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 June 30, 1999
[ ] 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 (I.R.S. Employer
of incorporated or organization) 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 August 6,
1999 was 17,392,822.
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 5
Item 3: Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Balance Sheets
June 30, March 31,
1999 1999
---------------- ----------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 29,118,575 $ 47,289,072
Short-term investments 41,378,295 -
Restricted investments 4,000,000 4,000,000
Trade receivables, net of allowance for doubtful accounts of $200,000 13,823,419 16,930,038
Maintenance deposits 16,166,808 13,018,466
Prepaid expenses and other assets 6,208,619 5,439,834
Inventories 1,508,126 1,203,916
Deferred tax assets 1,461,224 6,041,576
Deferred lease expenses 252,327 285,636
---------------- ----------------
Total current assets 113,917,393 94,208,538
Security, maintenance and other deposits 11,722,056 11,834,457
Property and equipment, net 9,821,168 8,733,778
Deferred lease and other expenses 226,888 267,762
Restricted investments 5,435,760 4,575,760
================ ================
$ 141,123,265 $ 119,620,295
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,123,156 $ 14,011,238
Air traffic liability 34,407,679 28,887,692
Other accrued expenses 10,376,615 10,781,509
Accrued maintenance expense 18,394,830 14,933,568
Current portion of obligations under capital leases 111,146 106,833
---------------- ----------------
Total current liabilities 77,413,426 68,720,840
Accrued maintenance expense 6,502,788 6,042,958
Deferred tax liability 30,928 30,928
Obligations under capital leases, excluding current portion 409,890 434,920
---------------- ----------------
Total liabilities 84,357,032 75,229,646
---------------- ----------------
Stockholders' equity
Preferred stock, no par value, authorized 1,000,000
shares; none issued - -
Common stock, no par value, stated value of $.001 per
share, authorized 40,000,000 shares; 17,232,772 and 16,141,172
shares issued and outstanding at June 30, 1999 and March 31, 1999 17,233 16,141
Additional paid-in capital 62,609,808 58,054,844
Unearned ESOP shares (406,250) (609,375)
Accumulated deficit (5,454,558) (13,070,961)
---------------- ----------------
Total stockholders' equity 56,766,233 44,390,649
---------------- ----------------
$ 141,123,265 $ 119,620,295
================ ================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Income
Three Months Ended June 30,
1999 1998
----------------------------------
(unaudited)
Revenues:
Passenger $ 75,974,913 $ 41,560,587
Cargo 1,441,084 1,004,748
Other 470,200 322,218
---------------- ----------------
Total revenues 77,886,197 42,887,553
---------------- ----------------
Operating expenses:
Flight operations 25,884,383 17,853,706
Aircraft and traffic servicing 10,705,730 7,137,822
Maintenance 13,550,252 8,727,868
Promotion and sales 11,830,919 7,126,460
General and administrative 3,687,623 1,278,559
Depreciation and amortization 574,211 338,449
---------------- ----------------
Total operating expenses 66,233,118 42,462,864
---------------- ----------------
Operating income 11,653,079 424,689
---------------- ----------------
Nonoperating income (expense):
Interest income 824,643 275,569
Interest expense (21,901) (240,239)
Other, net (121,566) (26,310)
---------------- ----------------
Total nonoperating income, net 681,176 9,020
---------------- ----------------
Income before income tax expense
12,334,255 433,709
Income tax expense 4,717,852 -
================ ================
Net income $ 7,616,403 $ 433,709
================ ================
Earnings per share:
Basic $ 0.46 $ 0.03
================ ================
Diluted $ 0.41 $ 0.03
================ ================
Weighted average shares of
common stock outstanding 16,539,582 12,513,827
================ ================
Weighted average shares of common stock and
common stock equivalents outstanding 18,470,832 13,689,997
================ ================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statement of Cash Flows
Three Months Ended June 30,
1999 1998
----------------------------------
(unaudited)
Cash flows from operating activities:
Net income $ 7,616,403 $ 433,709
Adjustments to reconcile net income to net cash
provided by operating activities:
Employee stock ownership plan compensation expense 203,125
Depreciation and amortization 648,393 521,294
Changes in operating assets and liabilities:
Trade receivables 3,106,619 2,373,625
Security, maintenance and other deposits (3,632,357) (3,323,636)
Prepaid expenses and other assets (768,785) (1,223,944)
Inventories (304,210) (237,527)
Deferred income tax expense 4,580,352 -
Accounts payable 111,918 (3,221,120)
Air traffic liability 5,519,987 919,620
Other accrued expenses (404,894) (1,067,365)
Accrued maintenance expense 3,921,092 1,894,524
---------------- ----------------
Net cash provided (used) by operating activities 20,597,643 (2,930,820)
---------------- ----------------
Cash flows used by investing activities:
Increase in short-term investments (41,378,295) (4,932,533)
Aircraft lease deposits 596,416 -
Increase in restricted investments (860,000) -
Capital expenditures (1,661,600) (328,162)
---------------- ----------------
Net cash used by investing activities (43,303,479) (5,260,695)
---------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 4,556,056 13,676,508
Proceeds from short-term borrowings - 179,663
Principal payments on obligations under capital leases (20,717) (10,451)
---------------- ----------------
Net cash provided by financing activities 4,535,339 13,845,720
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (18,170,497) 5,654,205
Cash and cash equivalents, beginning of period 47,289,072 3,641,395
---------------- ----------------
Cash and cash equivalents, end of period $ 29,118,575 $ 9,295,600
================ ================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Financial Statements
June 30, 1999
(1) Basis of Presentation
The accompanying unaudited 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 Company's 1999 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 months ended June 30, 1999 are not necessarily indicative of the
results that will be realized for the full year.
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. ("Frontier" or the "Company") and the
expectations of our Company and management. All statements, other than
statements of historical facts, 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," "project" 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
its business strategy or in response to competitive pressures or other factors
such as our commencement of passenger service and ground handling operations at
several airports and assumption of maintenance and ground handling operations at
DIA with our own employees; general economic factors and behavior of the
fare-paying public and the federal government, suspension of the carrier's
operations and increased federal scrutiny of low-fare carriers generally that
may increase our operating costs or otherwise adversely affect us; 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 our ability to achieve operating economies and implement our
business strategy; and uncertainties regarding aviation fuel prices. Because our
business, like that of the airline industry generally, is characterized by high
fixed costs relative to revenues, small fluctuations in our yield per RPM or
expense per ASM can significantly affect operating results. See "Risk Factors"
in our 1999 Form 10-K.
General
We are a scheduled airline based in Denver, Colorado. We currently
operate routes linking our Denver hub to 19 cities in 15 states spanning the
nation from coast to coast. At present, we use up to seven gates at Denver
International Airport ("DIA") for approximately 92 daily flight departures and
arrivals. During the quarter ended June 30, 1999, we added Portland, Oregon to
our route system on June 14, 1999 and added frequencies to San Francisco,
California, New York (LaGuardia), and Seattle, Washington. On November 1, 1998,
we initiated complimentary shuttle service between Boulder, Colorado and DIA.
Service to Orlando, Florida is scheduled to commence September 9, 1999 with one
daily nonstop flight and a second daily flight commencing on November 4, 1999.
Organized in February 1994, we commenced flight operations as a regional
carrier in July 1994 with two leased Boeing 737-200 jet aircraft. We currently
operate 19 leased jets as of August 6 1999, including 7 Boeing 737-200s and 12
larger Boeing 737-300s.
As a result of the expansion of our operations during the quarter ended
June 30, 1999, our results of operations are not necessarily indicative of
future operating results or comparable to the prior quarter ended June 30, 1998.
Small fluctuations in our yield per RPM or expense per ASM can
significantly affect operating results because we, like other airlines, have
high fixed costs in relation to revenues. Airline operations are highly
sensitive to various factors, including the actions of competing airlines and
general economic factors, which can adversely affect our liquidity, cash flows
and results of operations.
Results of Operations
We had net income of $7,616,000 or $.41 per diluted share for the quarter
ended June 30, 1999 as compared to net income of $433,709 or $.03 per diluted
share for the quarter ended June 30, 1998. During the quarter ended June 30,
1999, we reported a provision for income taxes which totaled $4,718,000 or $.26
per diluted share. During the quarter ended June 30, 1999 as compared to the
prior comparable period, we experienced higher fares as a result of increases in
business travelers and a general increase in fare levels. Our cost per ASM
increased to 8.12(cent) during the quarter ended June 30, 1999 from 7.80(cent)
for the prior comparable period principally as a result of an unanticipated
engine repair expense due to a premature failure, which accounted for .18(cent)
of expense per ASM, and our accrual for a potential employee performance bonus
under a new program adopted this year, which accounted for .09(cent) of expense
per ASM. Our expense per ASM for the quarter ended June 30, 1999 adjusted for
these items would have been 7.85(cent).
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 quarter ended June 30,
1999, our break-even load factor was 52% compared to the passenger load factor
achieved of 62%. For the quarter ended June 30, 1998, our break-even load factor
was 61.3% compared to the achieved passenger load factor of 62%. Our break-even
load factor decreased from the prior comparable period largely as a result of an
increase in our average fare to $133 during the quarter ended June 30, 1999 from
$108 during the quarter ended June 30, 1998, an increase in our total yield per
RPM from 12.71(cent) for the quarter ended June 30, 1998 to 15.38(cent) for the
quarter ended June 30, 1999 offset by an increase in our expense per ASM to
8.12(cent) for the quarter ended June 30, 1999 from 7.80(cent) for the quarter
ended June 30, 1998.
The following table provides certain of our quarterly financial and
operating data for the fifteen months of operations ended June 30, 1999.
Quarter Ended
--------------------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1999 1999
Passenger revenue (1) $41,561,000 $55,502,000 $49,113,000 $68,135,000 $75,975,000
Revenue passengers carried 368,000 420,000 373,000 503,000 553,000
Revenue passenger
miles (RPMs)(2) 337,555,000 387,810,000 338,691,000 442,541,000 506,247,000
Available seat miles
(ASMs)(3) 544,557,000 609,111,000 632,754,000 751,081,000 815,961,000
Passenger load factor (4) 62.0% 63.7% 53.5% 58.9% 62.0%
Break-even load factor (5) 61.3% 52.3% 50.8% 48.3% 52.0%
Block hours (6) 11,255 12,543 13,325 15,666 16,785
Average daily block hour
utilization (7) 10.27 10.27 9.57 10.24 10.80
Yield per RPM (cents) (8) 12.31 14.31 14.50 15.40 15.01
Total yield per RPM (cents) (9) 12.71 14.66 14.97 15.86 15.38
Total yield per ASM (cents) (10) 7.88 9.33 8.01 9.34 9.55
Expense per ASM (cents) 7.80 7.73 7.66 7.71 8.12
Passenger revenue per
block hour $3,692.67 $4,424.94 $3,685.78 $4,349.23 $4,526.36
Average fare (11) $108 $125 $124 $131 $133
Average aircraft in service 14.0 14.0 14.4 17.0 18.0
EBITDAR (12) $8,328,000 $17,713,000 $10,886,132 $21,923,000 $22,479,000
EBITDAR as a % of revenue 19.4% 31.2% 21.5% 31.2% 28.9%
Operating income $425,000 $9,778,000 $2,243,000 $12,234,000 $11,653,000
Net income $434,000 $9,870,000 $2,460,000 $17,802,000 $7,616,000
(1) "Passenger revenue" includes revenues for non-revenue passengers,
administrative fees, and revenue recognized for unused tickets that are
greater than one year from issuance date.
(2) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown.
(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.
(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
(6) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(7) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(8) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(9) "Total Yield per RPM" is determined by dividing total revenues by revenue
passenger miles.
(10) "Total Yield per ASM" is determined by dividing passenger revenues by
available seat miles.
(11) "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.
(12) "EBITDAR", or "earnings before interest, income taxes, depreciation,
amortization and aircraft rentals," is a supplemental financial measurement
many airline industry analysts and we use in the evaluation of our
business. However, EBITDAR should only be read in conjunction with all of
our 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 our 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 our operating revenues and expenses
expressed as cents per total available seat miles ("ASM") and as a percentage of
total operating revenues, as rounded, for the year ended March 31, 1999 and the
quarters ended June 30, 1999 and 1998.
Year Ended March 31, Quarters Ended June 30,
----------------------- -------------------------------------------------
1999 1999 1998
----------------------- ----------------------- ------------------------
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 8.44 97.2% 9.31 97.5% 7.63 96.9%
Cargo 0.19 2.2% 0.18 1.9% 0.18 2.3%
Other 0.06 0.6% 0.06 0.6% 0.06 0.8%
----------- ---------- ----------- ---------- ------------ ----------
Total revenues 8.69 100.0% 9.55 100.0% 7.88 100.0%
Operating expenses:
Flight operations 3.12 35.9% 3.17 33.2% 3.28 41.6%
Aircraft and traffic servicing 1.35 15.5% 1.31 13.7% 1.31 16.6%
Maintenance 1.42 16.4% 1.66 17.4% 1.60 20.4%
Promotion and sales 1.40 16.1% 1.45 15.2% 1.31 16.6%
General and administrative 0.36 4.2% 0.45 4.7% 0.23 3.0%
Depreciation and amortization 0.07 0.7% 0.08 0.8% 0.06 0.8%
=========== ========== =========== ========== ============ ==========
Total operating expenses 7.72 88.8% 8.12 85.0% 7.80 99.0%
=========== ========== =========== ========== ============ ==========
Total ASMs (000s) 2,537,503 815,961 544,557
Revenues
Our revenues are highly sensitive to changes in fare levels. Fare pricing
policies have a significant impact on our revenues. Because of the elasticity of
passenger demand, we believe that increases in fares will 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. 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. Passenger revenues are seasonal in leisure travel markets
depending on the markets' locations and when they are most frequently
patronized.
Our average fare for the quarters ended June 30, 1999 and 1998 was $133
and $108, respectively, an increase of 23.2%. We believe that the increase in
the average fare during the quarter ended June 30, 1999 over the prior
comparable period was largely a result of our focus on increasing the number of
business travelers and a general increase in fare levels. Additionally, during
the quarter ended June 30, 1998, we honored certain Western Pacific Airlines
flight coupons at a significantly reduced fare, which depressed the average fare
for the quarter by approximately $6. Western Pacific Airlines operated out of
DIA until it ceased operations on February 4, 1998.
Passenger Revenues. Passenger revenues totaled $75,975,000 for the
quarter ended June 30, 1999 compared to $41,561,000 for the quarter ended June
30, 1998, or an increase of 82.8%. Passenger revenue includes revenues for
non-revenue passengers, administrative fees, and revenue recognized for tickets
that are not used within one year from their issue dates. We carried 553,000
revenue passengers for the quarter ended June 30, 1999 compared to 368,000 for
the quarter ended June 30, 1998 or an increase of 50.3%. We had an average of 18
aircraft in our fleet during the quarter ended June 30, 1999 compared to an
average of 14 aircraft during the quarter ended June 30, 1998, an increase of
28.6%, and ASMs increased 271,404,000 or 49.8%. RPMs for the quarter ended June
30, 1999 were 506,247,000 compared to 337,555,000 for the quarter ended June 30,
1998, an increase of 50%.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $1,441,000 and $1,005,000 for the quarters ended June 30, 1999 and 1998,
representing 1.9% and 2.3% of total operating revenues, respectively, or an
increase of 43.4%. 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 $470,000 and $322,000 or .6% and .8% of
total operating revenues for the quarters ended June 30, 1999 and 1998,
respectively.
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
$66,233,000 and $42,463,000 for the quarters ended June 30, 1999 and 1998 and
represented 85% and 99% of total revenue, respectively. Operating expenses
decreased as a percentage of revenue during the quarter ended June 30, 1999 as a
result of the 82.8% increase in passenger revenues attributable to a 50.3%
increase in passengers and a 23.2% increase in the average fare.
Flight Operations. Flight operations expenses of $25,884,000 and
$17,854,000 were 33.2% and 41.6% of total revenue for the quarters ended June
30, 1999 and 1998, 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 $7,955,000 for 13,129,000 gallons used and $5,191,000 for 8,667,000
gallons used resulted in an average fuel cost of 60.6(cent) and 59.9(cent) per
gallon and represented 30.7% and 29.1% of total flight operations expenses for
the quarters ended June 30, 1999 and 1998, respectively. The average fuel cost
per gallon increased for the quarters ended June 30, 1999 from the comparable
prior period due to an overall increase in the market price of fuel. Fuel prices
are subject to change weekly, as we do not purchase supplies in advance for
inventory. Fuel consumption for the quarters ended June 30, 1999 and 1998
averaged 782 and 770 gallons per block hour, respectively. Fuel consumption
increased over the prior comparable period because of increased flap speed
settings mandated by the FAA which required more fuel to maintain air speed at
normal operating levels as well as the need to carry additional fuel because of
increased storm activity. The requirement for increased flap speed settings will
be lifted whan a fleet modification is completed, which is required to be done
by August 1, 2000.
Aircraft lease expenses totaled $10,374,000 (13.3% of total revenue) and
$7,591,000 (17.7% of total revenue) for the quarters ended June 30, 1999 and
1998, respectively, or an increase of 36.7%. The increase is largely due to
higher lease expenses for larger and newer Boeing 737 aircraft added to the
fleet and an increase in the average number of aircraft to 18 from 14, or 28.6%,
for the quarters ended June 30, 1999 and 1998, respectively.
Aircraft insurance expenses totaled $605,000 (.8% of total revenue) and
$647,000 (1.5% of total revenue) for the quarters ended June 30, 1999 and 1998,
respectively. Aircraft insurance expenses were .12(cent) and .19(cent) per RPM
for the quarters ended June 30, 1999 and 1998, respectively. Aircraft insurance
expenses decreased per RPM as a result of competitive pricing in the aircraft
insurance industry, our favorable experience rating since we began flight
operations in July 1994 and economies of scale due to the increase in fleet
size.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $3,452,000 and $2,316,000 or 4.5% and 5.6% of passenger revenue for each
of the quarters ended June 30, 1999 and 1998, or an increase of 49.1%. Pilot and
flight attendant compensation increased principally as a result of a 28.6%
increase in the average number of aircraft in service, general wage rate
increases, and an increase of 49.1% in block hours. We pay 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 we are not in the process of adding
aircraft to our system, pilot and flight attendant expense per aircraft
normalizes. With a scheduled passenger operation, and with salaried rather than
hourly crew compensation, our 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 $10,706,000 and $7,138,000 (an increase of 50%) for the quarters ended June
30, 1999 and 1998, respectively, and represented 13.7% and 16.6% of total
revenue. Aircraft and traffic servicing expenses will increase with the addition
of new cities to our route system. During the quarter ended June 30, 1999 we
served 19 cities and 14 during the quarter ended June 30, 1998, or an increase
of 35.7%. These include all expenses incurred at airports served by us including
landing fees, as well as station operations administration and flight operations
ground equipment maintenance. Station expenses include landing fees, facilities
rental, station labor, ground handling expenses, and interrupted trip expenses
associated with delayed or cancelled flights. Interrupted trip expenses are
amounts paid to other airlines to protect passengers as well as hotel, meal and
other incidental expenses. Aircraft and traffic servicing expenses were $1,348
and $1,291 per departure for the quarters ended June 30, 1999 and 1998,
respectively, or an increase of $57. During the quarter ended June 30, 1998, an
additional DIA revenue credit above amounts estimated and accrued, totaling
$371,000 for the calendar year ended December 31, 1997, was recorded which
approximated $67 per departure. After adjusting the cost per departure for the
quarter ended June 30, 1998 for this credit, the cost per departure would have
been $1,359 and the cost per departure for the quarter ended June 30, 1999 would
have been a $10 decrease from the prior comparable period. Aircraft and traffic
servicing expenses decreased as a result of conducting our own ground operations
at DIA beginning September 1, 1998 rather than having them performed by a third
party contractor. This savings was offset by increased interrupted trip expenses
as a result of a drop in the completion factor for the quarter ended June 30,
1999 to 98.4% from 99.1% for the quarter ended June 30, 1998 and expenses
associated with the Boulder, Colorado-DIA shuttle service which is complimentary
to our passengers.
Maintenance. Maintenance expenses of $13,550,00 and $8,728,000 were 17.4%
and 20.4% of total revenue for the quarters ended June 30, 1999 and 1998,
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 $807 and $775
for the quarters ended June 30, 1999 and 1998, respectively. During the quarter
ended June 30, 1999, we incurred an unanticipated engine repair expense as a
result of a premature failure totaling $1,500,000. Maintenance cost per block
hour would have been $718 excluding this engine repair expense, and we would
have experienced a 7.4% decrease in the cost per block hour. During the quarter
ended June 30, 1998 we were outsourcing certain aircraft heavy maintenance
checks. Effective March 1999, we began to conduct these checks in-house which we
expect will continue to reduce maintenance expenses in future periods.
Additionally, we believe that these costs will continue to normalize as we add
additional aircraft to our fleet.
Promotion and Sales. Promotion and sales expenses totaled $11,831,000 and
$7,126,000 and were 15.2% and 16.6% of total revenue for the quarters ended June
30, 1999 and 1998, 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.
Promotion and sales expenses decreased as a percentage of revenue for the
quarter ended June 30, 1999 over the prior comparable period largely as a result
of the increase in revenue.
Promotion and sales expenses per passenger were $21.39 and $19.36 for the
quarters ended June 30, 1999 and 1998, respectively. Promotion and sales
expenses increased largely as a result of increases in travel agency commissions
and credit card fees associated with the increase in our average fare from $108
for the quarter ended June 30, 1998 to $133 for the quarter ended June 30, 1999.
We also experienced an increase in reservation costs as a result of outsourcing
more of our reservation requirements offset by a decrease in advertising costs
per passenger.
General and Administrative. General and administrative expenses for the
quarters ended June 30, 1999 and 1998 totaled $3,688,000 and $1,279,000,
respectively, and were 4.7% and 3.0% of total revenue, respectively. These
expenses include the wages and benefits for several of our executive officers
and various other administrative personnel including legal, accounting, MIS,
aircraft procurement, corporate communications, and human resources and other
expenses associated with these departments. Employee health benefits, accrued
vacation and bonus expenses, and general insurance expenses are also included in
general and administrative expenses. Included in general and administrative
expenses for the quarter ended June 30, 1999 was an accrual of $742,000 for a
potential employee performance bonus under a new program adopted this year. We
also experienced increases in our human resources and MIS expenses as a result
of an increase in employees from approximately 950 in June 1998 to approximately
1,640 in June 1999. In addition to the usual increases in crew and station
personnel associated with additional aircraft and cities, we had significant
increases in maintenance personnel as a result of bringing certain heavy
maintenance checks in-house which began in March 1999 and ground handling
personnel for our own ramp operations at DIA which began in September 1998.
Because of the increase in personnel, our health insurance benefit expenses and
accrued vacation expense increased accordingly. During the quarter ended June
30, 1998, we relieved approximately $240,000 of our employee health insurance
liability that was determined to be overfunded with a corresponding credit to
general and administrative expenses.
Depreciation and Amortization. Depreciation and amortization expenses of
$574,000 and $338,000 were approximately .8% for each of the quarters ended June
30, 1999 and 1998. These expenses include depreciation of office equipment,
ground station equipment, and other fixed assets. Amortization of start-up and
route development costs is not included, as these expenses have been expensed as
incurred.
Nonoperating Income (Expense). Net nonoperating income totaled $681,000
for the quarter ended June 30, 1999 compared to $9,000 for the quarter ended
June 30, 1998. Interest income increased from $276,000 to $825,000 during the
quarter ended June 30, 1999 from the prior comparable period due to an increase
in cash balances as a result of an increase in cash provided by operating
activities and proceeds from stock option and warrant exercises. Interest
expenses decreased to $22,000 from $240,000 during the quarter ended June 30,
1999 from the prior year. In December 1997, we sold $5,000,000 of 10% senior
notes. In connection with this transaction, we 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 associated with the senior
secured notes totaled $234,000 during the quarter ended June 30, 1998. In
January 1999, we paid the note in full. Other, net nonoperating expense was
$122,000 for the quarter ended June 30, 1999 compared to other, net nonoperating
income of $26,000 for the quarter ended June 30, 1998.
Income Tax Expense: We accrued income taxes of $4,718,000 at 38.25% of
taxable income during the quarter ended June 30, 1999. During the quarter ended
June 30, 1998, the Company had tax loss carryforwards that offset taxable income
for the period.
Expenses per ASM. Our expenses per ASM for the quarters ended June 30,
1999 and 1998 were 8.12(cent) and 7.80(cent), respectively, or an increase of
4.1%. Our cost per ASM increased during the quarter ended June 30, 1999
principally as a result of an unanticipated engine repair expense due to a
premature failure which accounted for .18(cent) of expense per ASM and our
accrual for a potential employee performance bonus under a new program adopted
this year, which accounted for .09(cent) of expenses per ASM. Our expense per
ASM for the quarter ended June 30, 1999 adjusted for these items would have been
7.85(cent). Expenses per ASM excluding fuel for the quarters ended June 30, 1999
and 1998 were 7.14(cent) and 6.84(cent), respectively, or an increase of 4.4%.
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 us on five of our Boeing
737-200 aircraft, the expenses per ASM for us are higher by 11% when compared
with the 120 seat alternative used by many carriers. Our average seats per
aircraft for the quarter ended June 30, 1999 were 126 as compared to 124 seats
per aircraft for the quarter ended June 30, 1998, as a result of the increase in
the number of our Boeing 737-300 aircraft.
Liquidity and Capital Resources
Our balance sheet reflected cash and cash equivalents and short-term
investments of $70,497,000 and $47,289,000 at June 30, 1999 and March 31, 1999,
respectively. At June 30, 1999, total current assets were $113,917,000 as
compared to $77,413,000 of total current liabilities, resulting in working
capital of $36,504,000. At March 31, 1999, total current assets were $94,209,000
as compared to $68,721,000 of total current liabilities, resulting in working
capital of $25,488,000. The increase in our present working capital is largely a
result of cash flows provided by operating activities and proceeds from
exercises of common stock options and warrants during the quarter ended June 30,
1999.
Cash provided by operating activities for the quarter ended June 30, 1999
was $20,598,000. This is attributable to our net income for the period,
decreases in trade receivables, utilization of deferred tax assets, and
increases in air traffic liability and accrued maintenance expenses, offset by
increases in security, maintenance and other deposits and prepaid expenses. Cash
used by operating activities for the quarter ended June 30, 1998 was $2,931,000.
This was attributable to increases in security, maintenance and other deposits,
prepaid expenses and other assets and decreases in accounts payable and other
accrued expenses, offset by net income and decreases in trade receivables and
increases in air traffic liability and accrued maintenance expenses.
Cash used by investing activities for the quarter ended June 30, 1999 was
$43,303,000. We invested $41,378,000 in short-term investments comprised of
government-backed agencies with maturities of one year or less. During the
quarter ended June 30, 1999, cash security deposits for aircraft totaling
$596,000 were returned to us. We had issued to certain of our aircraft lessors
warrants to purchase 395,000 shares of our Common Stock at an aggregate purchase
price of $2,391,600. During May 1999 and June 1999, aircraft lessors exercised
all of these warrants and we received $2,391,600. To the extent that the
aircraft lessors were able to realize certain profit margins on their subsequent
sale of our Common Stock, they were required to refund a portion of the cash
security deposits they were holding. As a result of their sales of our Common
Stock, $486,000 in cash security deposits were returned to us during the quarter
ended June 30, 1999. Other cash security deposits were replaced with letters of
credit and these deposits were returned to us. Additionally, we secured two
aircraft delivered during the quarter ended June 30, 1999 with letters of credit
totaling $860,000. Our restricted investments increased $860,000 to
collateralize the letters of credit. We used $1,662,000 for capital expenditures
for rotable aircraft components, maintenance equipment and tools, aircraft
leasehold costs and improvements, and computer equipment for the quarter ended
June 30, 1999. Cash used in investing activities for the quarter ended June 30,
1998 was $5,261,000. We invested $4,933,000 in short-term investments comprised
of government-backed agencies with maturities of one year or less. We used
$328,000 for capital expenditures for rotable aircraft components and aircraft
leasehold costs and improvements during the quarter ended June 30, 1998.
Cash provided by financing activities for the quarters ended June 30,
1999 and 1998 was $4,536,000 and $13,846,000, respectively. During the quarter
ended June 30, 1999, we received $4,556,000 from the exercise of Common Stock
options and warrants. During the quarter ended June 30, 1998, we sold 4,363,001
shares of our Common Stock through a private placement to an institutional
investor. Gross proceeds to us from the transaction were approximately
$14,180,000, of which we received net proceeds of approximately $13,650,000
after offering costs. We issued a warrant to this investor to purchase 716,929
shares of our Common Stock at a purchase price of $3.75 per share. This warrant
expires in April 2002.
We operate 19 Boeing 737 type aircraft under operating leases with
expiration dates ranging from 1999 to 2006. Under these leases, we were required
to make cash security deposits or issue letters of credit to secure the lease
obligations. At June 30, 1999, we had made cash security deposits and
outstanding letters of credit totaling $4,952,000 and $4,504,000 respectively.
Accordingly, our restricted cash balance includes $4,504,000 which collateralize
the outstanding letters of credit. Additionally, we make deposits for
maintenance of these aircraft. At June 30, 1999, we had maintenance deposits of
$22,296,405.
Two of our leased aircraft are not compliant with FAA Stage 3 noise
regulations. As their leases expire in the fall of 1999 we are replacing these
aircraft with Stage 3 compliant aircraft. We have entered into lease agreements
to lease two Boeing 737-200 advanced aircraft to replace these aircraft.
However, delivery delays could cause us to temporarily reduce our fleet size and
therefore adversely affect our revenues.
We are exploring various means to increase revenues and reduce expenses.
We have performed ad hoc charters and will consider them in the future depending
on the availability of our fleet. We are considering revenue enhancement
initiatives with new marketing alliances. We began our own ground handling
operations at DIA effective September 1, 1998, a function that had been provided
by an independent contractor. Ground handling equipment required by us to
perform these operations necessitated capital expenditures of approximately
$800,000. Effective March 1, 1999, we began to conduct certain aircraft heavy
maintenance checks in-house that we expect will reduce maintenance expenses.
Other potential expense reduction programs include the installation of an
upgraded flight operations, maintenance, and parts inventory management
information system which we expect will be fully operational by the end of the
fiscal year ending March 31, 2000, and an in-house revenue accounting system.
We currently sublease from Continental Airlines, on a preferential-use
basis, four departure gates on Concourse A at DIA. In addition, we use, on a
non-preferential use basis, another three gates under the direct control of the
City and County of Denver ("CCD"). Our sublease with Continental expires on
February 29, 2000, as does Continental's lease with CCD for these four gates and
an additional six gates it leases on Concourse A. Continental has an option to
renew its lease for five years and reduce its lease obligation to three gates
and related space. United Airlines, which occupies all of DIA's Concourse B
gates, has a right of first refusal on any of the ten Continental gates for
which Continental does not renew its lease, and has stated its intention to
occupy four gates on Concourse A. Continental's lease and lease renewal option
for gates on Concourse A, as well as United's right of first refusal on
Continental's Concourse A gates, are provided for in a 1995 agreement between
CCD, Continental and United (the "1995 Agreement"). We have requested of CCD a
lease, effective March 1, 2000, for the four gates we currently sublease from
Continental and an additional five gates contiguous to those we now use.
However, our request is contingent upon the implementation of a rate making
methodology for DIA terminal facilities that remedies what we consider to be
unfair and discriminatory aspects of the current methodology, as established by
the 1995 Agreement. Under the present methodology costs related to a
non-functioning Concourse A automated baggage system and associated equipment
and space ("AABS") are allocated exclusively to Concourse A, causing rental
rates on Concourse A to be higher than those on DIA's Concourse C. Our sublease
for Concourse A gates with Continental, which expires in February 2000, provides
that Continental pays, on our behalf, a significant portion of the AABS costs
that would otherwise be payable by us under the current rate-making methodology.
CCD has indicated that it is considering alternative means of treating
AABS costs upon expiration of the Continental lease in February 2000. CCD and
the signatory airlines at DIA, including us, are discussing possible changes to
the rate-making methodology to deal with the AABS costs, although CCD has stated
that absent an agreement with a majority-in-interest of the DIA signatory
airlines, CCD will unilaterally impose a solution to the issue. Unless the issue
is resolved by agreement of all or at least a majority in interest of the
affected parties, there is a significant possibility that the 1995 Agreement, or
any rate-making methodology unilaterally imposed by CCD, will be subject to
litigation. In these circumstances, there is uncertainty with respect to the
number and location of gate facilities at DIA that will be available to us, as
well as the rates and charges that we will be required to pay for such
facilities after February 2000. If we were required to operate at fewer gates
than we have requested or if the ratemaking methodology is not amended or the
rates are increased, it could have a material adverse effect on our business and
results of operations.
Our goal is to continue to lease additional aircraft to serve additional
cities and to add flights on existing routes from Denver. We added routes to San
Diego, California, Atlanta, Georgia, Dallas/Ft. Worth, Texas and Las Vegas,
Nevada during the year ended March 31, 1999, and Portland, Oregon effective June
14, 1999. Service to Orlando, Florida is scheduled to commence September 9,
1999, with one daily nonstop flight and a second daily flight commencing on
November 4, 1999. We believe that expanding our 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 our 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 our business, and competition within the airline
industry that often requires quick reaction by management to changes in market
conditions, we may require additional capital to further expand our 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
we provide service, in addition to other markets where United Airlines provides
flights. We 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 our revenues
and results of operations.
Except for the year ended March 31, 1999 and the quarter ended June 30,
1999, we have incurred substantial operating losses since our inception. In
addition, we have substantial contractual commitments for leasing and
maintaining aircraft. We believe that our existing cash balances coupled with
improved operating results are and will be adequate to fund our operations at
least through March 31, 2000.
Year 2000 Compliance
We began operations in July 1994, and our operations depend predominantly
on third party computer systems. Because of our limited resources during our
start-up, the most cost effective way to establish our computer systems was to
outsource or to use manual systems. Internal systems we developed and any
software we acquired are limited and were designed or purchased with the Year
2000 taken into consideration.
We have 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.
We rely on third party business and government agencies to provide goods
and services which are critical to our operations, including the FAA, the DOT,
local airport authorities including DIA, utilities, communication providers,
financial institutions including credit card companies and fuel suppliers. We
are reviewing, and have initiated formal communications with, these third party
service providers to determine their Year 2000 readiness, the extent to which we
are vulnerable to any failure by such third parties to remediate their Year 2000
problems and to resolve such issues to the extent practicable.
All internal systems are in the testing and remediation phases. The
customer reservations and ticketing system and the credit card processing
system, for example, have already been tested and remediated. These systems are
outsourced and the third party provider absorbed the costs of modifying and
testing these systems. Our general accounting and payroll systems have been
upgraded to new versions that are certified as being Year 2000 compliant at an
insignificant cost to us. Our crew and dispatch training records, aircraft
maintenance records and inventory control are in the final stages of being
automated from manual systems to computer systems that are certified as being
Year 2000 compliant. The Boeing Company has verified that the computer systems
on the aircraft type operated by us are or will be Year 2000 compliant before
the year 2000. We plan to complete the testing and remediation phases by
September 30, 1999, and the contingency planning phase by October 31, 1999.
We have utilized existing resources with the exception of four temporary
personnel and have incurred appoximately $100,000 of expenses to implement our
Year 2000 project as of June 30, 1999. The total remaining costs of the Year
2000 project are expected to be insignificant and will be funded through cash
from operations. The costs and the dates on which we anticipate completion of
the Year 2000 project are based on our best estimates. There can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those anticipated.
Despite our efforts to address Year 2000 issues, we could potentially
experience disruptions or suspension of our operations (which we believe is the
most reasonably likely worse case scenario), including those resulting from
non-compliant systems used by third party businesses and governmental entities.
Our business, financial condition or results of operations could be materially
adversely affected by the failure of our systems or those operated by third
parties upon which our business relies.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The significant risk inherent in our market risk sensitive position is
the potential loss arising from an adverse change in the price of fuel as
described below. The sensitivity analysis presented does not consider either the
effects that such an adverse change may have on overall economic activity or
additional action management may take to mitigate our exposure to such a change.
Actual results may differ from the amounts disclosed. At the present time, we do
not utilize fuel price hedging instruments to reduce our exposure to
fluctuations in fuel prices.
Our earnings are affected by changes in the price and availability of
aircraft fuel. Market risk is estimated as a hypothetical 10 percent increase in
the average cost per gallon of fuel for the fiscal year ended March 31, 1999.
Based on fiscal year 1999 actual fuel usage, such an increase would have
resulted in an increase to aircraft fuel expense of approximately $2,300,000 in
fiscal year 1999. Comparatively, based on projected fiscal year 2000 fuel usage,
such an increase would result in an increase to aircraft fuel expense of
approximately $3,100,000 in fiscal year 2000. The increase in exposure to fuel
price fluctuations in fiscal year 2000 is due to our plan to increase our
average aircraft fleet size and related gallons purchased.
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
During the quarter, we issued an aggregate of 1,091,600 shares of
our Common Stock pursuant to the exercise of warrants as
discussed in "Liquidity and Capital Resources" above. The shares
were issued pursuant to an exemption by reason of Section 4(2) of
the Securities Act of 1933. A Registration Statement on Form S-3
covering the resale of these shares has been declared effective
by the Securities and Exchange Commission.
Item 6: Exhibits and Reports on Form 8-K
Exhibit Numbers
(a) Exhibits
10.44 Aircraft Sublease Agreement (MSN 23039) dated as of July 21, 1999
between Kommanditbolaget Flygplanet XIV, Sublessor, and Frontier
Airlines, Inc., Sublessee. Portions of this exhibit have been
excluded from the publicly available document and an application
for an order granting confidential treatment of the excluded
material has been made.
10.45 Aircraft Sublease Agreement (MSN 23040) dated as of July 21, 1999
between Kommanditbolaget Flygplanet XII, Sublessor, and Frontier
Airlines, Inc., Sublessee. Portions of this exhibit have been
excluded from the publicly available document and an application
for an order granting confidential treatment of the excluded
material has been made.
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: August 10, 1999 By: /s/ Samuel D. Addoms
---------------------------------------
Samuel D. Addoms, Principal Executive
Officer and Principal Financial Officer
Date: August 10, 1999 By: /s/ Elissa A. Potucek
---------------------------------------
Elissa A. Potucek, Vice President,
Controller, Treasurer and Principal
Accounting Officer