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 its
subsidiaries and the expectations of our company and management. All statements
included in this report that address activities, events or developments that we
expect, believe, intend or anticipate will or may occur in the future, are
forward-looking statements. When used in this document, the words estimate, anticipate,
intend, project, believe and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are inherently subject
to risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated.
These risks and uncertainties include, but are not limited to: the timing of and expense associated with,
expansion and modification of our operations in accordance with our business
strategy or in response to competitive pressures or other factors; failure of
our new markets to perform as anticipated; the inability to achieve a level of
revenue through fares sufficient to obtain profitability due to competition
from other air carriers and excess capacity in the markets we serve; the
inability to obtain sufficient gates at Denver International Airport to
accommodate the expansion of our operations; the inability to successfully
lease or build a new maintenance hangar prior to a potential lease termination
of our primary maintenance hangar 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; the
potential impact of new regulations related to congested airports including the
potential for additional slot restrictions
and an increase in landing fees and other rates aimed toward reducing
peak operations; 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
risk factors are contained in our SEC filings, including without limitation,
our Form 10-K for the year ended March 31, 2007. These risk 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 January 25, 2008, we, in
conjunction with our Regional Partner Republic Airlines, Inc. (Republic)
and our wholly owned subsidiary Lynx Aviation, Inc. (Lynx Aviation),
operated routes linking our Denver hub to 53
15
U.S.
cities spanning the nation from coast to coast, six cities in Mexico, two
cities in Canada and one in Costa Rica.
We also provide service to Mexico from nine 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
mainline fleet in service to 60 jets as of January 25, 2008 (38 of which
we lease and 22 of which we own), consisting of 49 Airbus A319s and 11 Airbus
A318s. During the three and nine months
ended December 31, 2007 and 2006, we increased year-over-year mainline
capacity by 16.3% and 14.1%, respectively, and we increased year-over-year
mainline passenger traffic by 25.3% and 20.0%, respectively.
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
replaced the CRJ 700 aircraft operated by Horizon Air Industries. The Horizon contract expired on return of the
last aircraft in November 2007. We
control the routing, scheduling and ticketing of the Republic 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. We select the markets to which the Republic
fleet flies in order to right-size each market properly. Republic currently provides service to 14
cities, of which six cities are to supplement our mainline service.
In September 2006, we
formed a new subsidiary, Lynx Aviation, Inc. We 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. Lynx Aviation obtained its
operating certificate to provide scheduled air transportation service from the
Federal Aviation Administration (FAA) in December 2007. The aircraft are operated by Lynx Aviation
under its operating certificate.
Lynx
Aviation began revenue service on December 7, 2007 upon receiving FAA
certification. As of January 29,
2008, Lynx Aviation has taken delivery of ten Q400 aircraft and plans
to have all ten aircraft in service by March 2008. Lynx Aviation expects to have its tenth
aircraft delivered on January 29, 2008. Lynx Aviation currently
serves the following destinations: Billings, Montana; Wichita, Kansas; Rapid
City, South Dakota; Albuquerque, New Mexico; Sioux City, Iowa; Oklahoma City
and Tulsa, Oklahoma; and El Paso, Texas.
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. ExpressJet provided this
service between November 15, 2007 and December 6, 2007. These routes are now serviced by Lynx
Aviation.
Following is a list of routes
that we have started serving or have announced our intention to serve from April 1,
2007 through January 25, 2008:
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
|
16
**
We terminated these scheduled routes effective November 26, 2007, January 7,
2008 and January 6, 2008, respectively.
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 routes effective July 10,
2007. In July 2007, we announced that we would no longer provide service
to Reno, Nevada effective September 5, 2007.
In November 2007, we
announced our plan to reinforce capacity to our top destinations to support the
start-up of Lynx Aviation by closing unprofitable routes and increasing
frequencies and capacity in several markets served through our hub at DIA. In January 2008, we discontinued service
to Mexico from several of our non-hub markets, discontinued service to
Guadalajara, Mexico from DIA, and discontinued service from Memphis, Tennessee
to Ft. Lauderdale and Orlando, Florida and Memphis, Tennessee to Las Vegas,
Nevada. We also adjusted seasonal
service in several markets that we serve.
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 270
daily mainline flight departures and arrivals, 47 Regional Partner daily system
flight departures and arrivals and 51 Lynx Aviation 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.
17
Overview
We intend to employ a modest growth strategy while keeping our
operating costs low. One of the key elements to keeping our mainline
costs low is maintaining the same family of Airbus aircraft. This
strategy produces 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. The addition of the
Bombardier Q400 turboprop aircraft operated 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 also keep our operating costs low by operating 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.
As of January 29, 2008, we had remaining firm purchase commitments
for ten Airbus 320 aircraft from Airbus.
Our contract with Republic also calls for an additional seven 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
environment. 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.
Highlights
from the Quarter
·
|
|
Lynx
Aviation obtained its operating certificate and began revenue service on
December 7, 2007.
|
|
|
|
·
|
|
We
achieved record load factors during the months of October and
November 2007.
|
|
|
|
·
|
|
We
took delivery of six Bombardier Q400 aircraft.
|
|
|
|
·
|
|
We
launched the Frontier gift card which may be purchased and redeemed on-line
at FrontierAirlines.com.
|
|
|
|
·
|
|
We
announced that we will build our new heavy maintenance facility at the
Colorado Springs Airport in Colorado Springs, Colorado.
|
Outlook
Fuel costs have continued to rise sharply during our second and third
fiscal quarters, as crude oil reached $100 a barrel in early January 2008. Crude oil has decreased slightly in the past
few weeks and on January 29, 2008 was $93 per barrel.
We had hedged 46%, 30%, and 40% of our fuel
purchases during the quarters ended June 30, 2007, September 30,
2007, and December 31, 2007 respectively, with realized settlements
resulting in hedging gains of $4,337,000, $4,792,000 and $12,829,000,
respectively. For the three months ended
March 31, 2008, we currently have 22% of estimated fuel purchases hedged
in crude oil and 24% hedged for Gulf Coast Jet A crack spreads. For the quarters ending June 30, 2008, September 30,
2008, December 31, 2008 and March 31, 2009, we have, using crude oil
derivatives, hedged an estimated 25% of our fuel purchases for each quarter in
a barrel price range from $87 to $105 with pricing specific to a particular
fiscal quarter. We also have Gulf Coast
Jet A crack spread derivatives for the June and September fiscal 2008
quarters at 42% and 45%, respectively, of estimated usage.
Our fuel hedging
activities do not qualify as hedging instruments as defined under SFAS
133. As such, changes in the fair value
of our hedges are recognized in earnings in the current period. This will cause fluctuations in earnings due
to the change in the non-cash mark to market valuations of these hedges prior
to settlement. The hedging activities
are discussed in Hedging Transactions below.
18
In December 2006, our Board of Directors approved a plan to replace
all of our Airbus aircraft seats with leather seats that have light weight
composite material with the project scheduled for completion in May 2008.
The lighter seats are expected to produce fuel savings and have a new design
allowing for more legroom. We also began adding four seats per Airbus aircraft
in November 2007 with the project scheduled for completion in July 2008. We have installed the new leather seats on 29
of our Airbus aircraft to date and have added seats on nine aircraft. We have accelerated the depreciation on our
old seats on our owned aircraft, which increased depreciation by $3,228,000 for
the nine months ended December 31, 2007.
We anticipate additional accelerated depreciation expense of
approximately $342,000. The costs to
purchase these additional aircraft seats are included in the Contractual
Obligations Table in the Liquidity and Capital Resources section.
Throughout
the third fiscal quarter, we began making several network adjustments that will
become effective throughout our fiscal fourth quarter to better align to our
strengths. We implemented more
constrained day of week capacity deployment and reduced capacity or eliminated
service in several non-Denver domestic markets, non-Denver point-to-point
flying to Mexico, and red-eye flying.
On
January 24, 2008, we announced our intent to sell four of our 22 owned
Airbus aircraft. This will allow us to
slow capacity growth and increase our cash position.
These
changes have resulted in a more modest projected year-over year mainline growth
rate of 5% - 6% for the March 2008 quarter versus the originally scheduled
11% to 12% growth. For the entire
mainline and regional network, capacity growth has been reduced from a
scheduled 20% to a projected 14% for the March 2008 quarter. These changes are already having an impact on
our March quarter traffic and revenue advanced bookings, as we are seeing
good year-over-year improvements in booked load factor and unit revenue.
Looking beyond the March quarter, we are finalizing more adjustments that
will further rationalize our network and leverage our position in Colorado and
our Denver hub.
We expect our fourth quarter of fiscal year 2008 mainline CASM to
increase as compared to our first and second quarters of fiscal year 2008 due
to higher fuel costs.
Based on current levels of fuel prices, we do
not expect to be profitable in the fourth quarter of fiscal year 2008.
On January 24,
2008, we announced our intent to sell four of our 22 owned Airbus
aircraft. This will allow us to slow
capacity growth and increase our cash position.
Results
of Operations
Frontier Holdings
includes the following operations: our mainline operations, which consists of
60 Airbus aircraft; our Regional Partner operations operated by Republic,
Horizon and ExpressJet (Regional Partners); and Lynx Aviation, which was in
its start-up phase of operations until December 7, 2007 when it began
revenue operations. Lynx Aviation and
our Regional Partners services are separate and apart from our mainline
operations.
To evaluate the separate
segments of our operations, management has segregated the revenues and costs of
our operations as follows: Passenger
revenue for our Regional Partners and for Lynx Aviation represents the revenue
collected for flights operated by these carriers. Operating expenses for Regional Partner
flights include all direct costs associated with the 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 our
Regional Partners in which we reimburse these expenses plus a margin. Operating expenses for Lynx Aviation include
all direct costs associated with the flights and the aircraft including
aircraft lease and depreciation, maintenance and crew costs. Operating expenses for both Regional Partners
and Lynx Aviation 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. We also allocate indirect expenses between mainline, Regional
Partners and Lynx Aviation operations by using departures, available seat
miles, or passengers as a percentage of system combined departures, available
seat miles or passengers.
19
The following table
provides certain of our financial and operating data for the three and nine months
ended December 31, 2007 and 2006.
Mainline and combined data exclude the expenses of Lynx Aviation prior
to receiving FAA approval to fly. The
start-up costs excluded were $3,396,000 and $8,454,000 for three and nine
months ended December 31, 2007, respectively, and $920,000 and $1,677,000
for the three and nine months ended December 31, 2006, respectively. Lynx Aviation began revenue service on December 7,
2007. We do not believe that the results
of Lynx Aviation during the quarter ended December 31, 2007 are indicative
of future results because the fleet was flown in sub-optimal routes, additional
crew were required for training and Lynx Aviation had low completion
factors. The costs of operations of Lynx
Aviation for the month of December 2007 were $4,096,000.
|
|
Three Months Ended
December 31,
|
|
|
|
Nine Months Ended
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
Selected Operating Data - Mainline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
|
$292,251
|
|
$237,912
|
|
22.8
|
%
|
$923,299
|
|
$783,996
|
|
17.8
|
%
|
Revenue
passengers carried (000s)
|
|
2,521
|
|
2,086
|
|
20.9
|
%
|
8,145
|
|
6,918
|
|
17.7
|
%
|
Revenue
passenger miles (RPMs) (000s) (2)
|
|
2,404,926
|
|
1,919,890
|
|
25.3
|
%
|
7,734,437
|
|
6,443,388
|
|
20.0
|
%
|
Available seat
miles (ASMs) (000s) (3)
|
|
3,133,507
|
|
2,694,959
|
|
16.3
|
%
|
9,551,889
|
|
8,373,036
|
|
14.1
|
%
|
Passenger load
factor (4)
|
|
76.7
|
%
|
71.2
|
%
|
5.5
|
pts.
|
81.0
|
%
|
77.0
|
%
|
4.0
|
pts.
|
Break-even load
factor (5)
|
|
80.9
|
%
|
76.8
|
%
|
4.1
|
pts.
|
79.9
|
%
|
77.4
|
%
|
2.5
|
pts.
|
Block hours (6)
|
|
66,023
|
|
56,761
|
|
16.3
|
%
|
199,026
|
|
173,382
|
|
14.8
|
%
|
Departures
|
|
25,803
|
|
23,644
|
|
9.1
|
%
|
79,779
|
|
72,431
|
|
10.1
|
%
|
Average seats
per departure
|
|
128.9
|
|
129.7
|
|
(0.6
|
)%
|
128.9
|
|
129.6
|
|
(0.5
|
)%
|
Average stage
length
|
|
942
|
|
879
|
|
7.2
|
%
|
929
|
|
892
|
|
4.1
|
%
|
Average length
of haul
|
|
954
|
|
920
|
|
3.7
|
%
|
950
|
|
931
|
|
2.0
|
%
|
Average daily
block hour utilization (7)
|
|
12.0
|
|
11.2
|
|
7.1
|
%
|
12.2
|
|
11.8
|
|
3.4
|
%
|
Passenger yield
per RPM (cents) (8)
|
|
11.99
|
|
12.20
|
|
(1.7
|
)%
|
11.83
|
|
12.05
|
|
(1.8
|
)%
|
Total yield per
RPM (cents) (9), (10)
|
|
12.67
|
|
12.95
|
|
(2.2
|
)%
|
12.42
|
|
12.63
|
|
(1.7
|
)%
|
Passenger yield
per ASM (RASM) (cents) (11)
|
|
9.20
|
|
8.69
|
|
5.9
|
%
|
9.58
|
|
9.28
|
|
3.2
|
%
|
Total yield per
ASM (cents) (12)
|
|
9.72
|
|
9.23
|
|
5.3
|
%
|
10.06
|
|
9.72
|
|
3.5
|
%
|
Cost per ASM
(cents) (CASM)
|
|
10.00
|
|
9.75
|
|
2.6
|
%
|
9.75
|
|
9.65
|
|
1.0
|
%
|
Fuel expense per
ASM (cents)
|
|
3.71
|
|
3.03
|
|
22.4
|
%
|
3.44
|
|
3.27
|
|
5.2
|
%
|
Cost per ASM
excluding fuel (cents) (13)
|
|
6.29
|
|
6.72
|
|
(6.4
|
)%
|
6.31
|
|
6.38
|
|
(1.1
|
)%
|
Average fare
(14)
|
|
$104.16
|
|
$101.68
|
|
2.4
|
%
|
$102.97
|
|
$102.76
|
|
0.2
|
%
|
Average aircraft
in service
|
|
60.0
|
|
55.0
|
|
9.1
|
%
|
59.5
|
|
53.5
|
|
11.2
|
%
|
Aircraft in
service at end of period
|
|
60
|
|
55
|
|
9.1
|
%
|
60
|
|
55
|
|
9.1
|
%
|
Average age of
aircraft at end of period (years)
|
|
3.8
|
|
3.1
|
|
22.6
|
%
|
3.8
|
|
3.1
|
|
22.6
|
%
|
Average fuel
cost per gallon (15)
|
|
$2.58
|
|
$2.12
|
|
21.7
|
%
|
$2.37
|
|
$2.28
|
|
3.9
|
%
|
Fuel gallons
consumed (000s)
|
|
45,103
|
|
38,535
|
|
17.0
|
%
|
138,617
|
|
119,935
|
|
15.6
|
%
|
20
|
|
Three Months Ended
December 31,
|
|
|
|
Nine Months Ended
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data Lynx Aviation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
|
$
|
2,659
|
|
|
|
NM
|
|
$
|
2,659
|
|
|
|
NM
|
|
Revenue
passengers carried (000s)
|
|
31
|
|
|
|
NM
|
|
31
|
|
|
|
NM
|
|
Revenue
passenger miles (RPMs) (000s) (2)
|
|
13,641
|
|
|
|
NM
|
|
13,641
|
|
|
|
NM
|
|
Available seat
miles (ASMs) (000s) (3)
|
|
21,496
|
|
|
|
NM
|
|
21,496
|
|
|
|
NM
|
|
Passenger load
factor (4)
|
|
63.5
|
%
|
|
|
NM
|
|
63.5
|
%
|
|
|
NM
|
|
Passenger yield
per RPM (cents) (8)
|
|
19.49
|
|
|
|
NM
|
|
19.49
|
|
|
|
NM
|
|
Passenger yield
per ASM (cents) (11)
|
|
12.37
|
|
|
|
NM
|
|
12.37
|
|
|
|
NM
|
|
Cost per ASM
(cents) (CASM)
|
|
19.05
|
|
|
|
NM
|
|
19.05
|
|
|
|
NM
|
|
Average fare
|
|
$
|
85.42
|
|
|
|
NM
|
|
$
|
85.42
|
|
|
|
NM
|
|
Aircraft in service
at end of period
|
|
6
|
|
|
|
NM
|
|
6
|
|
|
|
NM
|
|
NM = Change not
meaningful.
|
|
Three Months Ended
December 31,
|
|
|
|
Nine Months Ended
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data - Regional Partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
|
$
|
26,640
|
|
$
|
22,593
|
|
17.9
|
%
|
$
|
88,390
|
|
$
|
75,053
|
|
17.8
|
%
|
Revenue
passengers carried (000s)
|
|
270
|
|
215
|
|
25.6
|
%
|
890
|
|
720
|
|
23.6
|
%
|
Revenue
passenger miles (RPMs) (000s) (2)
|
|
187,538
|
|
140,401
|
|
33.6
|
%
|
575,934
|
|
457,635
|
|
25.9
|
%
|
Available seat
miles (ASMs) (000s) (3)
|
|
268,381
|
|
203,705
|
|
31.7
|
%
|
781,371
|
|
619,229
|
|
26.2
|
%
|
Passenger load
factor (4)
|
|
69.9
|
%
|
68.9
|
%
|
1.0
|
pts.
|
73.7
|
%
|
73.9
|
%
|
(0.2
|
)pts.
|
Passenger yield
per RPM (cents) (8)
|
|
14.21
|
|
16.09
|
|
(11.7
|
)%
|
15.35
|
|
16.40
|
|
(6.4
|
)%
|
Passenger yield
per ASM (cents) (11)
|
|
9.93
|
|
11.09
|
|
(10.5
|
)%
|
11.31
|
|
12.12
|
|
(6.7
|
)%
|
Cost per ASM
(cents) (CASM)
|
|
14.37
|
|
12.84
|
|
11.9
|
%
|
14.03
|
|
13.51
|
|
3.8
|
%
|
Average fare
|
|
$
|
98.82
|
|
$
|
105.31
|
|
(6.2
|
)%
|
$
|
99.29
|
|
$
|
104.19
|
|
(4.7
|
)%
|
Aircraft in
service at end of period
|
|
10
|
|
9
|
|
11.1
|
%
|
10
|
|
9
|
|
11.1
|
%
|
|
|
Three Months Ended
December 31,
|
|
|
|
Nine Months Ended
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
Selected Operating Data - Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue (000s) (1)
|
|
$
|
321,550
|
|
$
|
260,505
|
|
23.4
|
%
|
$
|
1,014,348
|
|
$
|
859,049
|
|
18.1
|
%
|
Revenue
passengers carried (000s)
|
|
2,822
|
|
2,301
|
|
22.6
|
%
|
9,066
|
|
7,638
|
|
18.7
|
%
|
Revenue
passenger miles (RPMs) (000s) (2)
|
|
2,606,105
|
|
2,060,291
|
|
26.5
|
%
|
8,324,012
|
|
6,901,023
|
|
20.6
|
%
|
Available seat
miles (ASMs) (000s) (3)
|
|
3,423,384
|
|
2,898,664
|
|
18.1
|
%
|
10,354,756
|
|
8,992,265
|
|
15.2
|
%
|
Passenger load
factor (4)
|
|
76.1
|
%
|
71.1
|
%
|
5.0.
|
pts
|
80.4
|
%
|
76.7
|
%
|
3.7
|
pts.
|
Passenger yield
per RPM (cents) (8)
|
|
12.19
|
|
12.47
|
|
(2.2
|
)%
|
12.08
|
|
12.34
|
|
(2.1
|
)%
|
Total yield per
RPM (cents) (9), (10)
|
|
12.81
|
|
13.17
|
|
(2.7
|
)%
|
12.63
|
|
12.88
|
|
(1.9
|
)%
|
Yield per ASM
(cents) (11)
|
|
9.28
|
|
8.86
|
|
4.7
|
%
|
9.71
|
|
9.47
|
|
2.5
|
%
|
Total yield per
ASM (cents) (12)
|
|
9.75
|
|
9.36
|
|
4.2
|
%
|
10.16
|
|
9.88
|
|
2.8
|
%
|
Cost per ASM
(cents)
|
|
10.40
|
|
9.96
|
|
4.4
|
%
|
10.09
|
|
9.91
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
(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 on our Regional Partners and Lynx
Aviation to mainline flights is included in our mainline passenger revenue.
|
|
|
|
|
(2)
|
Revenue passenger miles,
or RPMs, are determined by multiplying the number of fare-paying passengers
carried by the distance flown. This represents the number of miles flown by
revenue paying passengers.
|
|
|
|
|
(3)
|
Available seat miles, or
ASMs, are determined by multiplying the number of seats available for
passengers by the number of miles flown.
|
|
|
|
|
(4)
|
Passenger load factor is
determined by dividing revenue passenger miles by available seat miles. This
represents the percentage of aircraft seating capacity that is actually
utilized.
|
|
|
|
|
(5)
|
Break-even load factor is
the passenger load factor that will result in operating revenues being equal
to operating expenses, assuming constant revenue per passenger mile and
expenses.
|
|
|
|
|
|
A reconciliation of the
components of the calculation of mainline break-even load factor is as
follows:
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Net loss
|
|
$
|
32,508
|
|
$
|
14,406
|
|
$
|
18,674
|
|
$
|
9,940
|
|
Income tax
benefit
|
|
|
|
8,309
|
|
|
|
4,578
|
|
Passenger
revenue Mainline
|
|
292,251
|
|
237,912
|
|
923,299
|
|
783,996
|
|
Passenger
revenue - Regional Partners
|
|
26,640
|
|
22,593
|
|
88,390
|
|
75,053
|
|
Passenger
revenue Lynx Aviation
|
|
2,659
|
|
|
|
2,659
|
|
|
|
Regional
Partners expense
|
|
(38,579
|
)
|
(26,163
|
)
|
(109,602
|
)
|
(83,679
|
)
|
Lynx Aviation
expenses
|
|
(7,492
|
)
|
(920
|
)
|
(12,550
|
)
|
(1,677
|
)
|
Charter revenue
|
|
(3,945
|
)
|
(3,688
|
)
|
(8,440
|
)
|
(7,293
|
)
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue - mainline (excluding charter) required to break even
|
|
$
|
304,042
|
|
$
|
252,449
|
|
$
|
902,430
|
|
$
|
780,918
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Calculation of mainline break-even load factor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue- mainline (excluding charter) required to break even ($000s)
|
|
$
|
304,042
|
|
$
|
252,499
|
|
$
|
902,430
|
|
$
|
780,918
|
|
Mainline yield
per RPM (cents)
|
|
11.99
|
|
12.20
|
|
11.83
|
|
12.05
|
|
|
|
|
|
|
|
|
|
|
|
Mainline RPMs
(000s) to break even assuming constant yield per RPM
|
|
2,535,796
|
|
2,069,664
|
|
7,628,318
|
|
6,480,647
|
|
Mainline ASMs
(000s)
|
|
3,133,507
|
|
2,694,959
|
|
9,551,889
|
|
8,373,036
|
|
Mainline
break-even load factor
|
|
80.9
|
%
|
76.8
|
%
|
79.9
|
%
|
77.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
(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 mainline passenger revenue excluding charter revenue is as
follows:
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Passenger
revenues - as reported
|
|
$
|
321,550
|
|
$
|
260,505
|
|
$
|
1,014,348
|
|
$
|
859,049
|
|
Less: Passenger
revenues - Regional Partners
|
|
26,640
|
|
22,593
|
|
88,390
|
|
75,053
|
|
Less: Passenger
revenues Lynx Aviation
|
|
2,659
|
|
|
|
2,659
|
|
|
|
Passenger
revenue mainline service
|
|
292,251
|
|
237,912
|
|
923,299
|
|
783,996
|
|
Less: charter
revenue
|
|
3,945
|
|
3,688
|
|
8,440
|
|
7,293
|
|
Passenger
revenues - mainline (excluding charter, Regional Partners and Lynx Aviation)
|
|
288,306
|
|
234,224
|
|
914,859
|
|
776,703
|
|
Add: Passenger
revenues - Regional Partners
|
|
26,640
|
|
22,593
|
|
88,390
|
|
75,053
|
|
Add: Passenger
revenues Lynx Aviation
|
|
2,659
|
|
|
|
2,659
|
|
|
|
Passenger
revenues, system combined
|
|
$
|
317,605
|
|
$
|
256,817
|
|
$
|
1,005,908
|
|
$
|
851,756
|
|
|
(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 non-cash mark to market derivative losses of $3,535,000 and
$5,712,000 for the three and nine months ended December 31, 2007,
respectively. Average fuel cost per gallon for the three and nine months
ended December 31, 2006 includes a non-cash mark to market derivative
gain of $1,394,000 and a non-cash mark to market derivative loss of
$2,306,000, respectively.
|
23
The break-out of our mainline, Regional Partners and
Lynx Aviation operations from our consolidated statement of operations for the
three and nine months ended December 31, 2007 and 2006 are as follows (in
thousands):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
%
|
|
December 31,
|
|
%
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger-
Mainline
|
|
$
|
292,251
|
|
$
|
237,912
|
|
22.8
|
%
|
$
|
923,299
|
|
$
|
783,996
|
|
17.8
|
%
|
Passenger -
Regional Partner
|
|
26,640
|
|
22,593
|
|
17.9
|
%
|
88,390
|
|
75,053
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger - Lynx
Aviation
|
|
2,659
|
|
|
|
100.0
|
%
|
2,659
|
|
|
|
100.0
|
%
|
Cargo
|
|
1,424
|
|
1,653
|
|
(13.9
|
)%
|
4,587
|
|
5,234
|
|
(12.4
|
)%
|
Other
|
|
10,935
|
|
9,095
|
|
20.2
|
%
|
32,711
|
|
24,248
|
|
34.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
333,909
|
|
271,253
|
|
23.1
|
%
|
1,051,646
|
|
888,531
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight
operations
|
|
44,386
|
|
39,044
|
|
13.7
|
%
|
134,129
|
|
118,022
|
|
13.6
|
%
|
Aircraft fuel
|
|
116,327
|
|
81,592
|
|
42.6
|
%
|
328,389
|
|
273,457
|
|
20.1
|
%
|
Aircraft lease
|
|
28,315
|
|
27,553
|
|
2.8
|
%
|
84,892
|
|
80,761
|
|
5.1
|
%
|
Aircraft and
traffic servicing
|
|
48,084
|
|
43,055
|
|
11.7
|
%
|
134,697
|
|
120,159
|
|
12.1
|
%
|
Maintenance
|
|
24,431
|
|
22,357
|
|
9.3
|
%
|
75,662
|
|
65,017
|
|
16.4
|
%
|
Promotion and
sales
|
|
32,072
|
|
28,240
|
|
13.6
|
%
|
102,440
|
|
86,514
|
|
18.4
|
%
|
General and
administrative
|
|
14,764
|
|
11,881
|
|
24.3
|
%
|
43,565
|
|
39,851
|
|
9.3
|
%
|
Operating
expenses - Regional Partners
|
|
38,579
|
|
26,163
|
|
47.5
|
%
|
109,602
|
|
83,679
|
|
31.0
|
%
|
Operating
expenses - Lynx Aviation
|
|
7,492
|
|
920
|
|
714.3
|
%
|
12,550
|
|
1,677
|
|
648.4
|
%
|
Employee
separation costs and other charges (reversals)
|
|
442
|
|
|
|
100.0
|
%
|
442
|
|
(14
|
)
|
100.0
|
%
|
Gains on sales
of assets, net
|
|
(4
|
)
|
(8
|
)
|
(50.0
|
)%
|
|
|
(655
|
)
|
100.0
|
%
|
Post-retirement
liability curtailment gain
|
|
(6,361
|
)
|
|
|
100.0
|
%
|
(6,361
|
)
|
|
|
100.0
|
%
|
Depreciation
|
|
10,984
|
|
8,922
|
|
23.1
|
%
|
33,091
|
|
24,758
|
|
33.7
|
%
|
Total operating
expenses
|
|
359,511
|
|
289,719
|
|
24.1
|
%
|
1,053,098
|
|
893,226
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
interruption insurance proceeds
|
|
|
|
|
|
|
|
300
|
|
868
|
|
(65.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(25,602
|
)
|
(18,466
|
)
|
38.6
|
%
|
(1,152
|
)
|
(3,827
|
)
|
(69.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
24
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 nine months ended December 31, 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
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
|
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
|
|
9.33
|
|
95.9
|
%
|
8.83
|
|
95.7
|
%
|
9.67
|
|
96.1
|
%
|
9.37
|
|
96.4
|
%
|
Cargo
|
|
0.04
|
|
0.5
|
%
|
0.06
|
|
0.7
|
%
|
0.05
|
|
0.5
|
%
|
0.06
|
|
0.6
|
%
|
Other
|
|
0.35
|
|
3.6
|
%
|
0.34
|
|
3.6
|
%
|
0.34
|
|
3.4
|
%
|
0.29
|
|
3.0
|
%
|
Total revenues
|
|
9.72
|
|
100.0
|
%
|
9.23
|
|
100.0
|
%
|
10.06
|
|
100.0
|
%
|
9.72
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight operations
|
|
1.42
|
|
14.6
|
%
|
1.45
|
|
15.7
|
%
|
1.41
|
|
14.0
|
%
|
1.41
|
|
14.5
|
%
|
Aircraft fuel
expense
|
|
3.71
|
|
38.2
|
%
|
3.03
|
|
32.8
|
%
|
3.44
|
|
34.2
|
%
|
3.27
|
|
33.6
|
%
|
Aircraft lease
expense
|
|
0.90
|
|
9.3
|
%
|
1.02
|
|
11.1
|
%
|
0.89
|
|
8.8
|
%
|
0.97
|
|
9.9
|
%
|
Aircraft and
traffic servicing
|
|
1.54
|
|
15.8
|
%
|
1.60
|
|
17.3
|
%
|
1.41
|
|
14.0
|
%
|
1.43
|
|
14.8
|
%
|
Maintenance
|
|
0.78
|
|
8.0
|
%
|
0.83
|
|
9.0
|
%
|
0.79
|
|
7.9
|
%
|
0.78
|
|
8.0
|
%
|
Promotion and
sales
|
|
1.02
|
|
10.5
|
%
|
1.05
|
|
11.3
|
%
|
1.07
|
|
10.7
|
%
|
1.03
|
|
10.6
|
%
|
General and
administrative
|
|
0.47
|
|
4.8
|
%
|
0.44
|
|
4.8
|
%
|
0.46
|
|
4.6
|
%
|
0.48
|
|
4.9
|
%
|
Employee
separation and other charges
|
|
0.01
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
Loss (gains) on
sales of assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
Postretirement
liability curtailment gain
|
|
(0.20
|
)
|
(2.1
|
)%
|
|
|
|
|
(0.07
|
)
|
(0.7
|
)%
|
|
|
|
|
Depreciation
|
|
0.35
|
|
3.6
|
%
|
0.33
|
|
3.6
|
%
|
0.35
|
|
3.4
|
%
|
0.30
|
|
3.0
|
%
|
Total operating
expenses
|
|
10.00
|
|
102.9
|
%
|
9.75
|
|
105.6
|
%
|
9.75
|
|
96.9
|
%
|
9.65
|
|
99.3
|
%
|
25
Three
months ended December 31, 2007 as compared to three months ended December 31,
2006
We had a consolidated net
loss of $32,507,000 or 89¢ per diluted share for the quarter ended December 31,
2007, as compared to a consolidated net loss of $14,406,000 or 39¢ per diluted
share for the quarter ended December 31, 2006. Included in our net loss for the quarter
ended December 31, 2007 was a non-cash mark to market derivative loss
which increased fuel expense by $3,535,000.
Also included in net loss for the quarter ended December 31, 2007
was $4,833,000 of net start-up costs and losses for Lynx Aviation, $354,000 in
accelerated depreciation for our seat replacement project, $442,000 in employee
separation costs, offset by a post-retirement liability curtailment gain of
$6,361,000. These items increased our
net loss by 9¢ per share for the quarter ended December 31, 2007. Included in our net loss for the quarter
ended December 31, 2006 was a non-cash mark to market derivative gain
which decreased fuel expense by $1,394,000 and $920,000 of start-up costs for
Lynx Aviation. These items, net of
income taxes, decreased our net loss by 4¢ per share for the quarter ended December 31,
2006.
In December 2006, two major snow storms in Denver, Colorado had a
significant negative impact on our operating results for the quarter ended December 31,
2006. We cancelled 875 flights, 104,567
passengers were impacted and one storm completely shut down DIA for almost 48
hours. We estimate that this storm
reduced our revenue for the quarter ended December 31, 2006 by
approximately $13,200,000 ($12,200,000 in mainline passenger revenue and
$1,000,000 in regional partner revenue).
In addition, the snow storms increased many variable costs including
$1,200,000 in additional glycol expenses over the prior year and $889,000 in
additional wages related to our flight crews and station personnel, offset by a
reduction of fuel, landing fees, maintenance expenses and catering expenses of
$3,306,000.
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 $292,251,000 for the quarter ended December 31,
2007 compared to $237,912,000 for the quarter ended December 31, 2006, an
increase of 22.8%. 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 89.9% of our mainline passenger revenues and
increased $50,534,000 or 23.8% over the prior year. The increase in flown ticket sales resulted
from a 16.3% increase in ASMs, or $34,513,000, an increase of 5.5 points in
load factor, or $19,068,000, offset by a decrease of 1.2% in our yields from
ticket sales, or $3,047,000. The
percentage of revenues generated from other sources compared to total mainline
passenger revenue is as follows: Administrative fees were 2.7%, revenue
recognized for tickets that were not used within one year from issuance were
3.3%, charter revenues were 1.3% and revenue from our co-branded credit card
were 2.1%. These sources of revenue
increased total mainline passenger revenues by $5,108,000 as compared to the
prior year, an increase of 22.7%. This increase is primarily due to our 20.9%
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 $10,935,000 and $9,095,000 for the quarter ended December 31,
2007 and December 31, 2006, respectively, an increase of 20.2% and each
were 3.6% of total mainline operating revenues for the quarters ended December 31,
2007 and 2006, respectively. The
increase in other revenues was primarily due to the increase in the revenues
earned from carrying excess baggage, ground handling services provided to other
carriers, and the marketing component of our co-branded credit card
26
agreement and other
partnership agreements.
Mainline Operating Expenses
Total
mainline operating expenses were $313,440,000 and $262,636,000 for the quarters
ended December 31, 2007 and 2006, respectively, and represented 102.9% and
105.6% of total mainline revenues, respectively. Mainline operating expenses decreased as a
percentage of mainline revenues during the quarter ended December 31, 2007
as compared to the quarter ended December 31, 2006 largely a result of the
2.6% increase in mainline CASM as compared to a 5.9% increase in mainline RASM
Salaries,
Wages and Benefits
.
We
record salaries, wages and benefits within the specific expense category identified
in our statements of operations to which they pertain. Salaries, wages and benefits increased 17.5%
to $71,058,000 compared to $60,482,000, and were 23.3% and 24.3% of total
mainline revenues for the quarters ended December 31, 2007 and 2006,
respectively. Salaries, wages and
benefits increased over the prior comparable period largely as a result of an
increase in the number of full-time equivalent employees to support our
continued capacity growth. Our full-time equivalent employee count increased 15.6%
from approximately 4,500 at December 31, 2006 to 5,200 at December 31,
2007. The increase in employees and related salaries, wages and benefits is to
support the 16.3% increase in mainline capacity.
Flight Operations.
Flight operations expenses increased 13.7% to $44,386,000 as compared to
$39,044,000, and were 14.6% and 15.7% of total mainline revenues for the
quarters ended December 31, 2007 and 2006, respectively. Flight operations expenses increased due to
an increase in mainline block hours from 56,761 for the quarter ended December 31,
2006 to 66,023 for the quarter ended December 31, 2007, an increase of
16.3%. Flight operations expenses
include all expenses related directly to the operation such as insurance
expenses, pilot and flight attendant compensation, in-flight catering, crew
overnight expenses, flight dispatch and flight operations and flight operations
administrative expenses but excludes depreciation of owned aircraft and
aircraft lease expenses.
Pilot and flight attendant salaries before payroll
taxes and benefits increased 11.5% to $26,376,000 compared to $23,649,000, and
were 9.0% and 9.9% of passenger mainline revenues for the quarters ended December 31,
2007 and 2006, respectively. We employed
approximately 1,690 pilots and flight attendants at December 31, 2007 as
compared to 1,520 at December 31, 2006, an increase of 11.2%. We increased the number of pilots and flight
attendants over the prior year to support the 16.3% increase in block hours and
the 9.1% increase in the average aircraft in service.
Aircraft insurance expenses totaled
$2,041,000 (0.7% of total mainline revenues) and $2,460,000 (1.0% of total
mainline revenues) for the quarters ended December 31, 2007 and 2006,
respectively. Aircraft insurance
expenses were 81¢ and $1.18 per passenger for the quarters ended December 31,
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.
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 expenses
also include cash settlements and non-cash mark to market hedge adjustments
related to our fuel hedging activities.
Aircraft fuel expenses of $116,327,000 for 45,103,000 gallons used and
$81,592,000 for 38,535,000 gallons used resulted in an average fuel cost of $2.58
and $2.12 per gallon for the quarters ended December 31, 2007 and 2006,
respectively, an increase of 21.7%.
Aircraft fuel expenses represented 38.2% and 32.8% of total mainline
revenues for the quarters ended December 31, 2007 and 2006, respectively. Fuel prices are subject to change weekly, as
we purchase a very small portion in advance for inventory. Fuel consumption for the quarters ended December 31,
2007 and 2006 averaged 683 and 679 gallons per block hour, respectively, an
increase of 0.6%. The fuel burn
increased largely a result of the 5.5 point increase in our load factor during
the quarter ended December 31, 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 non-cash mark to market derivative gains and losses, were
$2.50 and $2.15 per gallon for the quarters ended December 31, 2007 and
2006, respectively, an increase of 16.3%.
Our
27
aircraft fuel expenses for the quarter ended December 31,
2007 include a non-cash mark to market derivative loss of $3,535,000 recorded
as an increase to fuel expense and cash receipts of $12,829,000 received from a
counter-party recorded as a decrease in fuel expense. Our aircraft fuel expenses for the quarter
ended December 31, 2006 include a non-cash mark to market derivative gain
of $1,394,000 recorded as a decrease to fuel expense and cash settlements of
$3,791,000 paid to a counter-party recorded as an increase in fuel expense.
Aircraft and Engine Lease.
Aircraft lease expenses totaled $28,315,000 (9.3% of total mainline revenues) and
$27,553,000 (11.1% of total mainline revenues) for the quarters ended December 31,
2007 and 2006, respectively, an increase of 2.8%. The increase in lease expenses is due to an
increase in the average number of leased aircraft from 37.0 to 38.0, or 2.7%.
Aircraft
and Traffic Servicing.
Aircraft and traffic servicing
expenses were $48,084,000 and $43,055,000, for the quarters ended December 31,
2007 and 2006, respectively, an increase of 11.7%, and represented 15.8% and
17.3% 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, glycol de-icing expense, 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 or as rates and charges at airports where we operate are increased. As of December 31, 2007, we served 41
mainline-only cities compared to 42 mainline-only cities as of December 31,
2006, a decrease of 2.4%. During the
quarter ended December 31, 2007, our departures increased to 25,803 from
23,644, an increase of 9.1%. Aircraft
and traffic servicing expenses were $1,864 per departure for the quarter ended December 31,
2007 as compared to $1,821 per departure for the quarter ended December 31,
2006, an increase of $43 per departure or 2.4%. During the quarter ended December 31,
2007, several snow storms increased many variable costs including $1,445,000 in
additional glycol expenses over the prior year or $56 per departure.
Maintenance.
Maintenance expenses of $24,431,000 and
$22,357,000 were 8.0% and 9.0% of total mainline revenues for the quarters
ended December 31, 2007 and 2006, respectively, and increased by 9.3% in
the current period as compared to the same quarter last year. Maintenance expenses include the costs of
all labor, parts and supplies related to the maintenance of the aircraft. Maintenance cost per block hour was $370 and
$394 for the quarters ended December 31, 2007 and 2006, respectively, a
decrease of 6.1%. During the quarter
ended December 31, 2007, we had additional heavy maintenance checks for
which the lessor reimbursed us for our labor and materials costs which reduced
maintenance expenses for the current quarter compared to the prior year. Maintenance costs incurred prior to required
scheduled heavy maintenance are performed by us and not reimbursable from our
lessors. In the prior year, our
aircraft, for the most part, did not require heavy scheduled maintenance
expenses reimbursable by our lessors.
Maintenance cost per block hour for the quarter ended December 31,
2006 was inflated as fixed costs were spread over fewer block hours because of
the 875 cancelled flights for the December 2006 snow storms which
decreased block hours by approximately 2,000.
Maintenance expenses will increase as the average age of our aircraft
increases and our aircraft require more scheduled maintenance events. We had 16
aircraft over five years old as of December 31, 2007 compared to five as
of December 31, 2006.
Promotion
and Sales
.
Promotion and sales expenses
totaled $32,072,000 and $28,240,000 and were 10.5% and 11.3% of total mainline
revenues for the quarters ended December 31, 2007 and 2006, respectively,
and increased by 13.6% in the current period as compared to the quarter ended December 31,
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 December 31,
2007, promotion and sales expenses per mainline passenger decreased to $12.72
from $13.54 for the quarter ended December 31, 2006. Promotion and sales expenses decreased per
passenger primarily due to a reduction in spending on promotions and
advertising.
General
and Administrative.
General and administrative expenses for the quarters ended December 31,
2007 and 2006 totaled $14,764,000 and $11,881,000, respectively, and each were
4.8% of total mainline revenues, respectively, and increased of 24.3%. General and administrative expenses include
the salaries and
28
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 such as workers compensation for our employees. General and
administrative expenses increased primarily due to increases in our workers
compensation expenses, general wage rate increases, and charges related to
changes in management.
Post-retirement
Liability Curtailment Gain.
On
December 14, 2007, the President signed the
Fair
Treatment for Experienced Pilots
Act (the Pilots Act), which
increased the retirement age for commercial pilots to 65 from 60. Pilots that have not reached age 60 will now
be allowed to work for five more years, provided they pass regular medical and
piloting exams.
Pursuant
to our collective bargaining agreement with our pilots, if pilots are forced to
retire due to FAA requirements, the retired pilots and their dependents could
retain medical benefits under the terms and conditions of the Health and
Welfare Plan for Employees of Frontier Airlines, Inc. until age 65. However, as a result of the Pilots Act, this
retirement health benefit is no longer required. It is only required for pilots who reached
mandatory retirement age prior to the effective date of the Pilots Act.
As
such, we recorded a one-time post-retirement liability curtailment gain of
$6,361,000 to reflect the impact of the Pilots Act, which was the reduction in
post-retirement liability for pilots who had not yet attained the age of 60.
Depreciation.
Depreciation expenses were $10,984,000 and
$8,922,000 and were approximately 3.6% of total mainline revenues for each of
the quarters ended December 31, 2007 and 2006, respectively, and
increased 23.1%. 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 December 31, 2007 as
compared to 18.0 purchased aircraft in service for the quarter ended December 31,
2006, an increase of 22.2%. The increase in depreciation expenses is also due
to accelerated depreciation of $354,000 on our Airbus aircraft seats, which we
are replacing with leather seats over the remainder of the year to be completed
in May 2008, and investments in rotable aircraft components, aircraft
improvements and ground equipment to support our capacity growth.
Consolidated
Nonoperating Expenses
Nonoperating
Expense.
Net
nonoperating expense totaled $6,906,000 for the three months ended December 31,
2007 as compared to net nonoperating expense of $4,249,000 for the three months
ended December 31, 2006, an increase of 62.5%
Interest
Income.
Interest
income decreased to $2,840,000 during the quarter ended December 31, 2007
from $3,824,000 during the quarter ended December 31, 2006, or 25.7% as a
result of a decrease in our average cash position as compared to the prior
comparable period.
Interest
Expense.
Interest
expense increased to $9,301,000 for the quarter ended December 31, 2007
from $7,889,000 for the quarter ended December 31, 2006, an increase of
17.9%. Debt related to aircraft
increased from $370,728,000 as of December 31, 2006 to $478,564,000 as of December 31,
2007 with an increase in the average weighted interest rate from 7.13% as of December 31,
2006 to 6.90% as of December 31, 2007.
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 18 to
22, offset by a decrease in the weighted average borrowing rate.
Income
Tax Benefit.
There was no provision for income
taxes for the quarter ended December 31, 2007 due to accumulated losses
for which valuation allowances have been recorded. We will assess the ongoing
utilization of accumulated losses and the related valuation allowance each
quarter. We recorded an income
tax benefit of $8,309,000 during the three months ended December 31,
2006 as a true-up of a year-to-date tax provision based on an annualized
expected tax rate.
Loss
on Early Extinguishment of Debt.
Prior to the closing of the five
sale-leaseback transactions during the quarter ended December 31, 2007, we
had temporary financing for our Bombardier Q400 aircraft which we repaid and we
wrote off $283,000 of debt issuance fees.
29
Regional
Partners
Regional
Partner revenues are derived from flights operated by Republic, Horizon and
ExpressJet. Our mainline passenger
revenue increases as a result of incremental revenue from passengers connecting
to/from regional flights. Regional
Partner operating expenses include all direct costs associated with Regional
Partners flights plus a margin and 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 our Regional Partners, which we reimburse these
expenses plus a margin. Regional Partner
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 totaled $26,640,000 for the quarter ended December 31,
2007 and $22,593,000 for the quarter ended December 31, 2006, a 17.9%
increase. The increase in revenue is due to a 25.6% increase in passengers
offset by a decrease in the average fare to $98.82 from $105.31, a decrease of
6.2%. The decrease in average fare is
largely due to the increase in connecting traffic over the December 31,
2006 quarter, which results in a lower fare than local traffic.
Regional
Partners Expenses.
Regional Partner expenses for the quarter ended December 31, 2007
and 2006 totaled $38,579,000 and $26,163,000, respectively, and were 144.8% and
115.8% of total regional partner revenues, respectively, an increase of
47.5%. 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 and an increase in fuel costs as compared to the
prior comparable period.
Lynx
Aviation
Passenger Revenues Lynx Aviation
.
Passenger revenues from flights operated by
Lynx Aviation after obtaining its operating certificate on December 6,
2007 totaled $2,659,000 for the quarter ended December 31, 2007.
Lynx Aviation Expenses
.
Lynx Aviation was in the start-up phase of operations until December 7,
2007 when it began revenue service. For
the quarter ended December 31, 2007, operating expenses were $7,492,000 as
compared to $920,000 for the quarter ended December 31, 2006. We do not believe that the results of Lynx
Aviation during the quarter ended December 31, 2007 are indicative of
future results because the fleet was flown in sub-optimal routes, additional
crew were required for training and Lynx Aviation had low completion factors.
During the quarter
ended December 31, 2007, Lynx Aviation incurred $3,397,000 related to
flight operation expenses primarily related to pilot salaries and training,
maintenance expenses related to salaries and wages for material specialists
personnel, line maintenance performed on aircraft and training for our Lynx
Aviation mechanics and general and administrative costs primarily related to
costs of constructing our internal manual and procedures to FAA standards and
the FAA certification process. After
obtaining an operating certificate in December 2007, additional direct and
allocated costs of $4,095,000 were incurred related to 679 departures.
During the quarter
ended December 31, 2006, Lynx Aviation incurred $920,000 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 and
the formation of the subsidiary.
30
Nine
Months ended December 31, 2007 as compared to the Nine Months ended December 31,
2006
Summary
We had a consolidated net
loss of $18,674,000 or 51¢ per diluted share for the nine months ended December 31,
2007, as compared to a consolidated net loss of $9,940,000 or 27¢ per diluted
share for the nine months ended December 31, 2006. Included in our consolidated net loss for the
nine months ended December 31, 2007 was a non-cash mark to market
derivative loss of $5,712,000. Also
included in consolidated net loss for the nine months ended December 31,
2007 was $9,891,000 of net start-up costs and losses for Lynx Aviation,
$3,228,000 in accelerated depreciation for our seat replacement project,
$442,000 in employee separation costs, offset by a post-retirement liability
curtailment gain of $6,361,000. These
items increased our consolidated net loss by 36¢ per diluted share. Included in our net loss for the nine months
ended December 31, 2006 were the following items before the effect of
income taxes: start-up costs for Lynx Aviation of $1,677,000, gains of $655,000
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 $2,306,000. These items,
net of income taxes, increased our consolidated net loss by 10¢ per diluted
share.
Mainline
Revenues
Passenger Revenues - Mainline
.
Mainline passenger revenues totaled
$923,299,000 for the nine months ended December 31, 2007 compared to
$783,996,000 for the nine months ended December 31, 2006, an increase of
17.8%.
Revenues from
passenger tickets flown generated 90.8% of our mainline passenger revenues and
increased $127,882,000 or 18.0% over the prior year. The increase in flown ticket sales resulted
from a 14.1% increase in ASMs, or $100,079,000, an increase of 4.0 points in
load factor, or $42,349,000, which was offset by a decrease of 1.8% in our
yields from ticket sales, or $14,545,000.
The percentage of revenues generated from other sources compared to
total mainline passenger revenue are as follows: Administrative fees were 2.8%;
revenue recognized for tickets that were not used within one year from issuance
were 3.0%, charter revenues were 0.9% and revenue from our co-branded credit
card were 2.0%. These sources of revenue
increased total mainline passenger revenue by $15,160,000 as compared to the
prior year, an increase of 23.3%. The increase is primarily due to our 17.7%
increase in passengers and the increased usage of our co-branded credit card.
Other Revenues
.
Other revenues totaled $32,711,000 and $24,248,000 and were 3.4% and
3.0% of total mainline operating revenues for the nine months ended December 31,
2007 and 2006, respectively, an increase of 34.9%. 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 $930,946,000 and $807,870,000 for the nine months ended
December 31, 2007 and 2006, respectively, and represented 96.9% and 99.3%
of total mainline revenues, respectively.
Mainline operating expenses decreased as a percentage of revenues during
the nine months ended December 31, 2007 largely a result of an increase of
3.2% in our mainline RASM and an increase in our mainline load factor of 4.0
points as compared to the prior comparable period. This was partially offset by an increase in our
mainline CASM of 1.0% as compared to the prior comparable period.
Salaries, Wages and
Benefits
.
Salaries, wages and benefits increased 14.1% to $206,949,000 for the
nine months ended December 31, 2007 compared to $181,391,000 for the nine
months ended December 31, 2006, and were 21.5% and 22.3% of total mainline
revenues for the nine months ended December 31, 2007 and 2006,
respectively. Salaries, wages and
benefits increased over the prior comparable period largely as a result of a
15.6% increase in the employee count to support the 14.1% increase in mainline
capacity, general wage
31
increases, increases in workers compensation
insurance and additional stock-based compensation expense.
Flight
Operations.
Flight
operations expenses increased 13.6% to $134,129,000 as compared to
$118,022,000, and were 14.0% and 14.5% of total mainline revenues for the nine
months ended December 31, 2007 and 2006, respectively. Flight operations expenses increased due to
an increase in mainline block hours from 173,382 for the nine months ended December 31,
2006 to 199,026 for the nine months ended December 31, 2007, an increase
of 14.8%.
Pilot and flight attendant salaries before
payroll taxes and benefits increased 13.2% to $78,339,000 compared to $69,234,000,
and were 8.2% and 8.5% of passenger mainline revenues for the nine months ended
December 31, 2007 and 2006, respectively.
We increased the number of pilots and flight attendants over the prior
year to support the 14.8% increase in block hours and the 11.2% increase in the
average aircraft in service.
Aircraft insurance
expenses totaled $6,350,000 (0.7% of total mainline revenues) and $7,871,000
(1.0% of total mainline revenues) for the nine months ended December 31,
2007 and 2006, respectively. Aircraft
insurance expenses were 78¢ and $1.14 per passenger for the nine months ended December 31,
2007 and 2006, respectively.
Aircraft Fuel.
Aircraft
fuel costs were $328,389,000 for 138,617,000 gallons used and $273,457,000 for
119,935,000 gallons used for the nine months ended December 31, 2007 and
2006, respectively, and resulted in an average fuel cost of $2.37 and $2.28 per
gallon, an increase of 3.9%. Aircraft
fuel costs, excluding non-cash mark to market gains and losses, were $2.33 and
$2.26 per gallon for the nine months ended December 31, 2007 and 2006,
respectively. Aircraft fuel expenses
represented 34.2% and 33.6% of total mainline revenues for the nine months
ended December 31, 2007 and 2006, respectively. The results of operations for the nine months
ended December 31, 2007 include non-cash mark to market derivative losses
of $5,712,000 recorded as an increase in fuel and net gains of $21,958,000 in
cash settlements received from a counter-party recorded as a decrease in fuel
expense. The results of operations for the nine months ended December 31,
2006 include non-cash mark to market derivative losses of $2,306,000 recorded
as an increase in fuel and net losses of $2,517,000 in cash payments to a
counter-party recorded as an increase in fuel expense. Fuel consumption for the nine months ended December 31,
2007 and 2006 averaged 696 and 692 gallons per block hour, respectively, an
increase of .6%.
Aircraft Lease.
Aircraft lease expenses totaled $84,892,000 (8.8% of total mainline revenues) and
$80,761,000 (9.9% of total mainline revenues) for the nine months ended December 31,
2007 and 2006, respectively, an increase of 5.1%. The increase in aircraft lease expenses is
due to an increase in the average number of leased aircraft from 36.5 to 38.0
or 4.1 %.
Aircraft
and Traffic Servicing.
Aircraft and traffic servicing
expenses were $134,697,000 and $120,159,000, an increase of 12.1%, for the nine
months ended December 31, 2007 and 2006, respectively, and represented
14.0% and 14.8% of total mainline revenue.
During the nine months ended December 31, 2007, our departures
increased to 79,779 from 72,431, an increase of 10.1%. Aircraft and traffic servicing expenses were
$1,688 per departure for the nine months ended December 31, 2007 as compared
to $1,659 per departure for the nine months ended December 31, 2006, an
increase of 1.7%. This increase was
primarily due to rent increases for the additional six gates at DIA and
approximately $2,400,000 of additional glycol expenses incurred during the nine
months ended December 31, 2007.
Maintenance.
Maintenance expenses of $75,662,000 and
$65,017,000 were 7.9% and 8.0% of total mainline revenues for the nine months
ended December 31, 2007 and 2006, respectively, and increased by 16.4% in
the current period as compared to last year.
Maintenance cost per block hour was $380 and $375 for the nine months
ended December 31, 2007 and 2006, respectively, an increase of 1.3%. During the nine months ended December 31,
2007, we had two major unscheduled maintenance events that were not covered by
maintenance agreements which increased expense by $1,315,000, or $7.00 per
block hour.
Promotion
and Sales
.
Promotion and sales expenses
totaled $102,440,000 and $86,514,000 and were 10.7% and 10.6% of total mainline
revenues for the nine months ended December 31, 2007 and 2006,
respectively, an increase of 18.4%.
During the nine months ended December 31, 2007, promotion and sales
expenses per mainline passenger increased to $12.58 from $12.51 for the nine months
ended December 31, 2006.
32
General
and Administrative.
General and administrative expenses for the nine months ended December 31,
2007 and 2006 totaled $43,565,000 and $39,851,000, respectively, and were 4.6%
and 4.9% of total mainline revenues, respectively, an increase of 9.3%. The increase in general and administrative
expenses primarily related to increased wages, information technology
consulting fees, and also increased due to charges related to management
changes, offset by decreases in workers compensation expense and health
insurance expense.
Depreciation.
Depreciation expenses for the nine months
ended December 31, 2007 and 2006 totaled $33,091,000 and $24,758,000,
respectively, and were 3.4% and 3.0% of total mainline revenues for the nine
months ended December 31, 2007 and 2006, respectively, an increase of
33.7%. Depreciation expenses increased
over the prior comparable period as a result of $3,228,000 in accelerated
depreciation recorded during the nine months ended December 31, 2007 for
our Airbus seat replacement project and a 22.3% increase in the average number
of aircraft owned to 21.4 during the nine months ended December 31, 2007
as compared to 17.5 during the nine months ended December 31, 2006.
Consolidated
Nonoperating Expenses
Nonoperating
Expense.
Net
nonoperating expense totaled $17,522,000 for the nine months ended December 31,
2007 as compared to net nonoperating expense of $10,691,000 for the nine months
ended December 31, 2006, an increase of 63.9%
Interest
Income.
Interest income decreased to
$10,037,000 from $11,980,000, or 16.2%, during the nine months ended December 31,
2007 from the prior comparable period as a result of a decrease in our average
cash position.
Interest
Expense.
Interest expense increased to $26,939,000 for
the nine months ended December 31, 2007 from $22,561,000 for the nine
months ended December 31, 2006. The
increase was due to additional debt related to the increase in the average
number of owned aircraft during the period from 17.5 to 21.4, which was offset
by a decrease in the weighted average interest rate from 7.13% as of December 31,
2006 to 6.90% as of December 31, 2007.
Income
Tax Benefit.
There was no provision for income
taxes for the nine months ended December 31, 2007 due to accumulated
losses for which valuation allowances have been recorded. We
recorded an income tax benefit of $4,578,000 during the nine months
ended December 31, 2006 at a 31.5% rate.
Regional Partners
Passenger Revenues
Regional Partners
. Regional
Partner revenues totaled $88,390,000 for the nine months ended December 31,
2007 and $75,053,000 for the nine months ended December 31, 2006, a 17.8%
increase. The increase in revenues is
due to a 23.6% increase in passengers offset by a decrease in the average fare
to $99.29 from $104.19, a decrease of 4.7%.
The decrease in average fare is largely due to the increase in
connecting traffic over the prior period 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 nine months ended December 31,
2007 and 2006 totaled $109,602,000 and $83,679,000, respectively, and were
124.0% and 111.5% of total regional partner revenues, respectively.
Lynx
Aviation
Passenger Revenues Lynx Aviation
.
Passenger revenues from flight operated by
Lynx Aviation after obtaining its operating certificate on December 6,
2007 totaled $2,659,000 for the nine months ended December 31, 2007.
33
Lynx Aviation Expenses
.
Lynx Aviation was in the start-up phase of operations until December 7, 2007
when it began revenue service. For the
nine months ended December 31, 2007, operating expenses were $12,550,000
as compared to $1,677,000 for the nine months ended December 31, 2006.
During the nine
months ended December 31, 2007, Lynx Aviation incurred $8,455,000 related
to flight operation expenses primarily related to pilot salaries and training,
maintenance expenses related to salaries and wages for material specialists
personnel, line maintenance performed on aircraft and training for our Lynx Aviation
mechanics and general and administrative costs primarily related to costs of
constructing our internal manual and procedures to FAA standards and the FAA
certification process. After obtaining
an operating certificate in December 2007, additional direct and allocated
costs of $4,095,000 were incurred related to 679 departures.
During the nine
months ended December 31, 2006, Lynx Aviation incurred $1,677,000 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 and the formation of the subsidiary.
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 as of January 29,
2008 was $2.78 per gallon. 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 two Bombardier aircraft scheduled for delivery in January 2008.
We had cash and cash equivalents of $170,434,000
and $202,981,000 at December 31, 2007 and March 31, 2007,
respectively. At December 31, 2007,
total current assets were $291,636,000 as compared to $367,481,000 of total
current liabilities, resulting in negative working capital of $75,845,000. 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 additional pre-delivery payments made of $24,259,000 for future aircraft
deliveries, an increase in the current portion of long-term debt of $6,481,000
as a result of additional debt for aircraft purchases, and capital expenditures
for aircraft and other assets in excess of financings, offset by cash provided
by operating activities of $32,687,000
Operating activitie
s.
Cash provided by operating activities for the
nine months ended December 31, 2007 was $32,687,000 as compared to cash
used by operating activities of $13,767,000 for the nine months ended December 31,
2006, an increase of $46,454,000. The increase in operating cash flows was
primarily due to a decrease in restricted investments and a lower reduction in
our air traffic liability. During the
nine months ended December 31, 2007, restricted investments decreased by
$1,429,000 as opposed to an increase of $16,017,000 during the nine months
ended December 31, 2006, producing a year-over-year increase in cash from
operating activities of $17,446,000.
During the nine months ended December 31, 2007, we replaced our
bankcard processor which temporarily reduced our collateral requirements until
we are fully ramped up with our current processor. During the nine months ended December 31,
2006, a $22,855,000 reduction in our air traffic liability was due to a 35.4%
decrease in our bookings as compared to March 31, 2006. During the nine months ended December 31,
2007, a $9,002,000 decrease in our air traffic liability was due to an 18.5%
decrease in our bookings as compared to March 31, 2007. This change in our air traffic liability
year-over-year is due to stronger bookings which generated a year-over-year
$13,853,000 increase in cash from operations.
Investing Activities
. Cash used in investing activities for the
nine months ended December 31, 2007 was $171,324,000. Capital expenditures were $240,212,000 for
the nine months ended December 31, 2007, which included the purchase of
three Airbus A318 and eight Bombardier Q400 aircraft, new leather seat sets for
24 aircraft, the purchase of LiveTV equipment, rotable aircraft components,
aircraft improvements, information technology enhancements, and ground
equipment. We received $93,147,000 primarily from the sale of five of the eight
newly acquired Bombardier Q400 aircraft in sale-leaseback transactions. Aircraft lease and purchase deposits made for
future aircraft deliveries during the period were $24,259,000.
34
Cash used in
investing activities for the nine months ended December 31, 2006 was
$101,604,000. Capital expenditures were
$109,088,000 for the nine months ended December 31, 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 $43,706,000 primarily from the sale of one of 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 $26,522,000, including
$10,812,000 for pre-delivery payments on Bombardier Q400 aircraft.
Financing Activities
.
Cash received from financing activities for
the nine months ended December 31, 2007 was $106,090,000. During the nine months ended December 31,
2007, we had short-term borrowings of $31,817,000 for the purchase of two of
our Bombardier aircraft. During the
period we refinanced these aircraft with long-term borrowings and repaid the
total amount of the borrowings. During
the nine months ended December 31, 2007, we also borrowed $201,136,000 for
the purchase of three Airbus A318 and eight Bombardier Q400 aircraft,
$12,333,000 under a PDP deposit financing and $3,000,000 in a line of
credit. These were offset by debt
principal payments of $106,326,000 on 30 of our owned Airbus and Bombardier
aircraft and we paid $1,084,000 in financing fees. Principal payments include $80,188,000 on
the retirement on debt of five of the Bombardier Q400 aircraft upon completion
of sale-leaseback transactions during the period.
Cash provided by
financing activities for the nine months ended December 31, 2006 was
$34,118,000. During the nine months
ended December 31, 2006, we paid $17,428,000 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.
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.
After a thorough fleet
analysis completed considering the current price of fuel and the potential
impacts of a slowing economy, we have elected to sell four of our 22 owned
Airbus A318 and A319 aircraft. We have begun marketing the aircraft and believe
that we should be able to close on these transactions in the next few months,
allowing us to slow our capacity growth and increase our cash position
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 two Bombardier aircraft for which we have firm purchase
commitments and expect to have adequate liquidity to cover our contractual
obligations. If we are unable to secure
all the necessary financing it could result in the loss of pre-delivery
payments and deposits (see discussion in the Contractual Obligations section
below).
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 the Summer of 2008, with completion
within 12 to 18 months. As
35
designed, the facility
would accommodate line maintenance for our mainline fleet and provide space for
our Regional Partners on an ad hoc basis.
We recently announced a decision to construct a heavy maintenance
facility at Colorado Springs Airport in Colorado Springs, Colorado. We have been working with local officials on
special facility bond financing and have identified the architectural firm that
will assist with project scoping and design.
At this point we have not begun design efforts. We therefore do not anticipate construction
to begin until late 2008. Relocating our heavy maintenance functions to
Colorado Springs will cause us to incur relocation expenses. We may also experience higher than normal
staff attrition. In addition, we may be
forced to contract for third party maintenance services during a transition
period, which would increase our overall maintenance costs.
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.
36
Contractual
Obligations
The following
table summarizes our contractual obligations as of December 31, 2007:
|
|
|
|
Less than
|
|
2-3
|
|
4-5
|
|
After
|
|
|
|
Total
|
|
1 year
|
|
years
|
|
years
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt -
principal (1)
|
|
$
|
573,565
|
|
$
|
33,241
|
|
$
|
75,635
|
|
$
|
95,512
|
|
$
|
369,177
|
|
Long-term debt -
interest (1)
|
|
277,343
|
|
37,259
|
|
67,030
|
|
53,913
|
|
119,141
|
|
Short-term
borrowings principal and
interest (2)
|
|
12,444
|
|
12,444
|
|
|
|
|
|
|
|
Operating leases
(3)
|
|
1,717,224
|
|
188,837
|
|
381,406
|
|
355,426
|
|
791,555
|
|
Unconditional
purchase obligations (4) (5) (6)
|
|
500,417
|
|
166,551
|
|
296,114
|
|
37,752
|
|
|
|
Total
contractual cash obligations
|
|
$
|
3,080,993
|
|
$
|
438,332
|
|
$
|
820,185
|
|
$
|
542,603
|
|
$
|
1,279,873
|
|
(1) At
December 31, 2007, we had 22 loan agreements for 13 Airbus A319 aircraft
and nine Airbus A318 aircraft. Two of the loans have a term of ten 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 December 31, 2007, interest rates for these loans
ranged from 6.25% to 8.87%. 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 9.00% at December 31, 2007.
|
|
|
At
December 31, 2007, we had three loan agreements for three Bombardier Q400
aircraft.
These aircraft loans have terms of 15 years, bear
fixed rate interest with a weighted average rate of 6.75 %, and are payable
in semi-annual installments. A security interest in the aircraft secures the
loans, which are guaranteed by both Frontier and Frontier Holdings.
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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 at the earlier times
discussed above, which would impact the timing of the principal payments.
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(2) In
November 2007, we entered into a pre-delivery deposit facility (PDP
Facility) for the purpose of financing obligations to make pre-delivery
payments on eight A320 aircraft. The PDP Facility allows the Company to draw
amounts up to $22,200,000 for aircraft deliveries through August 2010.
As of December 31, 2007, we had $12,333,000 outstanding under the PDP
Facility for A320 aircraft deliveries scheduled for February 2008 and
March 2008. As such, the amount outstanding is classified as short-term
borrowings on the consolidated balance sheet.
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(3) As of December 31, 2007,
we leased 36 Airbus A319 type aircraft, two Airbus A318 aircraft, and five
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37
Bombardier Q400 aircraft under operating leases with
expiration dates ranging from 2013 to 2022.
Under all of our leases, we have made cash security deposits, which
totaled $23,090,000 at December 31, 2007.
Additionally, we are required to make additional rent payments to cover
the cost of major scheduled maintenance overhauls of these aircraft. These
additional rent payments are based on the number of flight hours flown and/or
flight departures and are not included as an obligation in the table above
.
During the
nine months ended December 31, 2007 and 2006, additional rent expense to
cover the cost of major scheduled maintenance overhauls of these aircraft
totaled $20,055,000 and $19,940,000, respectively, and are included in
maintenance expense in the statements 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 agreement are reflected through the stated contract period.
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.
(4) As of December 31,
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 November 2011 and one remaining firm purchase
commitment for one spare Airbus engine scheduled for delivery in December 2009. Also as of December 31, 2007, we had two
remaining firm purchase commitments for Bombardier aircraft that we took
delivery of in January 2008.
Included in the purchase obligations are the remaining amounts due
Airbus and Bombardier, amounts for spare aircraft components to support the
additional aircraft and the remaining new leather aircraft seats for an
additional 23 ship sets yet to be purchased.
We are not under any contractual obligations with respect to spare parts
or the new aircraft seats.
We have secured financing commitments totaling approximately
$32,200,000 for commitments for the remaining two Bombardier aircraft. 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 of
2008. 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 December 31, 2007, we had made
pre-delivery payments on future aircraft deliveries totaling $30,193,000 of
which $7,209,000 relates to aircraft for which we have not yet secured
financing and $22,984,000 relates to aircraft for which we have secured
financing.
(5) 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.
(6) 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.
38
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 December 31, 2007,
we had outstanding letters of credit, bonds and cash security deposits totaling
$22,223,000. $1,984,000 and $24,664,000, 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 December 31, 2007, we had $18,187,000 available under this facility. We
have reduced the amount available for borrowings by letters of credit issued of
$14,560,000 and cash draws of $3,000,000.
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 December 31, 2007, we have
utilized $4,818,000 under this agreement for standby letters of credit that
provide credit support for certain facility leases.
During the nine
months ended December 31, 2007, we terminated our contract with a bankcard
processor and entered into a new agreement with another vendor. Both agreements require us to collateralize a
certain percentage of our air traffic liability associated with the estimated
amount of bankcard transactions. We are
in the process of unwinding the collateral that was in place with the prior
vendor and are in a ramp-up phase with the current vendor. As of December 31, 2007, the combined
amount totaled $37,966,000. As of January 25,
2008, the combined amount totaled $38,566,000.
This amount adjusts monthly until March 31, 2008 when the
collateral requirement with the prior vendor is totally eliminated and the
collateral requirement for the current vendor begins to be adjusted quarterly
in arrears based on our air traffic liability associated with these estimated
bankcard transactions. As of March 31,
2008, we expect that our estimated requirement will increase by approximately
$14,848,000.
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 December 31, 2007, we met these
financial tests and presently are only obligated to provide the minimum amount
of $100,000 in coverage to ARC. If we
failed the minimum testing requirements, we would be required to increase our
bonding coverage to four times the weekly agency net cash sales (sales net of
refunds and agency commissions). Based on net cash sales remitted to us for the
week ended January 25, 2008, the bond coverage would be increased to $9,245,000
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 using a variety of financial derivative
instruments. These fuel hedges do not
qualify for hedge accounting under SFAS 144, and, as such, realized and
non-cash mark to market adjustments to the fair value of the hedge contracts,
are included in aircraft fuel expense.
The results of operations for the nine months ended December 31,
2007 and 2006 include non-cash mark to market derivative losses of $5,712,000
and $2,306,000, respectively. Cash settlements for fuel derivatives contracts
for the nine months ended December 31, 2007 and 2006 were receipts of
$21,958,000 and payments of $2,517,000, respectively. We have entered into the following swap and
collar agreements that cover periods during our fiscal year 2008 including
hedges entered into prior to January 29, 2008:
39
Date
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|
Product *
|
|
Notional volume
** (barrels per
month)
|
|
Period covered
|
|
Price (per gallon or
barrel)
|
|
Percentage
of
estimated
fuel
purchases
|
|
|
|
|
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|
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January 2007
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|
Jet A
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|
100,000
|
|
April 1, 2007 -
June, 30, 2007
|
|
Swap priced at $1.817
per gallon
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|
26%
|
|
|
|
|
|
|
|
|
|
|
|
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January 2007
|
|
Crude Oil
|
|
40,000
|
|
July 1,
2007-September 30, 2007
|
|
$
|
64.70 per barrel call,
with a put of $59.15
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
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|
January 2007
|
|
Crude Oil
|
|
80,000
|
|
October 1, 2007 -
December 31, 2007
|
|
$
|
65.90 per barrel call,
with a put of $59.90
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|
20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2007
|
|
Crude Oil
|
|
80,000
|
|
April 1, 2007 -
June, 30, 2007
|
|
$
|
59.30 per barrel call,
with a put of $49.30
|
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2007
|
|
Crude Oil
|
|
80,000
|
|
July 1,
2007-September 30, 2007
|
|
$
|
60.75 per barrel call,
with a put of $50.45
|
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2007
|
|
Crude Oil
|
|
80,000
|
|
October 1, 2007 -
December 31, 2007
|
|
$
|
62.00 per barrel call,
with a put of $51.10
|
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2007
|
|
Crude Oil
|
|
80,000
|
|
January 1, 2008 -
March 31, 2008
|
|
$
|
62.60 per barrel call,
with a put of $52.10
|
|
22%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
2007
|
|
Jet A Crack Spread
Swaps
|
|
87,000
|
|
January 1, 2008 -
March 31, 2008
|
|
Swap priced at $19.30
per barrel
|
|
24%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
2007
|
|
Jet A Crack Spread
Swaps
|
|
176,000
|
|
April 1, 2008 -
June, 30, 2008
|
|
Swap priced at $17.80
per barrel
|
|
42%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
2007
|
|
Jet A Crack Spread
Swaps
|
|
186,000
|
|
July 1,
2008-September 30, 2008
|
|
Swap priced at 18.95
per barrel
|
|
45%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2008
|
|
Crude Oil
|
|
106,000
|
|
April 1, 2008 -
June, 30, 2008
|
|
Three way collar with a
call of $90.00 per barrel (capped at $105.00 and a put of $85.50)
|
|
25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2008
|
|
Crude Oil
|
|
111,000
|
|
July 1,
2008-September 30, 2008
|
|
Three way collar with a
call of $89.00 per barrel (capped at $104.00 and a put of $82.95)
|
|
25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2008
|
|
Crude Oil
|
|
103,000
|
|
October 1, 2008 -
December 31, 2008
|
|
Three way collar with a
call of $88.00 per barrel (capped at $103.00 and a put of $80.70)
|
|
25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2008
|
|
Crude Oil
|
|
102,000
|
|
January 1, 2009 -
March 31, 2009
|
|
Three way collar with a
call of $87.00 per barrel (capped at $102.00) and a put of $79.05
|
|
25%
|
|
40
* Jet A is Gulf
Coast Jet A fuel. Crude oil is
West Texas Intermediate crude oil. Jet A Crack spread swaps are hedges in
which we have hedged the difference between Gulf Coast Jet A fuel costs and the
West Texas Intermediate crude oil costs.
**
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 nine
months ended December 31, 2007 and 2006 were approximately $7,031,000 and
$4,178,000, 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 amounts
sufficient to pay the maturing principal and interest payments on the bonds. As
of December 31, 2007, approximately $562,757,000
principal amount of such bonds were
secured by fuel facility leases at major hubs in which we participate, as to
which each of the signatory airlines has provided indirect guarantees of the
debt. Our exposure is approximately $22,508,000 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.
Represented 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.
In February 2007, Frontier and the Frontier
Airline Pilots Association (FAPA) announced that FAPA membership ratified a
new collective bargaining agreement. The new four-year agreement amends the
previous five-year contract signed in May 2000. Implementation of the
approved agreement began in March 2007.
41
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.
42