we anticipate
commencing construction of the project in Spring 2008, with completion within
12 to 18 months. As designed, the
facility would accommodate line maintenance for our mainline fleet and provide
space for our Regional Partners and Lynx Aviation on an ad hoc basis. In the interim, we are seeking short-term use
of facilities around our network to accommodate line maintenance requirements. We continue to analyze the most economically
favorable location for a heavy maintenance facility. We requested proposals for a number of
locations deemed to be operationally acceptable, and have narrowed the list of
candidates to DIA and Colorado Springs.
We are hoping to make a final decision regarding the location of the
heavy maintenance hangar soon. To the
extent a facility is located at an airport other than DIA, we may incur
relocation expenses and higher than normal staff attrition. We may also be forced to contract for third
party maintenance services during a transition period, which would increase our
overall maintenance costs.
35
Contractual
Obligations
The following
table summarizes our contractual obligations as of September 30, 2007:
|
|
Total
|
|
Less than
1 year
|
|
2-3
years
|
|
4-5
years
|
|
After
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
and short-term borrowings - principal (1)
|
|
$
|
565,974
|
|
$
|
62,653
|
|
$
|
67,328
|
|
$
|
90,736
|
|
$
|
345,257
|
|
Long-term debt and
short-term borrowings - interest (1)
|
|
265,638
|
|
36,055
|
|
63,931
|
|
52,175
|
|
113,477
|
|
Operating leases
(2)
|
|
1,611,333
|
|
174,105
|
|
361,305
|
|
334,842
|
|
741,081
|
|
Unconditional
purchase obligations (3) (4) (5)
|
|
577,632
|
|
239,049
|
|
338,583
|
|
|
|
|
|
Total
contractual cash obligations
|
|
$
|
3,020,577
|
|
$
|
511,862
|
|
$
|
831,147
|
|
$
|
477,753
|
|
$
|
1,199,815
|
|
(1)
At September 30, 2007, we had 22 loan agreements for 13 Airbus A319
aircraft and nine Airbus A318 aircraft.
Two of the loans have a term of 10 years and are payable in equal
monthly installments, including interest, payable in arrears. These loans require monthly principal and
interest payments of $218,000 and $215,000, bear interest with rates of 6.71%
and 6.54%, and mature in May and August 2011, at which time a balloon payment
totaling $10,200,000 is due with respect to each loan. The remaining 20 loans have interest rates
based on LIBOR plus margins that adjust quarterly or semi-annually. At September 30, 2007, interest rates for
these loans ranged from 6.63% to 8.38%.
Each of these loans has a term of 12 years, and each loan has balloon
payments ranging from $2,640,000 to $9,312,000 at the end of the term. All of the loans are secured by the
aircraft. Actual interest payments will
change based on changes in LIBOR. In
July 2005, we also entered into a junior loan in the amount of $4,900,000 on an
Airbus A319 aircraft. This loan has a
seven-year term with quarterly installments of approximately $250,000. The loan bears interest at a floating rate
adjusted quarterly based on LIBOR, which was 9.13% at September 30, 2007.
At September 30, 2007, we had two loan agreements
for two Bombardier Q400 aircraft.
These aircraft
loans are variable rate interest only loans that had initial maturity dates of
September 30, 2007. The maturity dates
were extended to October 31, 2007 and can be further extended until December
15, 2007 if necessary. The Company has
secured long-term financing for these aircraft; however, if an operating
certificate is not obtained by Lynx Aviation, the aircraft will be purchased by
Frontier Holdings. A security interest
in the aircraft secures the loan and it is guaranteed by both Frontier and
Frontier Holdings.
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.
Holders may convert the notes into shares of our common stock at a
conversion rate of 96.7352 shares per $1,000 principal amount (representing a
conversion price of approximately $10.34 per share). 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 September 30, 2007, we 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 September 30,
2007. Additionally, we are required to
make additional rent payments to cover the cost of major scheduled maintenance
overhauls of these aircraft. These
additional rent payments are based on the number of flight hours flown and/or
flight departures and are not included as an obligation in the table above
. During the six months ended September 30, 2007 and
2006, additional rent expense to cover the cost of major scheduled maintenance
overhauls of these aircraft totaled $13,225,000, and $13,725,000, respectively,
and are included in maintenance expense in the
36
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. The
contract period is for an 11-year period starting on the date the last aircraft
is placed in service, which is scheduled for December 2008. The service began on March 4, 2007 and
replaced our agreement with Horizon. In
the contractual obligations table above, fixed costs associated with the
Republic and Horizon 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 September 30, 2007, we have remaining firm purchase commitments for ten
additional aircraft from Airbus that have scheduled delivery dates beginning in
February 2008 and continuing through August 2010 and one remaining firm
purchase commitment for one spare Airbus engine scheduled for delivery in
December 2009. We also have eight
remaining firm purchase commitments from Bombardier that all have scheduled
delivery dates 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 $161,000,000 for
commitments for our remaining eight Bombardier aircraft and to re-finance the
two Bombardier aircraft purchased during the quarter ended September 30,
2007. We have secured financing totaling
approximately $64,000,000 to complete the purchase of two of our remaining ten
Airbus aircraft scheduled for delivery in our fourth fiscal quarter. To complete the purchase of the remaining
eight Airbus aircraft scheduled for delivery starting in February 2009, we must
secure additional aircraft financing totaling approximately $256,000,000 assuming
bank financing was used for these remaining aircraft. The terms of the purchase agreements 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 manufacturers. 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 manufacturers 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
September 30, 2007, we had made pre-delivery payments on future aircraft
deliveries totaling $43,197,000 of which $17,572,000 relates to aircraft for
which we have not yet secured financing and $25,625,000 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 10 Airbus aircraft we currently
expect to purchase.
(5)
In
March 2004, we entered into a services agreement with Sabre, Inc. for its
SabreSonic
ä
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.
37
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.
We also provide letters of credit for our workers compensation
insurance. As of September 30, 2007, we
had outstanding letters of credit, bonds, and cash security deposits totaling
$21,015,000, $2,452,000 and $19,982,000 respectively.
We also have an
agreement with a financial institution where we can issue letters of credit of
up to an agreed upon percentage of spare parts inventories less amounts
borrowed under the credit facility. As
of September 30, 2007, we had $17,841,000 available under this facility. We
have reduced the amount available for borrowings by letters of credit issued of
$13,550,000.
In July 2005, we
entered into an additional agreement with another financial institution for a $5,000,000
revolving line of credit that permits us to issue letters of credit up to
$3,500,000. In June 2006, the revolving
line of credit was increased to $5,750,000 and it now permits us to issue
letters of credit up to $5,000,000 and matures in June 2008. As of September 30, 2007, we have utilized
$4,620,000 for letters of credit under this agreement for standby letters of
credit that provide credit support for certain facility leases.
We have a contract
with a bankcard processor that requires us to pledge a certificate of deposit
equal to a certain percentage of our air traffic liability associated with the
estimated amount of bankcard transactions.
As of September 30, 2007, that amount totaled $65,898,000. The amount is adjusted quarterly in arrears
based on our air traffic liability associated with these estimated bankcard
transactions. As of December 1, 2007, we
expect that our requirements will decrease by approximately $5,500,000.
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 September 30, 2007, we met these
financial tests and presently are only obligated to provide the minimum amount
of $100,000 in coverage to ARC. If we
failed the minimum testing requirements, we would be required to increase our
bonding coverage to four times the weekly agency net cash sales (sales net of
refunds and agency commissions). Based on net cash sales remitted to us for the
week ended October 19, 2007, the bond coverage would be increased to $6,483,000
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 products index price is
above the cap, we receive the difference between the index and the cap. When the hedged products 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, and, as such, realized
and mark to market adjustments are included in aircraft fuel expense. The results of operations for the six months
ended September 30, 2007 and 2006 include non-cash mark to market derivative
losses of $2,177,000 and $3,700,000, respectively. Cash settlements for fuel
derivatives contracts for the six months ended September 30, 2007 and 2006 were
receipts of $9,129,000 and $1,274,000, respectively. We have entered into the following swap and
collar agreements that cover periods during our fiscal year 2008:
38
Date
|
|
Product *
|
|
Notional volume ** (barrels per month)
|
|
Period covered
|
|
Price (per gallon or barrel)
|
|
Percentage of estimated
fuel
purchases
|
|
|
|
|
|
|
|
|
|
|
|
January
2007
|
|
Jet A
|
|
100,000
|
|
April 1, 2007 -
June, 30,2007
|
|
Swap priced at
$1.817 per gallon
|
|
26%
|
January
2007
|
|
Crude Oil
|
|
40,000
|
|
July 1, 2007-
September 30, 2007
|
|
$64.70 per barrel cap,
with a floor of $59.15
|
|
10%
|
January
2007
|
|
Crude Oil
|
|
80,000
|
|
October 1, 2007 -
December 31, 2007
|
|
$65.90 per barrel cap,
with a floor of $59.90
|
|
20%
|
January
2007
|
|
Crude Oil
|
|
80,000
|
|
April 1, 2007 -
June, 30,2007
|
|
$59.30 per barrel cap,
with a floor of $49.30
|
|
20%
|
January
2007
|
|
Crude Oil
|
|
80,000
|
|
July 1, 2007-
September 30, 2007
|
|
$60.75 per barrel cap,
with a floor of $50.45
|
|
20%
|
January
2007
|
|
Crude Oil
|
|
80,000
|
|
October 1, 2007 -
December 31, 2007
|
|
$62.00 per barrel cap,
with a floor of $51.10
|
|
20%
|
January
2007
|
|
Crude Oil
|
|
80,000
|
|
January 1, 2008 -
March 31, 2008
|
|
$62.60 per barrel cap,
with a floor of $52.10
|
|
19%
|
*Jet A is Gulf
Coast Jet A fuel. Crude oil is West
Texas Intermediate crude oil.
** One barrel is equal to 42 gallons.
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 six
months ended September 30, 2007 and 2006 were approximately $4,788,000 and
$2,910,000, 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
maintenance 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
39
amounts sufficient
to pay the maturing principal and interest payments on the bonds. As of
September 30, 2007, approximately $562,757,000
principal amount of such bonds were
secured by fuel facility leases at major hubs in which we participate, as to
which each of the signatory airlines has provided indirect guarantees of the
debt. Our exposure is approximately $23,142,000 principal amount of such bonds
based on our most recent consortia participation. Our exposure could increase
if the participation of other carriers decreases or if other carriers
default. The guarantees will expire when
the tax-exempt bonds are paid in full, which ranges from 2011 to 2033. We can exit any of our fuel consortia agreements
with limited penalties and certain advance notice requirements. We have not
recorded a liability on our consolidated balance sheets related to these
indirect guarantees.
Employees
In September 2007,
our dispatchers signed an amended five year collective bargaining agreement
with Frontier. The contract with our dispatchers, who are represented by the
Transport Workers Union (TWU), affects approximately 16 employees.
In March 2006, our
material specialists voted for union representation by the International
Brotherhood of Teamsters (IBT) affecting approximately 22 employees. In September 2007, a four year agreement was
reached between Frontier and the IBT, with an economic re-opener in July 2008,
to correspond to the maintenance union contract.
Critical Accounting
Policies and Estimates
There have been no
material changes to our critical accounting policies and estimates from the
information provided in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies
and Estimates, included in our annual report on Form 10-K for the year ended
March 31, 2007.
40
Item
3. Quantitative and Qualitative
Disclosures About Market Risk
Aircraft Fuel
Our earnings are affected by changes in the price and
availability of aircraft fuel. Market
risk is estimated as a hypothetical 10 percent change in the average cost per
gallon of fuel for the six months ended September 30, 2007. Based on actual fuel usage for the six months
ended September 30, 2007, such a change would have had the effect of increasing
or decreasing our mainline and regional partner aircraft fuel expense for the
quarter ended September 30, 2007 by approximately $24,300,000, 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
$46,800,000, excluding the effects of our fuel hedging arrangements.
Our results of operations for the six months
ended September 30, 2007 include cash settlements on fuel derivative contracts
of $9,129,000 recorded as a decrease to fuel expense and non-cash mark to
market losses of $2,177,000 recorded as an increase in fuel expense with
respect to fuel hedging agreements. As
of September 30, 2007, the fair value of the hedge agreements recorded on the
balance sheet as an asset was $11,552,000.
Interest
We are susceptible to market risk associated with
changes in variable interest rates on long-term debt obligations we incurred
and will incur to finance the purchases of our Airbus aircraft. Interest expense on 76.6% of our debt is
subject to interest rate adjustments every three to six months based upon
changes in the applicable LIBOR rate. A
change in the base LIBOR rate of 100 basis points (1.0%) would have the effect
of increasing or decreasing our annual interest expense by $4,093,000 assuming
the loans outstanding that are subject to interest rate adjustments at
September 30, 2007 totaling $409,305,000 are outstanding for the entire period.
41
Item 4. Controls and Procedures
Evaluation of
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer, or CEO,
and Chief Financial Officer, or CFO, of the effectiveness of our disclosure
controls and procedures as of September 30, 2007. Based on that
evaluation, our management, including our
CEO and CFO, concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act, is recorded, processed,
summarized and reported as specified in the SECs rules and forms, and is
accumulated and communicated to our management, including our CEO and CFO, to
allow timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial
Reporting
There were no changes in our
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f), identified in connection with the evaluation of our
controls performed during the quarter ended September 30, 2006 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART
II. OTHER INFORMATION
Item 4.
Submission
of Matters to a Vote of Security Holders
Our annual meeting of shareholders was held on
September 6, 2007 at which a quorum for the transaction of business was
present. One matter was voted upon, as described below.
Members of the Board of Directors elected at the
meeting were D. Dale Browning, Rita M. Cuddihy, Paul S. Dempsey, Patricia A.
Engels, B. Larae Orullian, Jeff S. Potter, Robert D. Taylor, and James B.
Upchurch. The votes cast with respect to each nominee were as follows:
Director
|
|
For
|
|
Withheld
|
|
|
|
|
|
Mr. Browning
|
|
32,415,069
|
|
586,752
|
Ms. Cuddihy
|
|
32,580,624
|
|
421,197
|
Mr. Dempsey
|
|
32,574,899
|
|
426,922
|
Ms. Engels
|
|
32,571,119
|
|
430,702
|
Ms. Orullian
|
|
32,558,062
|
|
443,759
|
Mr. Potter
|
|
30,899,798
|
|
2,102,023
|
Mr. Taylor
|
|
32,570,773
|
|
431,048
|
Mr. Upchurch
|
|
32,573,053
|
|
428,768
|
42
Item 6. Exhibits
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 Companys 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 Companys 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
Companys 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 Companys Current Report on Form 8-K dated
March 25, 2003).
|
43
Exhibit 10 Material Contracts:
|
|
|
|
10.3(b)*
|
|
Amendment No. 11 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 Companys Annual Report on Form 10-K for the year
ended March 31, 2006).
|
|
|
|
Exhibits 31 and 32
Certifications
|
|
|
|
31.1*
|
|
Certification of President and Chief Executive
Officer of Frontier Airlines Holdings, Inc. pursuant to Section 302
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2*
|
|
Certification of Chief Financial Officer of Frontier
Airlines Holdings, Inc. pursuant to Section 302 Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1**
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2**
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
* Filed herewith.
** Furnished herewith.
44
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: October 26, 2007
|
By:
|
/s/ Paul H. Tate
|
|
Paul H. Tate, Senior
Executive Vice President and
|
|
Chief Financial Officer
|
|
|
Date: October 26, 2007
|
By:
|
/s/ Elissa A. Potucek
|
|
Elissa A. Potucek, Vice
President, Controller,
|
|
Treasurer and Principal
Accounting Officer
|
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