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 September 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 Identification No.)
of incorporated or organization)
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 November 8,
1999 was 17,582,709.
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 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Condensed Balance Sheets
(Unaudited)
September 30, March 31,
1999 1999
--------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 47,683,727 $ 47,289,072
Short-term investments 33,466,704 -
Restricted investments 4,000,000 4,000,000
Trade receivables 12,620,673 16,930,038
Maintenance deposits 16,092,758 13,018,466
Prepaid expenses and other assets 6,886,878 5,439,834
Inventories 2,051,421 1,203,916
Deferred tax assets 999,921 6,041,576
Deferred lease expenses 219,027 285,636
--------------- ----------------
Total current assets 124,021,109 94,208,538
Security, maintenance and other deposits 10,854,170 11,834,457
Property and equipment, net 11,687,957 8,733,778
Deferred lease and other expenses 186,006 267,762
Restricted investments 6,185,760 4,575,760
=============== ================
$ 152,935,002 $ 119,620,295
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 13,979,947 $ 14,011,238
Air traffic liability 32,191,368 28,887,692
Other accrued expenses 14,611,403 10,781,509
Accrued maintenance expense 19,480,769 14,933,568
Current portion of obligations under capital leases 107,261 106,833
--------------- ----------------
Total current liabilities 80,370,748 68,720,840
Accrued maintenance expense 5,575,898 6,042,958
Deferred tax liability 30,928 30,928
Obligations under capital leases, excluding current portion 382,167 434,920
--------------- ----------------
Total liabilities 86,359,741 75,229,646
--------------- ----------------
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; 17,582,209 and 16,141,172 shares
issued and outstanding at September 30, 1999 and March 31, 1999 17,582 16,141
Additional paid-in capital 63,201,482 58,054,844
Unearned ESOP shares (203,125) (609,375)
Retained earnings (accumulated deficit) 3,559,322 (13,070,961)
--------------- ----------------
Total stockholders' equity 66,575,261 44,390,649
--------------- ----------------
$ 152,935,002 $ 119,620,295
=============== ================
See accompanying notes to financial statements.
1
FRONTIER AIRLINES, INC.
Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------- ---------------- --------------- ----------------
Revenues:
Passenger $ 83,412,784 $ 55,502,301 $ 159,387,697 $ 97,062,888
Cargo 1,477,492 967,071 2,918,576 1,971,819
Other 562,989 383,541 1,033,189 705,759
--------------- ---------------- --------------- ----------------
Total revenues 85,453,265 56,852,913 163,339,462 99,740,466
--------------- ---------------- --------------- ----------------
Operating expenses:
Flight operations 30,376,247 18,778,648 56,260,630 36,632,354
Aircraft and traffic servicing 11,914,874 8,453,991 22,620,604 15,591,813
Maintenance 12,347,293 9,410,480 25,897,545 18,138,348
Promotion and sales 12,646,049 8,296,433 24,476,968 15,422,893
General and administrative 4,170,915 1,758,020 7,858,538 3,036,579
Depreciation and amortization 633,441 377,525 1,207,652 715,974
--------------- ---------------- --------------- ----------------
Total operating expenses 72,088,819 47,075,097 138,321,937 89,537,961
--------------- ---------------- --------------- ----------------
Operating income 13,364,446 9,777,816 25,017,525 10,202,505
--------------- ---------------- --------------- ----------------
Nonoperating income (expense):
Interest income 1,122,479 344,403 1,947,122 619,972
Interest expense (26,115) (217,842) (48,016) (458,081)
Other, net 136,587 (34,819) 15,021 (61,129)
--------------- ---------------- --------------- ----------------
Total nonoperating income, net 1,232,951 91,742 1,914,127 100,762
--------------- ---------------- --------------- ----------------
Income before income tax expense 14,597,397 9,869,558 26,931,652 10,303,267
Income tax expense 5,583,517 - 10,301,369 -
=============== ================ =============== ================
Net income $ 9,013,880 $ 9,869,558 $ 16,630,283 $ 10,303,267
=============== ================ =============== ================
Earnings per share:
Basic $ 0.52 $ 0.71 $ 0.98 $ 0.78
=============== ================ =============== ================
Diluted $ 0.47 $ 0.64 $ 0.89 $ 0.71
=============== ================ =============== ================
Weighted average shares of
common stock outstanding
Basic 17,452,641 13,955,031 16,998,582 13,238,367
=============== ================ =============== ================
Diluted 19,090,549 15,354,381 18,637,440 14,483,683
=============== ================ =============== ================
See accompanying notes to financial statements.
2
FRONTIER AIRLINES, INC.
Condensed Statements of Cash Flows
For the Six Months Ended September 30, 1999 and 1998
(Unaudited)
1999 1998
--------------- ----------------
Cash flows from operating activities:
Net income $ 16,630,283 $ 10,303,267
Adjustments to reconcile net income to net cash
provided by operating activities:
Employee stock option plan compensation expense 406,250 322,875
Depreciation and amortization 1,356,016 1,438,249
Loss on sale of equipment - 6,793
Deferred tax expense 5,041,655 -
Changes in operating assets and liabilities:
Restricted investments - (819,354)
Trade receivables 4,309,365 2,075,169
Security, maintenance and other deposits (3,927,921) (4,228,192)
Prepaid expenses and other assets (1,447,044) (1,639,725)
Inventories (847,505) 78,010
Accounts payable (31,291) (2,895,972)
Air traffic liability 3,303,676 (608,327)
Other accrued expenses 3,829,894 704,576
Accrued maintenance expense 4,080,141 3,495,732
--------------- ----------------
Net cash provided by operating activities 32,703,519 8,233,101
--------------- ----------------
Cash flows used by investing activities:
Increase in short-term investments (33,466,704) -
Aircraft lease deposits refunded (paid) 1,833,916 (284,000)
Increase in restricted investments (1,610,000) -
Capital expenditures (4,161,830) (1,259,468)
--------------- ----------------
Net cash used by investing activities (37,404,618) (1,543,468)
--------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,148,079 13,395,477
Proceeds from short-term borrowings - 179,664
Principal payments on short-term borrowings - (58,778)
Principal payments on obligations under capital leases (52,325) (23,793)
--------------- ----------------
Net cash provided by financing activities 5,095,754 13,492,570
--------------- ----------------
Net increase in cash and cash equivalents 394,655 20,182,203
Cash and cash equivalents, beginning of period 47,289,072 3,641,395
--------------- ----------------
Cash and cash equivalents, end of period $ 47,683,727 $ 23,823,598
=============== ================
See accompanying notes to financial statements.
3
FRONTIER AIRLINES, INC.
Notes to Financial Statements
September 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
six months ended September 30, 1999 are not necessarily indicative of the
results that will be realized for the full year.
(2) Income Tax Expense
Income tax expense for the three and six months ended September 30, 1999
consists of:
Three months Six months
ended ended
----------------- -----------------
Current expense - 5,259,714
Deferred expense 5,583,517 5,041,655
================= =================
5,583,517 10,301,369
================= =================
4
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
our 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, 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 suitable 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 as they may be modified by the disclosures contained in
this report.
General
We are a scheduled airline based in Denver, Colorado. We currently
operate routes linking our Denver hub to 20 cities in 17 states spanning the
nation from coast to coast. At present, we use up to eight gates at Denver
International Airport ("DIA") for approximately 94 daily flight departures and
arrivals. During the six months ended September 30, 1999, we added Portland,
Oregon to our route system on June 14, 1999 and Orlando, Florida on September 9,
1999, respectively, and added frequencies to certain markets. On November 4,
1999 we added an additional daily nonstop flight to Orlando, Florida. On
November 1, 1998, we initiated complimentary shuttle service between Boulder,
Colorado and DIA.
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 November 8, 1999, including 6 Boeing 737-200s and
13 larger Boeing 737-300s.
As a result of the expansion of our operations during the six months
ended September 30, 1999, our results of operations are not necessarily
indicative of future operating results or comparable to the prior period ended
September 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 $16,630,000 or 89(cent) per diluted share for the
six months ended September 30, 1999 as compared to net income of $10,303,000 or
71(cent) per diluted share for the six months ended September 30, 1998. We had
net income of $9,014,000 or 47(cent) per diluted share for the three months
ended September 30, 1999 as compared to net income of $9,870,000 or 64(cent) per
diluted share for the three months ended September 30, 1998. During the three
and six months ended September 30, 1999, we reported a provision for income
taxes which totaled $5,584,000 and $10,301,000 or 29(cent) and 55(cent) per
diluted share, respectively. During the three and six months ended September 30,
1998, we had the benefit of tax loss carryforwards that offset tax expense for
the period. During the three and six months ended September 30, 1999 as compared
to the prior comparable periods, we experienced higher fares as a result of
5
increases in business travelers and a general increase in fare levels. Our cost
per ASM increased to 8.06(cent) during the six months ended September 30, 1999
from 7.76(cent) for the prior comparable period principally as a result of an
unanticipated engine repair expense due to a premature failure, which accounted
for .08(cent) of expense per ASM, our accrual for potential employee performance
bonuses, which accounted for .11(cent) of expense per ASM, and an overall
increase in the cost of fuel which accounted for .13(cent) per ASM.
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 six months ended
September 30, 1999, our break-even load factor was 52.4% compared to the
passenger load factor achieved of 63.0%. For the six months ended September 30,
1998, our break-even load factor was 56.2% compared to the achieved passenger
load factor of 62.9%. Our break-even load factor decreased from the prior
comparable period largely as a result of an increase in our average fare to $131
during the six months ended September 30, 1999 from $117 during the six months
ended September 30, 1998, an increase in our total yield per RPM from
13.75(cent) for the six months ended September 30, 1998 to 15.10(cent) for the
six months ended September 30, 1999 offset by an increase in our expense per ASM
to 8.06(cent) for the six months ended September 30, 1999 from 7.76(cent) for
the six months ended September 30, 1998.
The following table sets forth certain of our quarterly financial and
operating data for the 15 months of operations ended September 30, 1999.
Selected Financial and Operating Data
Quarter Ended
----------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30,
1998 1998 1999 1999 1999
Passenger revenue (1) $55,502,000 $49,113,000 $68,135,000 $75,975,000 $83,413,000
Revenue passengers carried 420,000 373,000 503,000 553,000 617,000
Revenue passenger
miles (RPMs)(2) 387,810,000 338,691,000 442,541,000 506,247,000 575,476,000
Available seat miles
(ASMs)(3) 609,111,000 632,754,000 751,081,000 815,961,000 900,524,000
Passenger load factor (4) 63.7% 53.5% 58.9% 62.0% 63.9%
Break-even load factor (5) 52.3% 50.8% 48.3% 52.0% 52.7%
Block hours (6) 12,543 13,325 15,666 16,785 17,987
Average daily block hour
utilization (7) 10.27 9.57 10.24 10.80 10.80
Yield per RPM (cents) (8) 14.31 14.50 15.40 15.01 14.49
Total yield per RPM (cents) (9) 14.66 14.97 15.86 15.38 14.85
Total yield per ASM (cents) (10) 9.33 8.01 9.34 9.55 9.49
Expense per ASM (cents) 7.73 7.66 7.71 8.12 8.01
Expense per ASM (excluding 6.81 6.73 6.91 7.14 6.83
fuel) (cents)
Passenger revenue per
block hour $4,424.94 $3,685.78 $4,349.23 $4,526.36 $4,637.40
Average fare (11) $125 $124 $131 $133 $130
Average aircraft in service 14.0 14.4 17.0 18.0 19.1
EBITDAR (12) $17,713,000 $10,886,132 $21,923,000 $22,479,000 $25,779,000
EBITDAR as a % of revenue 31.2% 21.5% 31.2% 28.9% 30.2%
Operating income $9,778,000 $2,243,000 $12,234,000 $11,653,000 $13,364,000
Net income $9,870,000 $2,460,000 $17,802,000 $7,616,000 $9,014,000
6
(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 total 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 three and six months ended
September 30, 1999 and 1998.
For the three months ended September 30, For the six months ended September 30,
1999 1998 1999 1998
-------------------- -------------------- -------------------- --------------------
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 9.26 97.6% 9.11 97.6% 9.29 97.6% 8.41 97.3%
Cargo 0.16 1.7% 0.16 1.7% 0.17 1.8% 0.17 2.0%
Other 0.06 0.7% 0.06 0.7% 0.06 0.6% 0.06 0.7%
========= ========= ========= ========= ========== ======== ========== ========
Total revenues 9.48 100.0% 9.33 100.0% 9.52 100.0% 8.64 100.0%
========= ========= ========= ========= ========== ======== ========== ========
Operating expenses:
Flight operations 3.37 35.6% 3.08 33.0% 3.28 34.4% 3.18 36.7%
Aircraft and traffic
servicing 1.32 13.9% 1.39 14.9% 1.32 13.9% 1.35 15.6%
Maintenance 1.37 14.5% 1.55 16.5% 1.51 15.9% 1.57 18.2%
Promotion and sales 1.41 14.8% 1.36 14.6% 1.42 15.0% 1.34 15.5%
General and adminstrative 0.47 4.9% 0.29 3.1% 0.46 4.8% 0.26 3.0%
Depreciation and
amortization 0.07 0.7% 0.06 0.7% 0.07 0.7% 0.06 0.7%
========= ========= ========= ========= ========== ======== ========== ========
Total operating expenses 8.01 84.4% 7.73 82.9% 8.06 84.7% 7.76 89.7%
========= ========= ========= ========= ========== ======== ========== ========
Total ASMs (000s) 900,524 609,111 1,716,485 1,153,668
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.
7
Our average fare for the six months ended September 30, 1999 and 1998 was
$131 and $117, respectively. We believe that the increase in the average fare
during the six months ended September 30, 1999 over the prior comparable periods
was largely a result of our focus on increasing the number of business travelers
and a general increase in fare levels. Additionally, during the six months ended
September 30, 1998, we honored certain Western Pacific Airlines flight coupons
at a significantly reduced fare, which depressed the average fare for the
period. Western Pacific Airlines operated out of DIA until it ceased operations
on February 4, 1998. Our average fare for the three months ended September 30,
1999 was $130 compared to $125 for the three months ended September 30, 1998.
During the three months ended September 30, 1998, we experienced higher average
fares in certain of our markets as a result of accommodating Northwest Airlines
passengers during that carrier's pilot strike during a portion of August and
September 1998.
Passenger Revenues. Passenger revenues totaled $159,388,000 for the six
months ended September 30, 1999 compared to $97,063,000 for the six months ended
September 30, 1998, or an increase of 64.2%. The number of revenue passengers
carried was 1,170,000 for the six months ended September 30, 1999 compared to
788,000 for the six months ended September 30, 1998 or an increase of 48.5%. We
had an average of 18.5 aircraft in our fleet during the six months ended
September 30, 1999 compared to an average of 14 aircraft during the six months
ended September 30, 1998, an increase of 32.1%, and an increase in ASMs of
562,817,000 or 48.8%. RPMs for the six months ended September 30, 1999 were
1,081,723,000 compared to 725,369,000 for the six months ended September 30,
1998, an increase of 49.1%. We believe that our passenger revenues were
adversely effected by late deliveries of aircraft during the three months ended
September 30, 1999.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $2,919,000 and $1,972,000 for the six months ended September 30, 1999
and 1998, respectively, representing 1.8% and 2.0%, respectively of total
operating revenues and an increase of 48.0%. 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 $1,033,000 and $706,000, or .6% and .7%
of total operating revenues for the six months ended September 30, 1999 and
1998, respectively, and an increase of 46.4%
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
$138,322,000 and $89,538,000 for the six months ended September 30, 1999 and
1998 and represented 84.7% and 89.7% of revenue, respectively. Operating
expenses decreased as a percentage of revenue during the six months ended
September 30, 1999 as a result of the 64.2% increase in passenger revenues
attributable to a 48.5% increase in passengers and an 12.0% increase in the
average fare offset by an increase in the cost of fuel and an accrual for
potential employee performance bonuses. Total operating expenses for the three
months ended September 30, 1999 and 1998 were $72,089,000 and $47,075,000 and
represented 84.4% and 82.8% of revenue, respectively. Operating expenses
increased as a percentage of revenue during the three months ended September 30,
1999 principally as a result of an increase in the cost of fuel and the accrual
for potential employee performance bonuses.
Flight Operations. Flight operations expenses of $56,261,000 and
$36,632,000 were 34.4% and 36.7% of total revenue for the six months ended
September 30, 1999 and 1998, respectively. Flight operations expenses of
$30,376,000 and $18,779,000 were 35.6% and 33.0% of total revenue for the three
months ended September 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.
8
Aircraft fuel expenses include both the direct cost of fuel, including
taxes, as well as the cost of delivering fuel into the aircraft. Aircraft fuel
expense of $18,512,000 for 27,404,000 gallons used and $10,807,000 for
18,621,000 gallons used resulted in an average fuel cost of 67.6(cent) and
58.0(cent) per gallon, for the six months ended September 30, 1999 and 1998,
respectively. Aircraft fuel expense represented 32.9% and 29.5% of total flight
operations expenses or 11.3% and 10.8% of total revenue for the six months ended
September 30, 1999 and 1998, respectively. Aircraft fuel expense of $10,557,000
for 14,275,000 gallons used and $5,617,000 for 9,954,000 gallons used resulted
in an average fuel expense of 74.0(cent) and 56.4(cent) per gallon for the three
months ended September 30, 1999 and 1998, respectively. Aircraft fuel costs
represented 34.8% and 29.9% of total flight operations expenses for the three
months ended September 30, 1999 and 1998, respectively, or 12.4% and 9.9% of
total revenue. The average fuel cost per gallon increased for the six months
ended September 30, 1999 from the comparable prior period due to an overall
increase in the cost of fuel. Fuel prices are subject to change weekly as we do
not purchase supplies in advance for inventory. Fuel consumption for the six
months ended September 30, 1999 and 1998 averaged 788 and 782 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, offset by fuel
efficiencies with the increase in more fuel efficient aircraft. The requirement
for increased flap speed settings will be lifted when a fleet modification is
completed, which is required to be completed by August 1, 2000.
Aircraft lease expenses totaled $22,019,000 (13.5% of total revenue) and
$15,181,000 (15.2% of total revenue) for the six months ended September 30, 1999
and 1998, respectively, or an increase of 45%. The increase is largely due to
higher lease expenses for larger Boeing 737-300 aircraft added to the fleet and
an increase in the average number of aircraft to 18.5 from 14, or 32.1%, for the
six months ended September 30, 1999 and 1998, respectively.
Aircraft insurance expenses totaled $1,317,000 (.8% of total revenue) for
the six months ended September 30, 1999. Aircraft insurance expenses for the six
months ended September 30, 1998 were $1,235,000 (1.2% of total revenue).
Aircraft insurance expenses were .12(cent) and .17(cent) per RPM for the six
months ended September 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 $7,230,000 and $4,787,000 or 4.5% and 4.9% of passenger revenue for each
of the six months ended September 30, 1999 and 1998, or an increase of 51%.
Pilot and flight attendant compensation increased principally as a result of a
32.1% increase in the average number of aircraft in service, general wage rate
increases, and an increase of 46.1% 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 exceptions.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $22,621,000 and $15,292,000 (an increase of 45.1%) for the six months ended
September 30, 1999 and 1998, respectively, and represented 13.9% and 15.6% of
total revenue. Aircraft and traffic servicing expenses include all expenses
incurred at airports served by us including landing fees, facilities rental,
station labor, ground handling expenses, and interrupted trip expenses
associated with delayed or cancelled flights. Interrupted trip expenses are
amounts paid to other airlines to protect passengers as well as hotel, meal and
other incidental expenses. Aircraft and traffic servicing expenses will increase
with the addition of new cities to our route system. During the six months ended
September 30, 1999 we served 20 cities compared to 15 cities during the six
months ended September 30, 1998, or an increase of 33.3%. Aircraft and traffic
servicing expenses were $1,381 and $1,324 per departure for the six months ended
September 30, 1999 and 1998, respectively, or an increase of $57. During the six
months ended September 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 $32 per departure. After adjusting the
cost per departure for this credit for the six months ended September 30, 1998,
the cost per departure would have been $1,356 and the cost per departure for the
six months ended September 30, 1999 would have been a $25 increase over the
prior comparable period. Aircraft and traffic servicing expenses increased as a
result of a drop in the completion factor for the six months ended September 30,
1999 to 98.9% from 99.2% for the six months ended September 30, 1998 and
expenses associated with the Boulder, Colorado-DIA shuttle bus service, which is
complimentary to our passengers. The increase in aircraft and traffic expenses
was offset by savings 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.
9
Maintenance. Maintenance expenses of $25,898,000 and $18,138,000 were
15.9% and 18.2% of total revenue for the six months ended September 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 $745 and $762 per block hour for the six months ended September 30, 1999 and
1998, respectively. During the six months ended September 30, 1999, we incurred
an unanticipated engine repair expense as a result of a premature failure
totaling $1,340,000. Maintenance cost per block hour would have been $706
excluding this engine repair expense, and we would have experienced a 7.4%
decrease in the cost per block hour. Also, during the six months ended September
30, 1999 we incurred higher than usual borrowed parts fees. During the six
months ended September 30, 1999 these fees were approximately $1,118,000
compared to $146,000 during the six months ended September 30, 1998. We are in
the process of increasing our spare parts inventory in an effort to mitigate
this expense in the future. During the six months ended September 30, 1998 we
were outsourcing certain aircraft heavy maintenance checks. Effective March
1999, we began to conduct the majority of these checks in-house which we expect
will continue to reduce maintenance expenses in future periods. Additionally,
maintenance costs per block hour have decreased as certain fixed costs are
spread over a larger fleet.
Promotion and Sales. Promotion and sales expenses totaled $24,477,000 and
$15,423,000 and were 15.0% and 15.5% of total revenue for the six months ended
September 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.
During the six months ended September 30, 1999, promotion and sales
expenses per passenger increased to $20.92 from $19.56 for the six months ended
September 30, 1998. 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 $117 for the six months ended September
30, 1998 to $131 for the six months ended September 30, 1999. We had an increase
in computer reservations costs associated with the expansion of our travel
agency electronic ticketing capabilities, an increase in reservation costs as a
result of outsourcing more of our reservation requirements, offset by a decrease
in advertising costs per passenger. We are hopeful that this expansion for
travel agent electronic ticketing capability will increase travel agency sales.
General and Administrative. General and administrative expenses for the
six months ended September 30, 1999 and 1998 totaled $7,859,000 and $3,037,000.
General and administrative 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 six months ended September 30, 1999
was an accrual of $1,875,000 for potential employee performance bonuses. We also
experienced increases in our human resources and MIS expenses as a result of an
increase in employees from approximately 1,124 in September 1998 to
approximately 1,763 in September 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. Because of
the increase in personnel, our health insurance benefit expenses and accrued
vacation expense increased accordingly.
Depreciation and Amortization. Depreciation and amortization expenses of
$1,208,000 and $716,000 were approximately .7% of total revenue for the six
months ended September 30, 1999 and 1998. These expenses include depreciation of
office equipment, ground station equipment, and other fixed assets of the
Company.
Nonoperating Income (Expense). Net nonoperating income totaled $1,914,000
for the six months ended September 30, 1999 compared to $101,000 for the six
months ended September 30, 1998. Interest income increased from $620,000 to
$1,947,000 during the six months ended September 30, 1999 from the prior 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 expense decreased to $48,000 from $458,000 during the six months ended
September 30, 1999 from the prior period. In December 1997, we sold $5,000,000
of 10% senior notes. In connection with this transaction, we issued warrants to
purchase 1,750,000 shares of Common Stock to the lender. Interest expense paid
in cash and the accretion of the warrants and deferred loan expenses associated
with the senior secured notes totaled $380,000 during the six months ended
September 30, 1998. In January 1999, we paid the note in full.
10
Income Tax Expense: We accrued income taxes of $10,301,000 at 38.25% of
pre-tax income during the six months ended September 30, 1999. During the six
months ended September 30, 1998, we had the benefit of tax loss carryforwards
that offset tax expense for the period.
Expenses per ASM. Our expenses per ASM for the six months ended September
30, 1999 and 1998 were 8.06(cent) and 7.76(cent), respectively, or an increase
of 3.9%. Our cost per ASM increased during the six months ended September 30,
1999 principally as a result of an unanticipated engine repair expense due to a
premature failure which accounted for .08(cent) of expense per ASM, our accrual
for potential employee performance bonuses, which accounted for .11(cent) of
expenses per ASM, and an overall increase in the cost of fuel which accounted
for .13(cent) per ASM. Our expense per ASM for the six months ended September
30, 1999 adjusted for these items would have been 7.74(cent). Expenses per ASM
excluding fuel for the six months ended September 30, 1999 and 1998 were
6.98(cent) and 6.82(cent), respectively, or an increase of 2.3%.
Liquidity and Capital Resources
Our balance sheet reflected cash and cash equivalents and short-term
investments of $81,150,000 and $47,289,000 at September 30, 1999 and March 31,
1999, respectively. At September 30, 1999, total current assets were
$124,021,000 and total current liabilities were $80,371,000, resulting in
working capital of $43,650,000. At March 31, 1999, total current assets were
$94,209,000 and total current liabilities were $68,721,000, resulting in working
capital of $25,488,000. The increase in our 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 six months ended September 30,
1999.
Cash provided by operating activities for the six months ended September
30, 1999 was $32,704,000. This is attributable to our net income for the period,
the utilization of deferred tax assets, decreases in trade receivables,
increases in our air traffic liability, other accrued expenses, and accrued
maintenance expenses, offset by increases in security, maintenance and other
deposits, prepaid expenses and inventories. Cash provided by operating
activities for the six months ended September 30, 1998 was $8,233,000. This was
attributable to our net income for the period, a decrease in trade receivables
and increases in other accrued expenses and accrued maintenance expenses, offset
by increases in security, maintenance and other deposits and prepaid expenses
and other assets, and decreases in accounts payable and air traffic liability.
Cash used in investing activities for the six months ended September 30,
1999 was $37,405,000. We invested $33,467,000 in short-term investments, net of
maturities, comprised of government-backed agencies with maturities of one year
or less. During the six months ended September 30, 1999, cash security deposits
for aircraft totaling $1,834,000 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, $1,024,000 in cash security deposits were returned to
us during the six months ended September 30, 1999. Other cash security deposits
were replaced with letters of credit and these deposits were returned to us. We
also received $500,000 in cash security deposits for aircraft returned to the
lessor during the six months ended September 30, 1999. Additionally, we secured
five aircraft delivered during the six months ended September 30, 1999 with
letters of credit totaling $1,610,000. Our restricted investments increased
$1,610,000 to collateralize the letters of credit. We used $4,162,000 for
capital expenditures for rotable aircraft components, maintenance equipment and
tools, aircraft leasehold costs and improvements, and computer equipment during
the six months ended September 30, 1999. Cash used in investing activities for
the six months ended September 30, 1998 was $1,543,000. We used $1,259,000 for
capital expenditures for ground handling equipment, rotable aircraft components
and aircraft leasehold costs and improvements. We used cash of $284,000 for
initial lease acquisition security deposits for a Boeing 737-200 aircraft that
was delivered in October 1998.
11
Cash provided by financing activities for the six months ended September
30, 1999 and 1998 was $5,096,000 and $13,493,000, respectively. During the six
months ended September 30, 1999, we received $5,148,000 from the exercise of
Common Stock options and warrants. During the six months ended September 30,
1998, we sold 4,363,001 shares of its common stock through a private placement
to an institutional investor. We received gross proceeds from the transaction of
approximately $14,180,000, of which we received net proceeds of approximately
$13,677,000. We issued a warrant to this investor to purchase 716,929 shares of
our Common Stock of us 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 2000 to 2006. Under these leases, we were required
to make cash security deposits or issue letters of credit to secure the lease
obligations. At September 30, 1999, we had made cash security deposits and had
outstanding letters of credit totaling $3,715,000 and $5,254,000, respectively.
Our restricted cash balance includes $5,254,000 that collateralizes the
outstanding letters of credit. Additionally, we make deposits for maintenance of
these aircraft. At September 30, 1999, we had maintenance deposits of
$22,605,000.
In October 1999, we signed a letter of intent to purchase 11 new Airbus
aircraft, with options to purchase an additional nine new Airbus aircraft. This
order contemplates a fleet replacement plan by which we will phase out our
Boeing 737 aircraft and replace them with a combination of Airbus A319 and A318
aircraft. As of November 8, 1999, we have made deposits totaling $2,550,000 to
secure these aircraft. As a complement to this purchase, in November 1999, we
signed two letters of intent to lease 16 new Airbus aircraft. When combined with
the purchase agreement and upon completion of our fleet transition, we expect
our fleet to be comprised of approximately two-thirds A319 aircraft and
one-third A318 aircraft. We expect to take delivery of our first Airbus aircraft
during the latter part of calendar 2001 and plan to complete our fleet
transition by the end of 2004. The A319 and A318 aircraft will be configured
with 132 and 114 passenger seats, respectively, with a 32-inch seat pitch. We
believe that operating newer Airbus aircraft will result in significant cost
savings and an improved product for our customers. In order to complete the
purchase of the Airbus aircraft, it will be necessary for us to secure
acceptable aircraft financing. While we believe that such financing will be
available to us, there can be no assurance that the same will be available when
required, or on acceptable terms. The inability to secure such financing could
have a material adverse effect on us.
In November 1998, our pilots voted to be represented by an independent
union, the Frontier Airlines Pilots Association. In September 1999 our
dispatchers elected to be represented by the Transport Workers Union of America.
The resulting impact of these unions on labor costs is unknown at this time as
the first bargaining agreements have not been negotiated.
We are exploring various means to increase revenues and reduce expenses.
We have added electronic ticketing capabilities for travel agencies which we
anticipate will increase travel agency sales. 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 previously been provided by an independent contractor.
Ground handling equipment required 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. Effective November 5, we reduced travel
agency commissions from 8% to 5% in response to our competitors. Another
potential expense reduction program includes 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.
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
12
which Continental does not renew its lease, and has stated its intention to
occupy at least eight 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 possibility that the 1995 Agreement, or any
rate-making methodology unilaterally imposed by CCD, could be subject to
litigation. In these circumstances, there is uncertainty as to the rates and
charges that we will be required to pay for Concourse A facilities after
February 2000. If the rate-making 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 or purchase 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. During the six months
ended September 30, 1999 we added routes to Portland, Oregon and Orlando,
Florida. 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 October 1999, the U.S. Senate approved the Air Transportation
Improvement Act. Among other matters, this Act calls for additional slot
allocations (one slot is one take-off or landing right) at Washington's Ronald
Reagan National Airport ("DCA"), New York's LaGuardia Airport and Chicago's
O'Hare International Airport. In addition, the bill calls for exemptions to the
perimeter rule at DCA, which currently limits non-stop flights into or out of
DCA to a maximum of 1,250 miles. Our present intent is to request permission to
provide service between Denver and DCA should access become available to us.
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 six months ended
September 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. However as discussed above, we will require
financing in order to fund our intended purchase of Airbus A319 and A318
aircraft.
13
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.
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.
All internal systems have been tested and remediated; however, 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 critical third
party service providers to determine their Year 2000 readiness. We have received
positive Year 2000 compliancy and readiness responses from many of our
mission-critical vendors and we continue to follow up to ensure readiness
statements are received. We cannot reasonably estimate the extent of the impact
on us of the Year 2000 problems that may be experienced by any of these parties.
There can be no assurance that the systems of such third parties on which we
rely will be modified on a timely basis.
We have initial contingency plans developed that are presently going
through review processes. We have hired an outside risk management consultant
who has been involved with developing and reviewing other airlines' contingency
plans to perform a review of our plans. We anticipate completing this process
mid-November 1999. The remainder of the year will be devoted to enhancing and
testing contingency plans for those scenarios within our control.
On December 31, 1999, all flights will terminate no later than 11:00 P.M.
Eastern Standard Time (9:00 P.M. Mountain Time) and the first scheduled flight
on January 1, 2000, departs at 7:20 A.M. Mountain Time. We believe that this
will give us adequate time to assess the operational status of our airline,
critical third party suppliers, and the cities we serve.
We have utilized existing resources with the exception of four temporary
personnel and have incurred approximately $160,000 of expenses to implement our
Year 2000 project as of September 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 and due to the complexity
and pervasiveness of the Year 2000 issue, and in particular the uncertainty
regarding the compliancy of third parties, no assurance can be given that our
compliancy plan will be achieved. We could potentially experience suspension of
flights to certain cities, delayed flights, or otherwise ceased operations, a
degraded level of safety, increased costs, delayed cash flows, and customer
inconvenience. 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.
14
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.
15
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on
September 9, 1999, at which a quorum for the transaction of
business was present. One matter was voted upon, as described
below.
Members of the Company's Board of Directors elected at the
meeting were Samuel D. Addoms, B. Ben Baldanza, D. Dale Browning,
Paul S. Dempsey, B. Larae Orullian, William B. McNamara, and James
B. Upchurch. The votes cast with respect to each nominee were as
follows:
14,646,607 "For" Mr. Addoms; 32,037 "Withheld"
14,646,210 "For" Mr. Baldanza; 32,434 "Withheld"
14,647,319 "For" Mr. Browning; 31,325 "Withheld"
14,646,828 "For" Mr. Dempsey; 31,816 "Withheld"
14,645,584 "For" Ms. Orullian; 33,060 "Withheld"
14,639,710 "For" Mr. McNamara; 39,934 "Withheld"
14,639,460 "For" Mr. Upchurch; 39,184 "Withheld"
Item 5: Other Information
On October 11, 1999, B. Ben Baldanza, after having been appointed
as an executive officer of US Airways, resigned his position from
our Board of Directors.
Item 6: Exhibits and Reports on Form 8-K
Exhibit
Numbers
(a) Exhibits
3.1 Restated Articles of Incorporation of the Company (1)
3.2 Amended and Restated Bylaws of the Company (September 9,
1999) (1)
4.4(c) Third Amendment to Rights Agreement dated September 9,
1999 (2)
10.10(a)Aircraft Lease Extension and Amendment Agreement dated as
of October 1, 1999. 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.(1)
10.11(a)Aircraft Lease Extension and Amendment Agreement dated as
of October 1, 1999. (1)
10.46 Aircraft Sublease Agreement (MSN 26442) dated as of
October 11, 1999 between Indigo Aviation AB (publ),
Lessor, and Frontier Airlines, Inc., Lessee. 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. (1)
27.1 Financial Data Schedule (1)
(1) Filed herewith.
(2) Incorporated by reference from the Company's Report on Form 8-A/A filed
on October 14, 1999.
(b) Reports on Form 8-K
None.
16
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: November 8, 1999 By: /s/ Steve B. Warnecke
-----------------------------------
Steve B. Warnecke, Vice President
and Chief Financial Officer
Date: November 8, 1999 By: /s/ Elissa A. Potucek
-----------------------------------
Elissa A. Potucek, Vice President,
Controller, Treasurer and Principal
Accounting Officer