- 15 -
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
12015 E. 46th Avenue, Denver, CO 80239
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (303) 371-7400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the Company's Common Stock outstanding as of February
10, 1999 was 15,792,814.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Information
Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3: Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Condensed Balance Sheets
December 31, March 31,
1998 1998
--------------- ---------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $25,322,423 $ 3,641,395
Restricted investments 4,000,000 4,000,000
Trade receivables, net of allowance for doubtful accounts of $191,834
and $139,096 at December 31, 1998 and March 31, 1998 10,164,432 11,661,323
Maintenance deposits 12,025,502 9,307,723
Prepaid expenses and other assets 6,796,423 3,843,694
Inventories 1,192,077 1,164,310
Deferred lease expenses 380,975 380,975
--------------- ---------------
Total current assets 59,881,832 33,999,420
Security, maintenance and other deposits 10,289,233 7,633,143
Property and equipment, net 6,900,406 5,579,019
Deferred lease and other expenses 494,697 780,429
Restricted investments 4,555,332 2,606,459
=============== ===============
$82,121,500 $ 50,598,470
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 9,842,383 $ 13,664,750
Air traffic liability 20,301,758 18,910,441
Other accrued expenses 5,357,643 5,157,640
Accrued maintenance expense 15,987,605 12,537,228
Note payable 61,006 -
Current portion of obligations under capital leases 49,837 54,346
--------------- ---------------
Total current liabilities 51,600,232 50,324,405
Senior secured notes payable 814,019 3,468,138
Accrued maintenance expense 4,955,805 2,381,354
Obligations under capital leases, excluding current portion 102,605 97,757
--------------- ---------------
Total liabilities 57,472,661 56,271,654
--------------- ---------------
Stockholders' equity
Preferred stock, no par value, authorized 1,000,000 shares;
none issued and outstanding - -
Common stock, no par value, stated value of $.001 per share,
authorized 40,000,000 shares; 15,316,444 and 9,253,563 shares
issued and outstanding at December 31, 1998 and March 31, 1998 15,316 9,253
Additional paid-in capital 55,507,746 37,954,584
Accumulated deficit (30,874,223) (43,637,021)
--------------- ---------------
Total stockholders' equity 24,648,839 (5,673,184)
--------------- ---------------
$82,121,500 $ 50,598,470
=============== ===============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
-------------- ---------------- --------------- ---------------
Revenues:
Passenger $ 49,112,767 $ 31,921,525 $146,175,655 $ 101,564,403
Cargo 1,279,175 596,736 3,250,994 2,008,154
Other 301,646 569,822 1,007,405 1,685,318
-------------- ---------------- --------------- ---------------
Total revenues 50,693,588 33,088,083 150,434,054 105,257,875
-------------- ---------------- --------------- ---------------
Operating expenses:
Flight operations 19,894,445 17,866,945 56,526,799 47,998,124
Aircraft and traffic servicing 8,584,155 8,376,494 24,175,968 22,824,452
Maintenance 9,178,653 9,052,299 27,317,001 23,606,405
Promotion and sales 8,365,827 7,481,557 23,788,720 21,037,834
General and administrative 1,989,114 1,503,212 5,025,693 4,753,969
Depreciation and amortization 438,380 433,350 1,154,354 1,154,469
-------------- ---------------- --------------- ---------------
Total operating expenses 48,450,574 44,713,857 137,988,535 121,375,253
-------------- ---------------- --------------- ---------------
Operating income (loss) 2,243,014 (11,625,774) 12,445,519 (16,117,378)
-------------- ---------------- --------------- ---------------
Nonoperating income (expense):
Interest income 422,217 200,604 1,042,189 580,935
Interest expense (203,789) (62,345) (661,870) (72,561)
Other, net (1,911) (31,753) (63,040) (45,180)
-------------- ---------------- --------------- ---------------
Total nonoperating income, net 216,517 106,506 317,279 463,194
-------------- ---------------- --------------- ---------------
Net income (loss) $ 2,459,531 $(11,519,268) $12,762,798 $(15,654,184)
============== ================ =============== ===============
Earnings (loss) per share:
Basic $ 0.17 $ (1.25) $ 0.93 $ (1.73)
============== ================ =============== ===============
Diluted $ 0.15 $ (1.25) $ 0.86 $ (1.73)
============== ================ =============== ===============
Weighted average shares of
common stock outstanding 14,697,983 9,228,313 13,726,675 9,048,926
============== ================ =============== ===============
Weighted average shares of common stock and
common stock equivalents outstanding 16,117,426 9,228,313 14,875,968 9,048,926
============== ================ =============== ===============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Condensed Statements of Cash Flows
For the Nine Months Ended December 31, 1998 and 1997
(Unaudited)
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net income (loss) $12,762,798 $(15,654,184)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Employee stock option plan compensation expense 645,750 -
Depreciation and amortization 1,640,062 1,386,633
Loss on sale of equipment 6,793 -
Changes in operating assets and liabilities:
Restricted investments (828,873) (2,250,266)
Trade receivables 1,496,891 (836,136)
Security, maintenance and other deposits (5,089,869) (3,383,149)
Prepaid expenses and other assets (2,952,729) (1,890,180)
Inventories (27,767) (207,753)
Note receivable - 11,741
Accounts payable (3,822,367) 2,337,583
Air traffic liability 1,391,317 3,980,925
Other accrued expenses 200,003 807,672
Accrued maintenance expense 6,024,828 5,777,719
--------------- ---------------
Net cash provided (used) by operating activities 11,446,837 (9,919,395)
--------------- ---------------
Cash flows used by investing activities:
Aircraft lease deposits (284,000) 207,500
Increase in restricted investments (1,120,000) (1,500,000)
Capital expenditures (2,447,096) (1,584,240)
--------------- ---------------
Net cash used by investing activities (3,851,096) (2,876,740)
--------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 14,064,381 415,357
Proceeds from sales of senior secured notes including warrants 5,000,000
Proceeds from short-term borrowings 179,664 170,318
Principal payments on short-term borrowings (118,658) (122,176)
Principal payments on obligations under capital leases (40,100) (26,787)
--------------- ---------------
Net cash provided by financing activities 14,085,287 5,436,712
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 21,681,028 (7,359,423)
Cash and cash equivalents, beginning of period 3,641,395 10,286,453
--------------- ---------------
Cash and cash equivalents, end of period $25,322,423 $ 2,927,030
=============== ===============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Condensed Financial Statements
December 31, 1998
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the 1998 Annual
Report on Form 10-K. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for
a fair presentation have been included. The results of operations for the
three and nine months ended December 31, 1998 and 1997 are not necessarily
indicative of the results that will be realized for the full year.
(2) Senior Secured Notes Payable
In December 1997, the Company sold $5,000,000 of 10% senior secured notes
to Wexford Management LLC ("Wexford"). The notes were due and payable in
full on December 15, 2001 with interest payable quarterly in arrears. The
notes were secured by substantially all of the assets of the Company. The
Wexford agreement contained restrictions primarily related to liens on
assets and required prior written consent for expenditures outside the
ordinary course of business. In connection with this transaction, the
Company issued Wexford warrants to purchase 1,750,000 shares of Common
Stock at $3.00 per share. The Company determined the value of the warrants
to be $1,645,434 and recorded the value as equity in additional paid-in
capital. The balance of the notes were to be accreted to its face value
over the term of the notes and included as interest expense. The effective
interest rate on the notes was approximately 18.2% including the value of
the warrants. (See Note 5.)
During the nine months ended December 31, 1998, Wexford exercised warrants
to purchase 1,369,880 shares of Common Stock with proceeds to the Company
totaling $4,109,640. Under the terms of the agreement, Wexford elected to
tender debt for the warrant exercise price first by application of accrued
unpaid interest and the remainder by reducing the principal balance of the
notes. As a result, $3,912,951 of the principal balance of the notes was
tendered during the nine months ended December 31, 1998.
(3) Common Stock
In April 1998, the Company sold 4,363,001 shares of its Common Stock,
through a private placement to an institutional investor. Gross proceeds to
the Company from the transaction were $14,179,753, of which the Company
received net proceeds of approximately $13,650,000. The Company issued a
warrant to this investor to purchase 716,929 shares of Common Stock of the
Company at a purchase price of $3.75 per share, which warrant expires in
April 2002.
(4) Income Tax Expense
The Company's income tax expense was zero for the three and nine months
ended December 31, 1998. The current income tax expense for these periods
was offset by a reduction in the Company's valuation allowance for deferred
tax assets, a result of the Company's ability to utilize previously
reserved for net operating loss carryforwards.
(5) Subsequent Event
In January 1999, Wexford, the holder of the senior secured notes (see Note
2), exercised an additional 49,000 warrants with proceeds to the Company
totaling $147,000. Under the terms of the agreement, Wexford elected to
tender debt for the warrant exercise price first by application of accrued
unpaid interest and the remainder by reducing the principal balance of the
notes. As a result, an additional $145,208 of the principal balance of the
notes was tendered. In January 1999, the Company paid the remaining balance
of the note in full which totaled $941,841, thereby terminating all of
Wexford's security interests in the Company's assets. Wexford had warrants
to purchase 331,120 shares of Common Stock outstanding as of the date the
notes were paid. As of February 10, 1999, subsequent to the pay-off of the
notes, Wexford exercised warrants to purchase 261,120 additional shares of
Common Stock with total proceeds to the Company of $783,360.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 that describe the business and
prospects of Frontier Airlines, Inc. (the "Company") and the expectations of the
Company and management. When used in this document, the words "estimate,"
"anticipate," "intend," "project," "management believes" and similar words and
phrases are intended to identify forward-looking statements. These statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those set forth. These risks and uncertainties
include, but are not limited to: the timing of, and expense associated with,
expansion and modification of the Company's operations in accordance with its
business strategy or in response to competitive pressures or other factors such
as the Company's commencement of passenger service and ground handling
operations at several airports and assumption of maintenance and ground handling
operations at DIA with its own employees; general economic factors and behavior
of the fare-paying public and the federal government, such as the crash in May
1996 of another low-fare carrier's aircraft that resulted in a federal
investigation of the carrier, suspension of the carrier's operations and
increased federal scrutiny of low-fare carriers generally that may increase the
Company's operating costs or otherwise adversely affect the Company; actions of
competing airlines, such as increasing capacity and pricing actions of United
Airlines and other competitors; the availability of Boeing 737 aircraft, which
may inhibit the Company's ability to achieve operating economies and implement
its business strategy; and uncertainties regarding aviation fuel prices. Because
the Company's business, like that of the airline industry generally, is
characterized by high fixed costs relative to revenues, small fluctuations in
the Company's yield per RPM or expense per ASM can significantly affect
operating results.
General
The Company is a low-fare, full-service commercial airline based in
Denver, Colorado. The Company currently operates routes linking its Denver hub
to 18 cities in 14 states spanning the nation from coast to coast. The Company's
current route system extends from Denver to Los Angeles, San Francisco and San
Diego, California; Chicago and Bloomington/Normal, Illinois; Boston,
Massachusetts; Baltimore, Maryland; Seattle/Tacoma, Washington; Phoenix,
Arizona; Minneapolis/St. Paul, Minnesota; Salt Lake City, Utah; Omaha, Nebraska;
Albuquerque, New Mexico, New York (LaGuardia), New York; El Paso and Dallas/Ft.
Worth, Texas; Atlanta, Georgia; and Las Vegas, Nevada. At present, the Company
utilizes approximately six gates at Denver International Airport ("DIA") for
approximately 83 daily flight departures and arrivals.
Organized in February 1994, the Company commenced flight operations in
July 1994 with two leased Boeing 737-200 jet aircraft. It has since expanded its
fleet to 17 leased jets as of December 1998, including eight Boeing 737-200s and
nine larger Boeing 737-300s.
On June 30, 1997, the Company signed an Agreement and Plan of Merger
("the Merger Agreement") providing for the merger (the "Merger") of the Company
with Western Pacific Airlines. Pursuant to the Merger Agreement, a "code share"
marketing alliance between the Company and Western Pacific went into effect on
August 1, 1997, in effect integrating the route networks of the two airlines. On
September 29, 1997, both companies mutually agreed to terminate the Merger
Agreement and the code-share arrangement. The separation of the two carriers
required the Company to implement a costly restructuring of its flight schedule
and route system to support a stand-alone operation competing against both
Western Pacific and United Airlines, the dominant air carrier at DIA. On October
5, 1997, Western Pacific filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Western Pacific ceased operations on February 4, 1998. This
transaction and the Company's competition with Western Pacific adversely
affected the Company's results of operations for the nine months ended December
31, 1997.
Results of Operations
The Company had net income of $12,763,000 or .86(cent) per diluted share
for the nine months ended December 31, 1998 as compared to a net loss of
$15,654,000 or 1.73(cent) per share for the nine months ended December 31, 1997.
The Company had net income of $2,460,000 or .15(cent) per diluted share for the
three months ended December 31, 1998 as compared to a net loss of $11,519,000 or
1.25(cent) per share for the three months ended December 31, 1997. During the
three and nine months ended December 31, 1998 as compared to the prior
comparable period, the Company experienced higher fares as a result of increases
in business travelers, decreased competition as a result of the demise of
Western Pacific, and an increase in the average length of haul and stage length.
During the nine months ended December 31, 1998, the Company also experienced
higher average fares in certain of its markets as a result of accommodating
Northwest Airlines passengers during that carrier's pilot strike in August and
September 1998. The Company's cost per ASM declined to 7.72(cent) during the
nine months ended December 31, 1998 from 8.54(cent) for the prior comparable
period, principally as a result of lower fuel prices and improved operating
efficiencies and economies of scale as the Company's fixed costs were spread
across a larger base of operations.
Small fluctuations in the Company's yield per RPM or expense per ASM can
significantly affect operating results because the Company, like other airlines,
has high fixed costs and low operating margins 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 the
Company's liquidity, cash flows and results of operations.
An airline's break-even load factor is the passenger load factor that
will result in operating revenues being equal to operating expenses, assuming
constant revenue per passenger mile and expenses. For the nine months ended
December 31, 1998, the Company's break-even load factor was 54.4% compared to
the passenger load factor achieved of 59.6%. For the nine months ended December
31, 1997, the Company's break-even load factor was 64.3% compared to the
achieved passenger load factor of 55.7%. The Company's break-even load factor
decreased from the prior comparable period largely as a result of an increase in
its average fare to $119 during the nine months ended December 31, 1998 from $98
during the nine months ended December 31, 1997, an increase in its total yield
per RPM from 13.31(cent) for the nine months ended December 31, 1997 to
14.14(cent) for the nine months ended December 31, 1998, and a decrease in its
expense per ASM to 7.72(cent) for the nine months ended December 31, 1998 from
8.54(cent) for the nine months ended December 31, 1997.
The following table sets forth certain quarterly financial and operating
data regarding the Company for the fifteen months of operations ended December
31, 1998.
Selected Financial and Operating Data
Quarter Ended
----------------------------------------------------------------------------------
December 31, March 31, June 30, September 30, December 31,
1997 1998 1998 1998 1998
Passenger revenue $31,922,000 $40,454,000 $41,561,000 $55,502,000 $49,113,000
Revenue passengers carried 301,000 370,000 368,000 420,000 373,000
Revenue passenger
miles (RPMs)(1) 259,443,000 328,309,000 337,555,000 387,810,000 338,691,000
Available seat miles
(ASMs)(2) 524,686,000 575,294,000 544,557,000 609,111,000 632,754,000
Passenger load factor(3) 49.4% 57.1% 62.0% 63.7% 53.5%
Break-even load factor(4) 67.3% 60.0% 61.3% 52.3% 50.8%
Block hours(5) 11,059 12,114 11,255 12,543 13,325
Average daily block hour
utilization(6) 10.52 10.30 10.27 10.27 9.57
Yield per RPM (cents)(7) 12.30 12.32 12.31 14.31 14.50
Total yield per RPM (cents)(8)
Total yield per ASM (cents)(9) 6.31 7.28 7.88 9.33 8.01
Expense per ASM (cents) 8.52 7.70 7.80 7.73 7.66
Passenger revenue per
block hour $2,886.52 $3,339.44 $3,692.67 $4,424.94 $3,685.78
Average fare(10) $101 $105 $108 $125 $124
Average aircraft in fleet 13.0 13.6 14.0 14.0 14.4
Operating income (loss) ($11,626,000) ($2,437,000) $425,000 $9,778,000 $2,243,000
Net income (loss) ($11,519,000) ($2,092,000) $434,000 $9,870,000 $2,460,000
EBITDAR(11) ($4,372,000) $5,318,000 $8,384,000 $17,859,000 $11,126,000
EBITDAR as a % of revenue (13.2%) 12.7% 19.5% 31.4% 21.9%
(1) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown.
(2) "Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(3) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(4) "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.
(5) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(6) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(7) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(8) "Total yield per RPM" is determined by dividing total revenues by revenue
passenger miles.
(9) "Total yield per ASM" is determined by dividing total revenues by available
seat miles.
(10) "Average fare" excludes revenue included in passenger revenue for
non-revenue passengers, administrative fees, and revenue recognized for unused
tickets that are greater than one year from issuance date.
(11) "EBITDAR", or " earnings before interest, income taxes, depreciation,
amortization and aircraft rentals," is a supplemental financial measurement used
by the Company in the evaluation of its business and by many airline industry
analysts. However, EBITDAR should only be read in conjunction with all of the
Company's financial data summarized above and its financial statements appearing
elsewhere herein, and should not be construed as an alternative either to
operating income (as determined in accordance with generally accepted accounting
principles) as an indicator of the Company's operating performance or to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity.
The following table provides operating revenues and expenses for the Company
expressed as cents per total available seat miles ("ASM") and as a percentage of
total operating revenues, as rounded, for the three and nine months ended
December 31, 1998 and 1997.
Three Months ended December 31, Nine Months Ended December 31,
----------------------------------------- -----------------------------------------
1998 1997 1998 1997
-------------------- -------------------- ------------------- --------------------
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 9.36 96.9% 6.09 96.5% 8.18 97.2% 7.15 96.5%
Cargo .24 2.5% .11 1.8% .18 2.1% .14 1.9%
Other .06 0.6% .11 1.7% .06 0.7% .12 1.6%
--------- --------- --------- --------- --------- --------- ---------- --------
Total revenues 9.66 100.0% 6.31 100.0% 8.42 100.0% 7.41 100.0%
Operating expenses:
Flight operations 3.15 39.3% 3.40 54.0% 3.17 37.5% 3.38 45.6%
Aircraft and traffic 1.36 16.9% 1.60 25.3% 1.35 16.1% 1.61 21.7%
servicing
Maintenance 1.45 18.1% 1.72 27.4% 1.53 18.2% 1.66 22.4%
Promotion and sales 1.32 16.5% 1.43 22.6% 1.33 15.8% 1.48 20.0%
General and .31 3.9% .29 4.5% .28 3.3% .33 4.5%
administrative
Depreciation and .07 0.9% .08 1.3% .06 0.8% .08 1.1%
amortization
========= ========= ========= ========= ========= ========= ========== ========
Total operating expenses 7.66 95.6% 8.52 135.1% 7.72 91.7% 8.54 115.3%
========= ========= ========= ========= ========= ========= ========== ========
Total ASMs (000s) 632,754 524,686 1,786,422 1,420,891
Revenues
The Company's revenues are highly sensitive to changes in fare levels.
Fare pricing policies have a significant impact on the Company's revenues.
Because of the elasticity of passenger demand, the Company believes that
increases in fares will result in a decrease in passenger demand in many
markets. The Company cannot predict future fare levels, which depend to a
substantial degree on actions of competitors. When sale prices or other price
changes are initiated by competitors in the Company's markets, the Company
believes that it must, in most cases, match those competitive fares in order to
maintain its market share. Passenger revenues are seasonal in leisure travel
markets depending on the markets' locations and when they are most frequently
patronized.
The Company's average fare for the nine months ended December 31, 1998
and 1997 was $119 and $98, respectively. Management believes that the increase
in the average fare during the nine months ended December 31, 1998 over the
prior comparable period was largely a result of the Company's focus on
increasing the number of business travelers, decreased competition as a result
of the demise of Western Pacific, and an increase in the average length of haul
and stage length. The average length of haul increased from 802 miles for the
nine months ended December 31, 1997 to 916 miles for the nine months ended
December 31, 1998. The Company also experienced higher average fares in certain
of its markets as a result of accommodating Northwest Airlines passengers during
that carrier's pilot strike in August and September 1998.
Passenger Revenues. Passenger revenues totaled $146,176,000 for the nine
months ended December 31, 1998 compared to $101,564,000 for the nine months
ended December 31, 1997, or an increase of 43.9%. The number of revenue
passengers carried was 1,161,000 for the nine months ended December 31, 1998
compared to 986,000 for the nine months ended December 31, 1997 or an increase
of 17.8%. The Company had an average of 14.4 aircraft in its fleet during the
nine months ended December 31, 1998 compared to an average of 11.8 aircraft
during the nine months ended December 31, 1997, an increase of 22%, and an
increase in ASMs of 365,531,000 or 25.7%.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $3,251,000 and $2,008,000 for the nine months ended December 31, 1998
and 1997, respectively, representing 2.1% and 1.9% of total operating revenues,
respectively, or an increase of 61.9%. This adjunct to the passenger business is
highly competitive and depends heavily on aircraft scheduling, alternate
competitive means of same day delivery service and schedule reliability.
Other revenues, comprised principally of interline handling fees, liquor
sales and excess baggage fees, totaled $1,007,000 and $1,685,000 or .7% and 1.6%
of total operating revenues for each of the nine months ended December 31, 1998
and 1997, respectively. Other revenues were higher during the nine months ended
December 31, 1997 as a result of ticket handling fees associated with the code
share agreement with Western Pacific. Ticket handling fees are earned by the
ticketing airline to offset ticketing costs incurred on segments ticketed on the
flight operated by the Company's code share partner. The Company recognized
approximately $857,000 in ticket handling fees associated with its code share
agreement with Western Pacific during the nine months ended December 31, 1997.
The costs that offset this revenue are included in sales and promotion expenses.
Operating Expenses
Operating expenses include those related to flight operations, aircraft
and traffic servicing, maintenance, promotion and sales, general and
administrative and depreciation and amortization. Total operating expenses were
$137,989,000 and $121,375,000 for the nine months ended December 31, 1998 and
1997 and represented 91.7% and 115.3% of total revenue, respectively. Operating
expenses decreased as a percentage of revenue during the nine months ended
December 31, 1998 as the Company experienced significantly lower fuel prices and
improved operating efficiencies and economies of scale as the Company's fixed
costs were spread across a larger base of operations.
Flight Operations. Flight operations expenses of $56,527,000 and
$47,998,000 were 37.5% and 45.6% of total revenue for the nine months ended
December 31, 1998 and 1997, respectively. Flight operations expenses include all
expenses related directly to the operation of the aircraft including fuel, lease
and insurance expenses, pilot and flight attendant compensation, in flight
catering, crew overnight expenses, flight dispatch and flight operations
administrative expenses.
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
costs of $16,691,000 for 28,964,000 gallons used and $17,478,000 for 23,918,000
gallons used resulted in an average fuel cost of 57.6(cent) and 73.1(cent) per
gallon and represented 29.5% and 36.4% of total flight operations expenses for
the nine months ended December 31, 1998 and 1997, respectively. The average fuel
cost per gallon decreased for the nine months ended December 31, 1998 from the
comparable prior period due to an overall decrease in the cost of fuel. Fuel
prices are subject to change weekly as the Company does not purchase supplies in
advance for inventory. Fuel consumption for each of the nine months ended
December 31, 1998 and 1997 averaged 780 gallons per block hour.
Aircraft lease expenses totaled $23,387,000 (15.6% of total revenue) and
$17,041,000 (16.2% of total revenue) for the nine months ended December 31, 1998
and 1997, respectively, or an increase of 37.2%. The increase is largely due to
higher lease expenses for larger and newer Boeing 737-300 aircraft added to the
fleet and partially attributable to the increase in the average number of
aircraft to 14.4 from 11.8, or 22%, for the nine months ended December 31, 1998
and 1997, respectively.
Aircraft insurance expenses totaled $1,774,000 (1.2% of total revenue) for the
nine months ended December 31, 1998 offset by a profit commission of $153,000
for the policy period ended June 6, 1998. The profit commission was earned
because the Company had no aircraft hull insurance claims during the 1997-1998
policy year. Aircraft insurance expenses for the nine months ended December 31,
1997 were $2,075,000 (2% of total revenue). Aircraft insurance expenses
decreased as a percentage of revenue as a result of competitive pricing in the
aircraft insurance industry, the Company's favorable experience rating since it
began flight operations in July 1994 and economies of scale due to the increase
in fleet size. For the policy period June 7, 1998 to June 6, 1999, the Company
reduced its aircraft insurance rates by approximately 44.8% or an estimated
annual savings of $1,787,000 at its present fleet levels.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $8,235,000 and $6,948,000 or 5.6% and 6.8% of passenger revenue for each
of the nine months ended December 31, 1998 and 1997, or an increase of 8.5%.
Pilot and flight attendant compensation increased principally as a result of a
22% increase in the average number of aircraft in service and an increase of
21.1% in block hours. The Company pays pilot and flight attendant salaries for
training consisting of approximately six and three weeks, respectively, prior to
scheduled increases in service which can cause the compensation expense during
that period to appear high in relationship to the average number of aircraft in
service. When the Company is not in the process of adding aircraft to its
system, pilot and flight attendant expense per aircraft normalizes. With a
scheduled passenger operation, and with salaried rather than hourly crew
compensation, the Company's expenses for flight operations are largely fixed,
with flight catering and fuel expenses the principal exception.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $24,176,000 and $22,825,000 (an increase of 5.9%) for the nine months ended
December 31, 1998 and 1997, respectively, and represented 16.1% and 21.7% of
total revenue. These include all expenses incurred at airports served by the
Company, as well as station operations administration and flight operations
ground equipment maintenance. Station expenses include landing fees, facilities
rental, station labor and ground handling expenses. Station expenses as a
percentage of revenue decreased during the nine months ended December 31, 1998
over the nine months ended December 31, 1997 as a result of the Company's rental
costs (in particular, the gate rentals at DIA and other cities where the Company
added additional frequencies), which are largely fixed costs, remaining
relatively constant as compared to the increase in revenue. Additionally, the
Company began its own ground handling operations at DIA effective September 1,
1998 which is more cost effective than using a third party contractor. Aircraft
and traffic servicing expenses will increase with the addition of new cities to
the Company's route system; however, the increased existing gate utilization at
DIA is expected to reduce per unit expenses.
Maintenance. Maintenance expenses of $27,317,000 and $23,606,000 were
18.2% and 22.4% of total revenue for the nine months ended December 31, 1998 and
1997, respectively. These include all labor, parts and supplies expenses related
to the maintenance of the aircraft. Routine maintenance is charged to
maintenance expense as incurred while major engine overhauls and heavy
maintenance check expense is accrued monthly. Maintenance cost per block hour
was $736 and $770 per block hour for the nine months ended December 31, 1998 and
1997, respectively. Maintenance costs per block hour decreased as a result of
six new aircraft added to the Company's fleet during the past year and the fixed
rental cost of the hangar facility being spread over a larger aircraft fleet
offset by FAA mandated corrosion inspections on the Company's 737-200s. The
newer aircraft require fewer routine repairs and are generally covered by a
warranty period of approximately up to three years on standard Boeing
components. Management believes that these costs will continue to normalize as
additional aircraft are added to the fleet.
Promotion and Sales. Promotion and sales expenses totaled $23,789,000 and
$21,038,000 and were 15.8% and 20% of total revenue for the nine months ended
December 31, 1998 and 1997, respectively. These include advertising expenses,
telecommunications expenses, wages and benefits for reservationists and
reservations supervision as well as marketing management and sales personnel,
credit card fees, travel agency commissions and computer reservations costs. The
Company's promotion and sales expenses for the nine months ended December 31,
1997 included expenses as a result of the code share agreement with Western
Pacific, under which the Company incurred additional communications, computer
reservation, and interline service charges and handling fees for the code share
agreement. These expenses were offset, in part, by interline handling fees
earned which are included in other revenues. The Company did not have any code
share agreements during the nine months ended December 31, 1998 that had as
large of an impact on its expenses as the code share agreement with Western
Pacific. Promotion and sales expenses decreased as a percentage of revenue for
the nine months ended December 31, 1998 over the prior comparable period largely
as a result of the increase in revenue.
Promotion and sales expenses per passenger decreased to $20.49 from
$21.32 for the nine months ended December 31, 1997, as a result of the
elimination of expenses related to the code share agreement with Western Pacific
offset by increased reservation costs and an increase in credit card fees. The
costs of reservation expenses increased as a result of outsourcing part of the
Company's reservations requirements. These increased costs were offset by a
decrease in travel agency commissions. During April 1998, the Company reduced
travel agency commissions to 8% from 10%, matching an 8% commission instituted
by the Company's competitors in the fall of 1997. Additionally, the Company's
direct sales, which are not subject to commissions, increased as a percentage of
passenger revenue. Travel agency commissions and interline service charges and
handling fees, as a percentage of passenger revenue, before non-revenue
passengers, administrative fees and breakage (revenue from expired tickets),
decreased to 5.4% for the nine months ended December 31, 1998 from 7.5% for the
nine months ended December 31, 1997.
Advertising expenses of $2,654,000 were 1.8% of passenger revenue for the
nine months ended December 31, 1998, compared to $2,336,000 or 2.3% of passenger
revenue for the nine months ended December 31, 1997. As new cities are added to
the Company's flight schedule, advertising and marketing promotions are designed
and implemented to increase awareness of the Company's new service, name and
brand awareness. Advertising expenses decreased as a percentage of revenue
largely as a result of the increase in the average fare. Additionally, during
the nine months ended December 31, 1997 the Company was competing with Western
Pacific for the "low fare" market which required a higher volume of advertising.
General and Administrative. General and administrative expenses for the
nine months ended December 31, 1998 and 1997 totaled $5,026,000 and $4,754,000,
respectively, and were 3.3% and 4.5% of total revenue, respectively. These
expenses include the wages and benefits for the Company's executive officers and
various other administrative personnel. Legal and accounting expenses, supplies
and other miscellaneous expenses are also included in this category. Included in
general and administrative expenses during the nine months ended December 31,
1997 were unusual expenses of approximately $500,000 associated with the
terminated Merger Agreement with Western Pacific.
Depreciation and Amortization. Depreciation and amortization expenses of
$1,154,000 were approximately .8% and 1.1% of total revenue for each of the nine
months ended December 31, 1998 and 1997. These expenses include depreciation of
office equipment, ground station equipment, and other fixed assets of the
Company. Amortization of start-up and route development costs are not included
as these expenses have been expensed as incurred.
Nonoperating Income (Expense). Net nonoperating income totaled $317,000
for the nine months ended December 31, 1998 compared to $463,000 for the nine
months ended December 31, 1997. Interest income increased from $581,000 to
$1,042,000 during the nine months ended December 31, 1998 from the prior
comparable period due to an increase in cash balances as a result of the sale of
Common Stock in April 1998 and an increase in cash from operating activities.
Interest income was offset by interest expense of $662,000 during the nine
months ended December 31, 1998. In December 1997, the Company sold $5,000,000 of
10% senior notes. In connection with this transaction, the Company issued the
lender warrants to purchase 1,750,000 shares of Common Stock. Interest expense
paid in cash and the accretion of the warrants and deferred loan expenses
totaled $562,000 during the nine months ended December 31, 1998.
See Notes 2 and 5 to Financial Statements.
Income Tax Expense: The Company has substantial net operating loss
carryforwards (NOL's) available to offset future taxable income. However, a
portion of these NOL's could be subject to Internal Revenue Code Section 382
annual limitations. Additionally, alternative minimum tax rules could limit the
Company's ability to utilize a portion of the NOL's each year and could result
in alternative minimum tax expense.
Expenses per ASM. The Company's expenses per ASM for the nine months
ended December 31, 1998 and 1997 were 7.72(cent) and 8.54(cent), respectively,
or a decrease of 9.6%. Expenses per ASM decreased from the prior comparable
period as a result of economies of scale as fixed costs were spread across a
larger base of operations, a decrease in fuel prices, and the average ASMs per
aircraft having increased as the Company added aircraft with greater seating
capacity as compared to earlier fleet additions. Expenses per ASM excluding fuel
for the nine months ended December 31, 1998 and 1997 were 6.79(cent) and
7.31(cent), respectively, or a decrease of 7.1%. Expenses per ASM are influenced
to a degree by the amount of aircraft utilization and by aircraft seating
configuration. For example, with the 108 seat all coach seating configuration
selected by the Company on five of its Boeing 737-200 aircraft, the expenses per
ASM of the Company are higher by 11% when compared with the 120 seat alternative
used by many carriers. The Company's average seats per aircraft for the nine
months ended December 31, 1998 were 124 as compared to 122 seats per aircraft
for the nine months ended December 31, 1997.
Liquidity and Capital Resources
The Company's balance sheet reflected cash and cash equivalents of
$25,322,000 at December 31, 1998 and $3,641,000 at March 31, 1998. At December
31, 1998, total current assets were $59,882,000 as compared to $51,600,000 of
total current liabilities, resulting in working capital of $8,282,000. At March
31, 1998, total current assets were $33,999,000 as compared to $50,324,000 of
total current liabilities, resulting in a working capital deficit of
$16,325,000. The Company had a working capital deficit of $13,580,000 at
December 31, 1997. The Company's present working capital is largely a result of
the sale in April 1998 of 4,363,001 shares of the Company's Common Stock with
net proceeds to the Company totaling approximately $13,650,000, combined with
cash flows from operating activities during the nine months ended December 31,
1998.
Cash provided by operating activities for the nine months ended December
31, 1998 was $11,447,000. This is attributable to the Company's net income for
the period, a decrease in receivables and increases in air traffic liability,
other accrued expenses and accrued maintenance expenses, offset by increases in
restricted investments, security, maintenance and other deposits and prepaid
expenses and other assets, and decreases in accounts payable. Cash used by
operating activities for the nine months ended December 31, 1997 was $9,919,000.
This was attributable primarily to the Company's net loss for the period, an
increase in restricted investments, trade receivables, security, maintenance and
other deposits, and prepaid expenses and other assets, offset by increases in
accounts payable, air traffic liability, other accrued expenses and accrued
maintenance expenses.
Cash used by investing activities for the nine months ended December 31,
1998 was $3,851,000. The Company used $2,447,000 for capital expenditures for
ground handling equipment, rotable aircraft components and aircraft leasehold
costs and improvements. The Company used cash of $284,000 for initial lease
acquisition security deposits for one Boeing 737-200 aircraft delivered in
October 1998. Additionally, the Company secured two aircraft delivered in
December 1998 with letters of credit totaling $1,120,000. The Company's
restricted investments increased $1,120,000 to collateralize the letters of
credit. Cash used by investing activities for the nine months ended December 31,
1997 was $2,877,000, largely a result of capital expenditures for rotable
aircraft components and aircraft leasehold costs and improvements for three
aircraft delivered in May, August and September 1997. Additionally, the Company
secured aircraft delivered in August 1997 and February 1998 with letters of
credit totaling $1,500,000. In turn the Company received $650,000 during the
nine months ended December 31, 1997 from the aircraft lessor that was previously
on deposit to secure these aircraft. The Company's restricted investments
increased $1,500,000 to collateralize the letter of credit.
Cash provided by financing activities for the nine months ended December
31, 1998 and 1997 was $14,085,000 and $5,437,000, respectively. During the nine
months ended December 31, 1998, the Company sold 4,363,001 shares of its Common
Stock through a private placement to an institutional investor. Gross proceeds
to the Company from the transaction were approximately $14,180,000, of which the
Company received net proceeds of approximately $13,650,000. The Company issued a
warrant to this investor to purchase 716,929 shares of Common Stock of the
Company at a purchase price of $3.75 per share. This warrant expires in April
2002. Additionally, during the nine months ended December 31, 1998, the Company
received $208,000 from the exercise of Common Stock options. During the nine
months ended December 31, 1997, the Company received $415,000 from the exercise
of Common Stock options. In December 1997, the Company sold $5,000,000 of 10%
senior secured notes. In connection with this transaction, the Company issued
warrants to purchase 1,750,000 shares of Common Stock at $3.00 per share.
Five of the Company's Boeing 737-200 aircraft are leased under operating
leases that originally expired in 1997. The leases provide for up to two renewal
terms of two years each with no increase in basic rent. The Company renewed the
leases for the first two-year renewal period and these leases now expire in
1999. Under these leases, the Company was required to make security deposits and
makes deposits for maintenance of these leased aircraft. These deposits totaled
$625,000 and $4,431,000, respectively, at December 31, 1998. These aircraft are
not compliant with FAA Stage 3 noise regulations. As their leases expire in 1999
the Company plans to replace these aircraft with Stage 3 compliant aircraft.
Although there can be no assurances that the Company will be successful in
replacing any or all of these aircraft, the Company has entered into a letter of
intent to lease two Boeing 737-200 advanced aircraft to replace two of the non
Stage 3 compliant aircraft. Management believes that the replacement aircraft,
if any, will be newer, larger aircraft with higher monthly rental costs.
The Company in November 1995 leased two Boeing 737-300 aircraft under
operating leases that expire in the year 2000. The Company was required to make
security deposits and makes deposits for maintenance of these leased aircraft.
Security and maintenance deposits for these aircraft totaled $1,505,000 and
$2,918,000, respectively, at December 31, 1998. The Company has issued to each
of the two Boeing 737-300 aircraft lessors a warrant to purchase 100,000 shares
of the Company's common stock at an aggregate purchase price of $500,000. These
warrants, to the extent not earlier exercised, expire upon the expiration dates
of the aircraft leases.
In June 1996, the Company leased two additional Boeing 737-200 aircraft
under operating leases that expire in the year 2001. In November 1997, the
Company renegotiated one of these leases extending the lease term by one year to
2002 in return for a slight reduction in the monthly rental payment. The Company
was required to make security deposits for these aircraft totaling $858,000.
Commencing July 1996, the Company was required to make monthly deposits for
maintenance of these leased aircraft. At December 31, 1998, these deposits
totaled $2,921,000. These aircraft were "hush-kitted" by the lessor at its
expense during 1996 making them compliant with FAA Stage 3 noise regulations.
The Company has issued to the aircraft lessor two warrants, each of which
entitles the lessor to purchase 70,000 shares of the Company's common stock at
an aggregate purchase price of $503,300 per warrant. These warrants, to the
extent not earlier exercised, expire upon the expiration dates of the aircraft
leases.
In November 1996, the Company took delivery of a leased Boeing 737-300
aircraft which it placed in scheduled service in December 1996. The lease term
for this aircraft is eight years from date of delivery. The Company was required
to secure the aircraft lease with a letter of credit totaling $600,000. The
Company is also required to make monthly cash deposits for maintenance of this
aircraft. As of December 31, 1998, the Company had maintenance deposits
associated with this leased aircraft totaling $1,459,000.
During the year ended March 31, 1997, the Company entered into four
operating lease agreements for four additional new Boeing 737-300 aircraft. The
Company took delivery of these aircraft in May, August and September 1997 and in
February 1998. In connection with the Boeing 737-300 aircraft delivered in
September 1997, the Company has issued to the lessor a warrant to purchase
55,000 shares of common stock at an aggregate purchase price of $385,000. This
warrant, to the extent not earlier exercised, expires upon the expiration date
of the aircraft lease. As of December 31, 1998, the Company had made cash
security deposits totaling $1,616,000 with respect to these aircraft. During the
year ended March 31, 1998, the Company secured lease obligations for two of
these aircraft with letters of credit totaling $1,500,000 and, in turn, $650,000
of cash security deposits was returned to the Company. The Company's restricted
cash increased by $1,500,000 to collateralize the letters of credit. Two of the
four leases have seven year terms, and two have eight year terms, in each case
from date of delivery. Two of the four leases have up to two one year renewal
terms and a third may be renewed for up to three one year terms. The Company is
required to pay monthly cash deposits to each aircraft lessor based on flight
hours and cycles operated to provide funding of future scheduled maintenance
costs. As of December 31, 1998, the Company had maintenance deposits associated
with these aircraft totaling $5,358,000.
In October 1998, the Company took delivery of a leased Boeing 737-200
advanced aircraft. The lease term for this aircraft is seven years from date of
delivery. The Company has made cash security deposits totaling $284,000 to
secure the aircraft lease. The Company is also required to make monthly cash
deposits for maintenance. As of December 31, 1998, the Company had maintenance
deposits associated with this aircraft totaling $22,000.
During December 1998, the Company leased from two different lessors two
additional new Boeing 737-300 aircraft. The first aircraft has a 40 month lease
term from date of delivery with an option to extend the lease term for an
additional 12 months. The second aircraft lease term expires on May 1, 2000, and
may be extended to October 31, 2000 at the lessor's option. The Company secured
these aircraft with letters of credit totaling $1,120,000. The Company is also
required to make monthly cash deposits for maintenance of these aircraft
commencing in January 1999. The addition of these two aircraft permitted the
Company's then 17 aircraft fleet to be in compliance with Stage 3 noise level
requirements until January 1, 2000.
Management is continuing to take steps designed to improve the Company's
operating performance. Effective in January 1997, the Company introduced
electronic ticketing. Passengers who call the Company directly are provided the
option of receiving a paper ticket or a confirmation number in lieu of a paper
ticket. Electronic ticketing decreases certain costs including postage and
handling costs, ticket stock, and reduced revenue accounting fees.
The Company is exploring various means to increase revenues and reduce
expenses. The Company has performed ad hoc charters and will consider them in
the future depending on the availability of its fleet. The Company is
considering revenue enhancement initiatives with new marketing alliances.
Effective March 1, 1999, the Company will begin to conduct certain aircraft
heavy maintenance checks in-house which is expected to reduce maintenance
expenses. Other potential expense reduction programs include the installation of
an upgraded flight operations, maintenance, and parts inventory management
information system which will be installed by the end of the fiscal year ending
March 31, 1999.
The Company began its own ground handling operations at DIA effective
September 1, 1998, a function which had been provided by an independent
contractor. Ground handling equipment required by the Company to perform these
operations internally necessitated capital expenditures of approximately
$800,000
The Company's sublease with Continental Airlines for terminal gates and
other related space at DIA expires in March 2000. If DIA is unsuccessful in
reallocating the cost of the inoperative automated baggage system on Concourse
A, which is presently subsidized by Continental Airlines, the Company's
operating costs to cover the additional cost associated with this system would
increase materially. The Company's present fixed monthly rate under the terms of
the sublease with Continental would change to a per passenger fee charged
directly to the Company.
The Company has a contract with a credit card processor that requires the
Company to provide a letter of credit to match the total amount of air traffic
liability associated with credit card customers. The credit card processor does
not always require the Company to match the total amount depending on certain
events or circumstances such as seasonality, ticket price sales, and the
Company's financial condition. In November 1997, the credit card processor
required an increase in the collateral amount from its present level of
$2,000,000 to $4,000,000, which increased the Company's current restricted
investment balance accordingly. The credit card processor has not requested any
increases since November 1997. As of February 4, 1999, the Company could be
required to increase the collateral amount to $7,314,000.
The Company's goal is to continue to lease additional aircraft to serve
additional cities and to add flights on existing routes from Denver. The Company
added routes to Atlanta, Georgia, Dallas/Ft. Worth, Texas and Las Vegas, Nevada
effective December 17, 1998. The Company believes that expanding its route
system would facilitate a greater volume of connecting traffic as well as a
stable base of local traffic and offset the impact of higher DIA-related
operating costs through more efficient gate utilization. Expansion of the
Company's operations will entail the hiring of additional employees to staff
flight and ground operations in new markets, and significant initial costs such
as deposits for airport and aircraft leases. Because of the expansion of the
Company's business, and competition within the airline industry which often
requires quick reaction by management to changes in market conditions, the
Company may require additional capital to further expand its business.
In February 1997, United Airlines commenced service using its low fare
United "Shuttle" between Denver and Phoenix, Arizona, and in October 1997 such
service to Salt Lake City was added by United. These are both markets in which
the Company provides service, in addition to other markets where United Airlines
provides flights. The Company commenced service between Denver and Las Vegas in
December 1998, another market in which United provides service with United
"Shuttle". This competition, as well as other competitive activities by United
and other carriers, have had and could continue to have an adverse effect on the
Company's revenues and results of operations.
Except for the nine months ended December 31, 1998, the Company has
incurred substantial operating losses since its inception. In addition, the
Company has substantial contractual commitments for leasing and maintaining
aircraft. The Company believes that its existing cash balances coupled with
improved operating results are and will be adequate to fund the Company's
operations at least through December 31, 1999.
Year 2000 Compliance
Background. Older computers were programmed to use a two-digit code for
the date entry rather than a four-digit code. For example, the date November 17,
1970 would be entered as "11/17/70" rather than "11/17/1970." The decision to
use two digits instead of four was based largely on cost-reduction
considerations and the belief that the code would no longer be used at the
millennium. Nevertheless, coding conventions have not changed, and on January 1,
2000, computers may read the digits "00" as denoting the year 1900 rather than
2000. At the least, this could result in massive quantities of incorrect data.
At worst, it could result in the total or partial failure of time sensitive
computer systems and software.
The Company's Year 2000 Issues. The Company began operations in July
1994, and its operations depend predominantly on third party computer systems.
Because of the Company's limited resources during its start-up, the most cost
effective way to establish its computer systems was to outsource or to use
manual systems. Internal systems developed and any software acquired are limited
and were designed or purchased with the Year 2000 taken into consideration.
The Company has designated an employee committee that is responsible for
(1) identifying and assessing Year 2000 issues, (2) modifying, upgrading or
replacing computer systems, (3) testing internal and third party systems and,
(4) developing contingency plans in the event that a system or systems fail.
This committee periodically reports to management regarding progress being made
in addressing the Year 2000 issue. Management, in turn, periodically reports to
the Board of Directors on the issue.
The Company relies on third parties which provide goods and services
which are imperative to the Company's operations including, but not limited to,
the U.S. Federal Aviation Administration, the U.S. Department of Transportation,
local airport authorities including DIA, utilities, communication providers, and
fuel suppliers. The Company is reviewing, and has initiated formal
communications with, these third party service providers to determine their Year
2000 readiness, the extent to which the Company is vulnerable to any failure by
such third parties to remediate their Year 2000 problems and to resolve such
issues to the extent practicable.
Although the Company is primarily in the identification and assessment
phase of its Year 2000 project, some systems are in the modification and testing
phases. These include the customer reservations and ticketing system and the
credit card processing system that is interfaced with the reservations and
ticketing system. These systems are outsourced and the costs of modifying and
testing these systems are being absorbed by the third party provider. The
Company's general accounting and payroll systems are being upgraded to new
versions that are Year 2000 compliant at an insignificant cost to the Company.
The Company's crew and dispatch training records, aircraft maintenance records
and inventory control are in the process of automating from manual systems to
computer systems that are Year 2000 compliant. The Boeing Company has verified
that the computer systems on the aircraft type operated by the Company are or
will be Year 2000 compliant before the year 2000. The Company plans to complete
its identification and assessment phase by February 28, 1999, its modification
and testing phases by June 30, 1999, and its contingency plans by October 31,
1999.
The Company has utilized existing resources and has not incurred any
significant costs to implement its Year 2000 project to date. The total
remaining cost of the Year 2000 project are expected to be immaterial and will
be funded through cash from operations. The costs and the dates on which the
Company anticipates it will complete the Year 2000 project are based on
management's best estimates. There can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Despite its efforts to address Year 2000 issues, the Company could
potentially experience disruptions to some of its operations, including those
resulting from non-compliant systems used by third party business and
governmental entities. The Company's business, financial condition or results of
operations could be materially adversely affected by the failure of its systems
or those operated by third parties upon which the Company's business relies.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 5: Other Information
Effective January 11, 1999, Arthur H. Amron resigned his position as a
member of the Company's board of directors.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.35 Aircraft Lease Agreement (MSN 28738) dated as of November 23, 1998
among First Security Bank, National Association, Lessor, Heller
Financial Leasing, Inc., Owner Participant, and the Company, Lessee.
10.36 Aircraft Sublease Agreement (MSN 28734) dated as of December 14, 1998
between Indigo Pacific AB, Sublessor, and the Company, Sublessee.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FRONTIER AIRLINES, INC.
Date: February 12, 1999 By: /s/ Samuel D. Addoms
Samuel D. Addoms, Principal Executive
Officer and Principal Financial Officer
Date: February 12, 1999 By: /s/ Elissa A. Potucek
Elissa A. Potucek, Vice President,
Controller, Treasurer and Principal
Accounting Officer