<PAGE>
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, 1997
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
- ------------------------------------------------ ------------------------------
(State or other jurisdiction of incorporated or (I.R.S. Employer
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 8,
1997 was 9,091,563.
<PAGE>
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
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRONTIER AIRLINES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1997 MARCH 31,
(UNAUDITED) 1997
------------ ------------
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,531,252 $ 10,286,453
Restricted investments 2,000,000 2,000,000
Trade receivables, net of allowance
for doubtful accounts of $115,097
and $71,713 at June 30, 1997 and
March 31, 1997 7,067,713 7,451,342
Maintenance deposits 8,275,474 6,968,379
Prepaid expenses and other assets 3,822,334 3,449,871
Inventories 994,433 997,102
Deferred lease expenses 293,868 289,579
Note receivable - current portion 27,838 27,288
------------ ------------
Total current assets 31,012,912 31,470,014
Security, maintenance and other deposits 7,078,536 6,596,660
Property and equipment, net 4,634,014 4,340,982
Note receivable - long-term portion 24,509 31,762
Deferred lease and other expenses 923,966 918,994
Restricted investments 734,262 734,133
------------ ------------
$ 44,408,199 $ 44,092,545
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 6,790,625 $ 8,045,533
Air traffic liability 13,390,120 13,058,632
Other accrued expenses 4,421,099 3,318,043
Accrued maintenance expense 10,104,288 8,277,115
Note payable 152,300 9,812
Current portion of obligations
under capital leases 36,728 35,700
------------ ------------
Total current liabilities 34,895,160 32,744,835
Accrued maintenance expense 1,669,925 1,408,363
Obligations under capital leases,
excluding current portion 46,868 56,444
------------ ------------
Total liabilities 36,611,953 34,209,642
------------ ------------
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 20,000,000 shares;
8,844,375 shares issued and
outstanding 8,844 8,844
Additional paid-in capital 35,764,710 35,764,710
Accumulated deficit (27,977,308) (25,890,651)
------------ ------------
Total stockholders' equity 7,796,246 9,882,903
------------ ------------
$ 44,408,199 $ 44,092,545
============ ============
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
FRONTIER AIRLINES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Passenger $ 33,621,450 $ 27,569,884
Cargo 627,809 415,203
Other 307,411 161,961
------------ ------------
Total revenues 34,556,670 28,147,048
------------ ------------
Operating expenses:
Flight operations 14,244,102 10,502,604
Aircraft and traffic servicing 6,788,493 5,853,791
Maintenance 7,734,691 4,288,575
Promotion and sales 6,299,522 5,055,123
General and administrative 1,378,766 1,108,921
Depreciation and amortization 349,588 200,254
------------ ------------
Total operating expenses 36,795,162 27,009,268
------------ ------------
Operating (loss) income (2,238,492) 1,137,780
------------ ------------
Nonoperating income:
Interest income 160,806 218,608
Other, net (8,971) (19,978)
------------ ------------
Total nonoperating income,
net 151,835 198,630
------------ ------------
Net (loss) income $ (2,086,657) $ 1,336,410
============ ============
(Loss) income per common share and
share equivalent, note 2 $ (0.24) $ 0.15
============ ============
Weighted average number of common shares
and common share equivalents
outstanding, note 2 8,844,375 8,865,968
============ ============
See accompanying notes to financial statements.
</TABLE>
2
<PAGE>
FRONTIER AIRLINES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,
1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(2,086,657) $ 1,336,410
Adjustments to reconcile net loss to net cash
used by operating activities:
Employee stock option plan compensation
expense - 124,998
Depreciation and amortization 419,482 233,554
Changes in operating assets and liabilities:
Restricted investments (129) (2,138,758)
Trade receivables 383,629 903,833
Security, maintenance and other deposits (1,641,471) (1,904,693)
Prepaid expenses and other assets (451,618) (607,723)
Inventories 2,669 152,978
Note receivable 6,703 -
Accounts payable (1,254,908) (553,716)
Air traffic liability 331,488 2,835,769
Other accrued expenses 1,103,056 197,155
Accrued maintenance expense 2,088,735 2,306,323
----------- ------------
Net cash (used) provided by operating
activities (1,099,021) 2,886,130
----------- ------------
Cash flows used by investing activities:
Increase in short-term investments - (2,595,344)
Aircraft lease deposits (147,500) (1,184,750)
Capital expenditures (642,620) (694,488)
----------- ------------
Net cash used in investing activities (790,120) (4,474,582)
----------- ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 6,562,118
Deferred offering costs - 9,756
Proceeds from short-term borrowings 170,318 -
Principal payments on short-term borrowings (27,830) (10,441)
Principal payments on obligations
under capital leases (8,548) (30,286)
----------- ------------
Net cash provided by financing
activities 133,940 6,531,147
----------- ------------
Net (decrease) increase in cash and
cash equivalents (1,755,201) 4,942,695
Cash and cash equivalents, beginning of period 10,286,453 6,359,254
----------- ------------
Cash and cash equivalents, end of period $ 8,531,252 $11,301,949
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
FRONTIER AIRLINES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(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. 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, 1997 and 1996 are not necessarily indicative of the
results that will be realized for the full year. For further information,
refer to the audited financial statements and notes thereto for the year
ended March 31, 1997 contained in the Form 10-KSB for the fiscal year ended
March 31, 1997.
(2) PER SHARE DATA
Primary earnings per share is based upon the weighted average number of
shares of common stock outstanding and dilutive common stock equivalents
(stock options and warrants). Common stock equivalents have been excluded
from the June 30, 1997 calculation as they are considered antidilutive. The
number of weighted average shares outstanding includes common stock
outstanding and dilutive common stock equivalents. Fully diluted earnings
per share is not materially different than primary earnings per share and
has not been presented.
-4-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements that describe the business and
prospects of Frontier Airlines, Inc. (the "Company") and the expectations of the
Company and management. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
set forth. These risks and uncertainties include, but are not limited to: the
timing of, and expense associated with, expansion and modification of the
Company's operations in accordance with its business strategy or in response to
competitive pressures or other factors such as the Company's commencement of
passenger service and ground handling operations at several airports and
assumption of maintenance operations at DIA with its own employees; general
economic factors and behavior of the fare-paying public and the federal
government, such as the crash in May 1996 of another low-fare carrier's aircraft
that resulted in a federal investigation of the carrier, suspension of the
carrier's operations and increased federal scrutiny of low-fare carriers
generally that may increase the Company's operating costs or otherwise adversely
affect the Company; actions of competing airlines, such as increasing capacity
and pricing actions of United Airlines, other competitors, and Western Pacific
Airlines, Inc. ("Western Pacific") if the proposed merger with Western Pacific
is not completed; the risk that the merger with Western Pacific is not
completed; the current limited supply of Boeing 737 aircraft and the higher
lease costs associated with such aircraft, which inhibits the Company's ability
to achieve operating economies and implement its business strategy; the future
impact of recently mandated changes in the air transportation excise tax
effective October 1, 1997; and possible future increases in aviation fuel
prices. Because the Company's business, like that of the airline industry
generally, is characterized by high fixed costs relative to revenues and low
profit margins, small fluctuations in the Company's yield per RPM or expense per
ASM can significantly affect operating results.
As discussed in "Proposed Merger with Western Pacific Airlines" below, the
Company signed a Merger Agreement with Western Pacific on June 30,1997. The
discussion contained in this report generally describes the historic business of
the Company and plans of the Company as an independent airline. It does not
discuss the pro forma effect of the Company's merger with Western Pacific or the
operations of a combined company. As such, forward-looking information about
the Company in this report relates to operations of the Company prior to
consummation of the merger or operations of the Company if the merger does not
occur. Further information about the merger and the combined company will be
provided in a proxy statement relating to approval of the merger by shareholders
of the Company.
GENERAL
The Company is a low-fare, full-service airline based in Denver, Colorado. The
Company's flight operations began on July 5, 1994 with two Boeing 737-200
aircraft operating eight daily flights between Denver, Colorado and four North
Dakota cities. The Company leased three additional Boeing 737-200 aircraft in
1994 and added four cities in Montana to its route system. Since that time, the
Company has increased the number of markets it serves from its Denver hub to 13
cities in 10 states spanning the western two-thirds of the United States. The
Company presently operates a fleet of 12 aircraft comprised of seven Boeing 737-
200 and five Boeing 737-300 aircraft.
The Company significantly rescheduled its flights in 1995 and eliminated two of
its original North Dakota cities and all four of its Montana destinations.
Flights to Bismarck and Fargo, North Dakota, the last two of the Company's eight
original markets, were suspended on September 10, 1996. As of August 1, 1997 the
Company's current route system extends from Denver to Los Angeles, San Diego and
San Francisco, California; Chicago and Bloomington/Normal, Illinois;
Seattle/Tacoma, Washington; Phoenix, Arizona; St. Louis, Missouri;
Minneapolis/St. Paul, Minnesota; Salt Lake City, Utah; Omaha, Nebraska;
Albuquerque, New Mexico; and El Paso, Texas. Further route expansion from Denver
to Boston, Massachusetts is scheduled to be implemented on September 16, 1997.
At present, the Company utilizes four gates at Denver International Airport
("DIA") for approximately 28 daily flight departures.
The Company has leased two more Boeing 737-300s, one to be delivered in late
August 1997 and one in January 1998, at which time it plans to add new cities to
its route system or additional frequencies to markets presently being served.
Subject to future aircraft availability, the Company plans to lease additional
jets in the 737 series to permit the Company to further expand its lines of
service. The Merger Agreement between the Company and
-5-
<PAGE>
Western Pacific requires Western Pacific's concurrence in any such additional
leases. Demand and competition for Boeing 737 aircraft has increased
significantly in the past two years.
The Company expanded operations during the quarters ended June 30, 1996 and June
30, 1997. Therefore, the Company's results of operations for the quarters ended
June 30, 1996 and 1997 are not necessarily comparable or indicative of future
operating results. Effective in September 1996, the Company began performing
scheduled maintenance on its aircraft using its own mechanics, with the
exception of major maintenance cycles which continue to be performed by FAA
approved contractors.
PROPOSED MERGER WITH WESTERN PACIFIC AIRLINES
On June 30, 1997, the Company signed an Agreement and Plan of Merger (the
"Merger Agreement") providing for the merger (the "Merger") of the Company with
Western Pacific, a low fare airline based in Colorado Springs, Colorado. Western
Pacific commenced service from DIA on June 29, 1997 and currently provides 45
daily departures from DIA. Western Pacific operates approximately 68 total
departures per day from DIA and Colorado Springs with 19 Boeing 737 aircraft.
Western Pacific also owns a majority interest in Mountain Air Express, a
commuter airline that operates out of DIA and Colorado Springs. Western
Pacific's common stock is quoted on the Nasdaq National Market under the symbol
"WPAC". The following discussion is qualified in its entirety by reference to
the Merger Agreement, which is included as an exhibit to this report. In
addition, readers are advised to review the reports of Western Pacific filed
with the Securities and Exchange Commission (File No. 0-27238).
Upon consummation of the Merger, each shareholder of the Company will receive
.75 shares (subject to adjustment in certain circumstances) of common stock of
Western Pacific for each share of the Company's Common Stock held by such
shareholder. The management of Western Pacific will retain managerial control of
Western Pacific after the Merger. Three members of the Company's board of
directors will be granted seats on Western Pacific's board of directors, which
will be increased to nine members. The Company's investment banking firm has
issued an opinion to the Company's Board of Directors that the exchange ratio is
fair to the Company's shareholders from a financial point of view, and Western
Pacific's board of directors has received a similar opinion from its investment
banking firm with respect to Western Pacific.
The Merger Agreement provides that prior to the completion of the Merger, or
termination of the Merger Agreement if that occurs before the Merger is
completed, the operations of the Company and Western Pacific will generally be
conducted in the ordinary course of business. The Company is prohibited from
leasing additional aircraft, raising capital through equity or debt financings
(except under certain conditions) or making major capital expenditures without
Western Pacific's consent. Certain limitations are placed on Western Pacific's
operations as well. The Merger Agreement provides that each company must pay the
other a termination fee of $4 million in the event either company enters into a
business combination with any other entity, and in certain other circumstances
resulting in termination of the Merger Agreement.
Closing of the Merger is subject to several conditions, including approval of
the Merger by the shareholders of the Company and Western Pacific, regulatory
approval of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act,
effectiveness of a Registration Statement relating to the Western Pacific common
stock to be issued in the Merger, the continued effectiveness of the "fairness
opinions" issued by each of the Company's and Western Pacific's investment
banking firms and the Company obtaining required consents or waivers of consent
to the Merger from aircraft lessors and other third parties. In addition, either
the Company or Western Pacific may terminate the Merger Agreement in the event
of a material adverse change in the financial condition, business, operations or
prospects of the other party to the Merger. There can be no assurance that the
conditions will be met or that the Merger will be consummated. The failure of
the Company and Western Pacific to consummate the Merger could have a material
adverse effect on the Company.
In connection with the Merger, the Company entered into a code share agreement
(the "Code Share Agreement") with Western Pacific which provides that the
parties will jointly market their flight schedules by permitting each party to
assign its airline designator code to flights operated by the other party. The
Code Share Agreement terminates on December 31, 1997; provided, however, that if
the Merger terminates under certain conditions then the Code Share Agreement
will terminate on December 31, 1998.
-6-
<PAGE>
RESULTS OF OPERATIONS
The Company incurred a net loss of $2,087,000 or $.24 per share for the quarter
ended June 30, 1997 as compared to net income of $1,336,000 or $.15 per fully
diluted share for the quarter ended June 30, 1996. During the quarter ended June
30, 1997 as compared to the prior comparable quarter, the Company experienced
higher average aircraft lease expenses on its newer larger aircraft, higher
maintenance expenses associated with its in-house maintenance operation which
began in September 1996, increased maintenance expenses associated with the
Boeing 737-200 aircraft, intensive increased competition from DIA's dominant
carrier, United Airlines, and the return of the 10% passenger excise tax which
was not in effect during the quarter ended June 30, 1996. Because of United
Airlines' competitive activity, the Company was unable to adjust its fares to
permit recovery of these increased expenses. Management believes alleged
anticompetitive practices by United in the Denver market have had, and, to the
extent they continue, will have a material adverse effect on the Company's
revenues and results of operations. (See Part I, Item 3: Legal Proceedings of
the Company's Form 10-KSB for the fiscal year ended March 31, 1997.)
Small fluctuations in the Company's yield per RPM or expense per ASM can
significantly affect operating results because the Company, like other airlines,
has high fixed costs and low operating margins in relation to revenues. Airline
operations are highly sensitive to various factors, including the actions of
competing airlines and general economic factors, which can adversely affect the
Company's liquidity, cash flows and results of operations.
-7-
<PAGE>
The following table sets forth certain quarterly financial and operating data
regarding the Company for the fifteen months of operations ended June 30, 1997.
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
QUARTER ENDED
--------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1997 1997
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Passenger revenue $ 27,570,000 $ 29,518,000 $ 24,503,000 $ 32,167,000 $ 33,622,000
Revenue passengers carried 271,000 308,000 272,000 329,000 339,000
Revenue passenger
miles (RPMs)(1) 190,541,000 220,982,000 193,316,000 235,100,000 249,436,000
Available seat miles
(ASMs)(2) 313,216,000 363,667,000 354,103,000 388,734,000 405,395,000
Passenger load factor(3) 60.8% 60.8% 54.6% 60.5% 61.5%
Break-even load factor(4) 58.3% 66.0% 73.1% 66.9% 65.6%
Block hours(5) 7,297 8,384 8,089 8,689 9,087
Average daily block hour
utilization(6) 10.97 10.24 9.86 10.09 10.28
Yield per RPM(7) 14.47c 13.36c 12.68c 13.68c 13.48c
Yield per ASM(8) 8.80c 8.12c 6.92c 8.27c 8.29c
Expense per ASM 8.62c 8.98c 9.46c 9.39c 9.08c
Passenger revenue per
block hour $ 3,778.27 $ 3,520.75 $ 3,029.18 $ 3,702.04 $ 3,700.01
Average fare(9) $ 98 $ 92 $ 86 $ 94 $ 94
Average aircraft in service 7.4 9.6 10.3 11.0 10.6
Operating income (loss) $ 1,138,000 ($2,547,000) ($8,318,000) ($3,434,000) ($2,238,000)
Net income (loss) $ 1,336,000 ($2,189,000) ($8,043,000) ($3,290,000) ($2,087,000)
</TABLE>
(1) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown.
(2) "Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(3) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(4) "Break-even load factor" is the passenger load factor that will result in
operating revenues being equal to operating expenses, assuming constant
revenue per passenger mile and expenses.
(5) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(6) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(7) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(8) "Yield per ASM" is determined by dividing passenger revenues by available
seat miles.
(9) "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.
-8-
<PAGE>
The following table provides information regarding the Company's operating
revenues and expenses for the quarter ended June 30, 1996.
<TABLE>
<CAPTION>
REVENUE/
AMOUNT PERCENT BLOCK HOUR YIELD/ASM YIELD/RPM
----------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
- --------
Passenger $27,570,000 97.9% $3,778.27 8.80c 14.47c
Cargo 415,000 1.5% 56.87 0.13c 0.22c
Other 162,000 0.6% 22.20 0.05c 0.09c
----------- ----- --------- --------- ---------
Total operating revenues $28,147,000 100.0% $3,857.34 8.98c 14.78c
=========== ===== ========= ========= =========
EXPENSE/ EXPENSE/
AMOUNT PERCENT BLOCK HOUR ASM
----------- ------- ---------- ---------
EXPENSES
- --------
Flight operations $10,503,000 37.3% $1,439.36 3.35c
Aircraft and traffic servicing 5,854,000 20.8% 802.25 1.87c
Maintenance 4,288,000 15.2% 587.63 1.38c
Promotion and sales 5,055,000 18.0% 692.75 1.61c
General and administrative 1,109,000 3.9% 151.98 .35c
Depreciation and amortization 200,000 0.7% 27.41 .06c
----------- ----- --------- ---------
Total operating expenses $27,009,000 95.9% $3,701.38 8.62c
=========== ===== ========= =========
</TABLE>
The following table provides information regarding the Company's operating
revenues and expenses for the quarter ended June 30, 1997.
<TABLE>
<CAPTION>
REVENUE/
AMOUNT PERCENT BLOCK HOUR YIELD/ASM YIELD/RPM
----------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
- --------
Passenger $33,622,000 97.3% $3,700.01 8.29c 13.48c
Cargo 628,000 1.8% 69.11 0.15c 0.25c
Other 307,000 0.9% 33.79 0.08c 0.12c
----------- ----- --------- --------- ---------
Total operating revenues $34,557,000 100.0% $3,802.91 8.52c 13.85c
=========== ===== ========= ========= =========
EXPENSE/ EXPENSE/
AMOUNT PERCENT BLOCK HOUR ASM
----------- ------- ---------- ---------
EXPENSES
- --------
Flight operations $14,244,000 41.2% $1,567.51 3.51c
Aircraft and traffic servicing 6,788,000 19.7% 747.00 1.67c
Maintenance 7,735,000 22.4% 851.22 1.91c
Promotion and sales 6,299,000 18.2% 693.19 1.56c
General and administrative 1,379,000 4.0% 151.75 .34c
Depreciation and amortization 350,000 1.0% 38.52 .09c
----------- ----- --------- ---------
Total operating expenses $36,795,000 106.5% $4,049.19 9.08c
=========== ===== ========= =========
</TABLE>
REVENUES
General. Airline revenues are primarily a function of the number of passengers
carried and fares charged by the airline. The Company believes that revenues
will gradually increase in a new market over a 60 to 120 day period as market
penetration is achieved. The Company added three new markets during the quarter
ended June 30, 1996 and none during the quarter ended June 30, 1997.
The Company's results are highly sensitive to changes in fare levels. Fare
pricing policies have a significant impact on the Company's revenues. The
Company's average fare for the quarters ended June 30, 1997 and 1996 were $94
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<PAGE>
and $98, respectively. Management believes that the decrease in the average fare
during the quarter ended June 30, 1997 was largely a result of the reinstatement
of the 10% excise tax on air transportation effective March 7, 1997 which was
not in effect during the quarter ended June 30, 1996. Effective October 1, 1997,
the 10% excise tax is reduced initially to 9% and adds a per-flight-segment fee
of $1 on domestic flights. The tax decreases to 8% October 1, 1998 and to 7.5%
on October 1, 1999. The per-flight-segment fee increases to $2 effective October
1, 1998, $2.25 effective October 1, 1999 and thereafter increases in annual
amounts of 25 cents until it reaches $3 October 1, 2002. Given the elasticity of
passenger demand, the Company believes that increases in fares will result in a
decrease in passenger demand. To maintain passenger traffic in the face of an
excise tax increase may require some downward adjustment in net fares realized
by the Company. The Company cannot completely predict future fare levels, which
depend to a substantial degree on actions of competitors. When sale prices or
other price changes are made by competitors in the Company's markets, the
Company believes that it must, in most cases, match these competitive fares in
order to maintain its market share. Passenger revenues are seasonal in each
market.
Passenger Revenue. Passenger revenues totaled $33,622,000 for the quarter ended
June 30, 1997 compared to $27,570,000 for the quarter ended June 30, 1996, or an
increase of 22%. The number of revenue passengers carried was 339,000 for the
quarter ended June 30, 1997 compared to 271,000 for the quarter ended June 30,
1996 or an increase of 25%. The average fare for the quarter ended June 30,
1997 was $94 compared to the average fare for the quarter ended June 30, 1996 of
$98. The Company had an average of 10.6 aircraft in service during the quarter
ended June 30, 1997 compared to an average of 7.4 aircraft in service during the
quarter ended June 30, 1996 for an increase in ASMs of 92,179,000 or 29%.
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, 1997, the Company's break-even load factor was 65.6% compared to a passenger
load factor of 61.5%. For the quarter ended June 30, 1996 the Company's break-
even load factor was 58.3% compared to a passenger load factor of 60.8%. The
Company's break-even load factor increased over the prior comparable period as
increased competition kept the Company from increasing fares to compensate for
the 10% excise tax, increased aircraft lease expenses and maintenance expenses
associated with the Company's maintenance facility which began operations in
September 1996 and increased maintenance expenses associated with the Boeing
737-200 aircraft.
The Company's load factor increased from 60.8% to 61.5% for the quarter ended
June 30, 1997 over the prior comparable period. Management believes that its
load factor for the quarter ended June 30, 1997 might have been higher but
continued to be adversely affected by the public's reaction to two significant
airline accidents which occurred during 1996. One of the accidents involved a
low fare carrier and the other involved a major national airline. In both
accidents the aircraft was destroyed and all passengers and crew were killed.
Cargo revenues, consisting of revenues from freight and mail service, totaled
$628,000 and $415,000 for the quarters ended June 30, 1997 and 1996,
representing 1.8% and 1.5% of total operating revenues, respectively. 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 liquor sales and excess baggage fees,
totaled $307,000 and $162,000 or less than 1% of total operating revenues for
each of the quarters ended June 30, 1997 and 1996, 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 increased to 106.5%
of revenue for the quarter ended June 30, 1997 compared to 95.9% of revenue for
the quarter ended June 30, 1996. Operating expenses increased as a percentage of
revenue as the Company experienced higher average aircraft lease expenses on its
newer larger aircraft, higher maintenance expenses associated with its in-house
maintenance operation which began in September 1996, and increased maintenance
expenses associated with the Boeing 737-200 aircraft.
-10-
<PAGE>
Flight Operations. Flight operations expenses of $14,244,000 and $10,503,000
were 41.2% and 37.3% of total revenue for the quarters ended June 30, 1997 and
1996, 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
$5,520,000 for 7,169,000 gallons used and $4,586,000 for 5,802,000 gallons used
resulted in an average fuel cost of 77c and 79c per gallon and represented 38.8%
and 43.7% of total flight operations expenses for the quarters ended June 30,
1997 and 1996, respectively. The average fuel cost per gallon decreased for the
quarter ended June 30, 1997 from the comparable prior period due to an overall
decrease in the cost of fuel. Fuel prices are subject to change weekly as the
Company does not purchase supplies in advance for inventory. Fuel consumption
for the quarters ended June 30, 1997 and 1996 averaged 789 and 795 gallons per
block hour, respectively. Fuel consumption per block hour decreased as a result
of more fuel efficient aircraft.
Aircraft lease and insurance expenses, excluding short-term aircraft lease
expenses, totaled $5,251,000 (15.2% of total revenue) and $3,060,000 (10.9% of
total revenue) for the quarters ended June 30, 1997 and 1996, respectively, or
an increase of 71.6%. The increase is partially attributable to the increase in
the average number of aircraft in service to 10.6 from 7.4 for the quarters
ended June 30, 1997 and 1996, respectively, and partially due to higher lease
expenses on larger newer aircraft fleet additions.
Pilot and flight attendant salaries totaled $1,967,000 and $1,530,000 or 5.9%
and 5.6% of passenger revenue for each of the quarters ended June 30, 1997 and
1996, or an increase of 28.6%. Pilot and flight attendant compensation
increased principally as a result of a 43.2% increase in the average number of
aircraft in service and an increase of 24.5% in block hours. During the quarter
ended June 30, 1997, the Company added one leased aircraft to its fleet in May
1997. During the quarter ended June 30, 1996 the Company added two leased
aircraft to its fleet in June 1996. The Company pays pilot and flight
attendant salaries for training consisting of approximately six and three weeks,
respectively, prior to scheduled increases in service, causing the compensation
expense for the quarters ended June 30, 1997 and 1996 to appear high in
relationship to the average number of aircraft in service. When the Company is
not in the process of adding aircraft to its system, it expects that pilot and
flight attendant expense per aircraft will normalize. With a scheduled
passenger operation, and with salaried rather than hourly crew compensation, the
Company's expenses for flight operations are largely fixed, with flight catering
and fuel expenses the principal exception.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were
$6,788,000 and $5,854,000 for the quarters ended June 30, 1997 and 1996,
respectively, and represented 19.7% and 20.8% of total revenue. These include
all expenses incurred at airports served by the Company, as well as station
operations administration and flight operations ground equipment maintenance.
Station expenses include landing fees, facilities rental, station labor and
ground handling expenses. Station expenses as a percentage of revenue decreased
during the quarter ended June 30, 1997 over the quarter ended June 30, 1996 as a
result of the Company's rental costs (in particular, the gate rentals at DIA)
which are largely fixed costs, remaining relatively constant as compared to the
increase in revenue and more of its "above wing" (including passenger check-in
at ticket counters, concourse gate operations and cabin cleaning) operations
were performed by Company personnel rather than by third party suppliers. The
Company began its own "above wing" operations at Los Angeles International
Airport in June 1996, Chicago (Midway) in July 1996, Seattle-Tacoma in August
1996, and El Paso, Texas effective October 1996. Aircraft and traffic servicing
expenses will increase with the addition of new cities; however, the increased
existing gate utilization at DIA is expected to reduce per unit expenses.
Maintenance. Maintenance expenses of $7,735,000 and $4,288,000 were 22.4% and
15.2% of total revenue for the quarters ended June 30, 1997 and 1996,
respectively. These include all maintenance, labor, parts and supplies expenses
related to the upkeep of the aircraft. Routine maintenance is charged to
maintenance expense as incurred while major engine overhauls and heavy
maintenance checks are accrued each quarter. Maintenance cost per block hour
was $851 and $588 per block hour for the quarters ended June 30, 1997 and 1996,
respectively. Continental Airlines had been providing routine aircraft
maintenance services for the Company at Denver. Continental discontinued this
service in mid-September 1996. As a result of the discontinued service, the
Company hired its
-11-
<PAGE>
own aircraft mechanics to perform routine maintenance and subleased a portion of
a hangar from Continental at DIA in which to perform this work. The performance
of this work by the Company, together with the cost of leasing adequate hangar
space, increased the Company's maintenance cost per block hour. Management
believes that these costs will normalize as it adds additional aircraft to its
fleet. Additionally, maintenance expenses have increased with respect to routine
maintenance on the Boeing 737-200 aircraft.
Promotion and Sales. Promotion and sales expenses totaled $6,299,000 and
$5,055,000 and were 18.2% and 18.0% of passenger revenue for the quarters ended
June 30, 1997 and 1996, 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 are
included in these costs. The promotion and sales expenses per passenger were
$18.58 and $18.65 for the quarters ended June 30, 1997 and 1996, respectively.
Promotion and sales expenses per passenger decreased as a result of a decrease
in computer reservation system costs, travel agency commissions, and interline
service charges offset by an increase in advertising expenses.
The Company's promotion and sales expenses per passenger decreased by $1.23,
largely as a result of its new electronic ticket product introduced in January
1997. The Company's travel agency sales and interline revenue decreased 4.5% and
3.6%, respectively, during the quarter ended June 30, 1997 from the prior
comparable period with a corresponding increase in direct sales.
Advertising expenses of $725,000 were 2.2% of passenger revenue for the quarter
ended June 30, 1997, compared to approximately $480,000 or 1.7% of passenger
revenue for the quarter ended June 30, 1996. Advertising expenses increased as a
percentage of passenger revenue as the Company increased advertising in response
to increased fare competition from United Airlines and the entry of Western
Pacific, which began flight operations from DIA on June 29, 1997.
General and Administrative. General and administrative expenses for the quarters
ended June 30, 1997 and 1996 totaling $1,379,000 and $1,109,000 were 4.0% and
3.9% of total revenue, respectively. These expenses include the wages and
benefits for the Company's executive officers and various other administrative
personnel. Legal and accounting expenses, supplies and other miscellaneous
expenses are also included in this category.
Depreciation and Amortization. Depreciation and amortization expense of $350,000
and $200,000 were approximately one percent of total revenue for the quarters
ended June 30, 1997 and 1996, respectively. These expenses include depreciation
of office equipment, ground station equipment, and other fixed assets of the
Company. Amortization of start-up and route development costs are not included
as these expenses have been expensed as incurred.
Nonoperating Income (Expenses). Total net nonoperating income totaled $152,000
for the quarter ended June 30, 1997 compared to $199,000 for the quarter ended
June 30, 1996, or a decrease of 23.6%, principally a result of a decrease in
interest income. Interest income decreased from the prior comparable period as a
result of a decrease in cash associated with the net loss incurred during the
quarter ended June 30, 1997.
Expenses per ASM. The Company's expenses per ASM for the quarters ended June 30,
1997 and 1996 were 9.08c and 8.62c, respectively, or an increase of 5.3%.
Expenses per ASM increased over the comparable period as a result of increased
flight operation expenses resulting from an increase in the average aircraft
lease expense associated with newer aircraft, increased maintenance expenses
largely a result of the Company's start-up of its own maintenance facility, and
increased maintenance expenses associated with the Boeing 737-200 aircraft,
offset in part by economies of scale as the fixed costs were spread across a
larger base of operations.
Expenses per ASM are influenced to some degree by the utilization of aircraft
and by the seating configuration that each airline employs. For example, with
the 108 seat all coach seating configuration selected by the Company on five of
its Boeing 737-200 aircraft, the expenses per ASM of the Company are higher by
11% when compared with the 120 seat alternative used by many carriers.
-12-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet reflected cash and cash equivalents of $8,531,000 at
June 30, 1997 and $10,286,000 at March 31, 1997. At June 30, 1997, total current
assets were $31,013,000 as compared to $34,895,000 of total current liabilities,
resulting in a working capital deficit of $3,882,000. At March 31, 1997, total
current assets were $31,470,000 as compared to $32,745,000 of total current
liabilities, resulting in a working capital deficit of $1,275,000.
Cash used by operating activities for the quarter ended June 30, 1997 was
$1,099,000. This is largely attributable to the Company's net loss for the
period, increases in maintenance deposits and prepaid expenses, offset by
decreases in trade receivables and increases in air traffic liability and
accrued maintenance expenses. Cash provided by operating activities for the
quarter ended June 30, 1996 was $2,886,000. This is attributed primarily to the
Company's net income for the period, decreases in trade receivables, increases
in air traffic liability, other accrued expenses, and accrued maintenance
expenses, offset by increases in restricted investments to secure credit card
transactions, maintenance and other deposits and a decrease in accounts payable.
Cash used in investing activities for the quarter ended June 30, 1997 was
$790,000 largely a result of capital expenditures for rotable aircraft
components and aircraft leasehold costs and improvements for the aircraft
delivered in May 1997. Cash used in investing activities for the quarter ended
June 30, 1996 was $4,475,000, which included additional capital expenditures for
the Boeing 737-300s and the two additional Boeing 737-200s leased during the
quarter ended June 30, 1996, spare parts, ground equipment, computer equipment,
and leasehold improvements. The Company invested $2,595,000 in short-term
investments comprised of government backed agencies with maturities of one year
or less. The Company used cash of $1,185,000 for initial lease acquisition
security deposits for the Boeing 737-200 aircraft delivered in June 1996.
Cash provided by financing activities for the quarter ended June 30, 1997 and
1996 was $134,000 and $6,531,000, respectively. During the quarter ended June
30, 1996, the Company completed a private placement of its Common Stock that
resulted in net proceeds of approximately $2,721,000 in April 1996. In May 1996,
the Company notified the warrant holders of the Company's intent to exercise its
redemption rights with respect to warrants not exercised on or before June 28,
1996. The Company received net proceeds from the exercise of these warrants of
approximately $13,278,000, $3,841,000 of which was recorded during the quarter
ended June 30, 1996.
Five of the Company's Boeing 737-200 aircraft are leased under operating leases
which originally expired in 1997. The leases provide for up to two renewal terms
of two years each with no increase in basic rent. The Company renewed the leases
for the first two-year renewal period and these leases now expire in 1999. Under
these leases, the Company was required to make security deposits and makes
deposits for maintenance of these leased aircraft. These deposits totaled
$625,000 and $4,069,000, respectively, at June 30, 1997.
The Company in November 1995 leased two Boeing 737-300 aircraft under operating
leases which expire in the year 2000. The Company was required to make security
deposits and makes deposits for maintenance of these leased aircraft. Security
and maintenance deposits for these aircraft totaled $1,505,000 and $3,195,000,
respectively, at June 30 1997. These aircraft are compliant with FAA Stage 3
noise regulations. The Company has issued to each of the two Boeing 737-300
aircraft lessors a warrant to purchase 100,000 shares of the Company's Common
Stock at an aggregate purchase price of $500,000. These warrants, to the extent
not earlier exercised, expire upon the expiration dates of the aircraft leases.
In June 1996, the Company leased two additional Boeing 737-200 aircraft under
operating leases which expire in the year 2001. The Company was required to make
security deposits for these aircraft totaling $858,000. Commencing July 1996 the
Company was required to make monthly deposits for maintenance of these leased
aircraft. At June 30, 1997, these deposits totaled $1,881,000. These aircraft
were "hush-kitted" by the lessor at its expense during 1996 making them
compliant with FAA Stage 3 noise regulations. The Company has issued to the
aircraft lessor two warrants, each of which entitles the lessor to purchase
70,000 shares of the Company's Common Stock at an aggregate purchase price of
$503,300 per warrant.
-13-
<PAGE>
In November 1996, the Company took delivery of a leased Boeing 737-300 aircraft
which it placed in scheduled service in December 1996. The lease term for this
aircraft is eight years from date of delivery. The Company was required to
secure the aircraft lease with a letter of credit totaling $600,000. The Company
is also required to make monthly cash deposits for maintenance of this aircraft.
As of June 30, 1997, the Company had made maintenance deposits associated with
this leased aircraft totaling $546,000.
During the fiscal year ended March 31, 1997, the Company entered into four
operating lease agreements for four additional new Boeing 737-300 aircraft with
scheduled deliveries during the Company's fiscal year ended March 31, 1998. The
Company took delivery of two of these aircraft in May 1997 and August 1997, one
has a scheduled delivery in late August 1997 and the fourth is scheduled for
delivery in January 1998. Delivery of the January 1998 aircraft is subject to
the Company maintaining certain financial covenants which, if not met, permit
the lessor to terminate the lease prior to delivery. In connection with the
Boeing 737-300 aircraft to be delivered in late August 1997, the Company has
issued to the lessor a warrant to purchase 55,000 shares of Common Stock at an
aggregate purchase price of $385,000. At June 30, 1997, the Company had made
security deposits totaling $1,971,000 with respect to these aircraft and is
required to make additional security deposits between July 1997 and April 1998
totaling $1,145,000 with respect to these aircraft leases. Two each of these
lease agreements have seven and eight year terms from date of delivery,
respectively. Two of these leases have up to two one year renewal terms and a
third may be renewed for up to three one year terms. The Company is required to
pay monthly cash deposits to each aircraft lessor based on flight hours and
cycles operated to provide funding of future scheduled maintenance costs. As of
June 30, 1997, the Company had deposits associated with the aircraft delivered
in May 1997 totaling $94,000.
Management is continuing to take steps designed to improve the Company's
operating performance. Effective January 28, 1997, the Company introduced
electronic ticketing. Passengers who call the Company directly are presently
given the option of receiving a paper ticket or a confirmation number in lieu of
a paper ticket. Electronic ticketing will decrease certain costs including
postage and handling costs, ticket stock, and reduced revenue accounting fees
because the accounting for electronic ticketing is automated. The Company plans
to offer its passengers the option of booking flight reservations through the
Company's Internet site starting in the fall of 1997.
The Company is exploring various means to reduce expenses. These include further
reductions in credit card fees and addition of an in-house revenue accounting
system. The Company believes that it can reduce its airport operating expenses
at certain cities by performing its own "above wing" operations rather than
continuing to contract out these services. Since April 1996, conversions to the
Company's own "above wing" operations occurred at nine of the Company's 14
airport stations.
The Company has a contract with a credit card processor that requires the
Company to provide a letter of credit to match the total amount of air traffic
liability associated with credit card customers if the Company does not meet
certain financial covenants and if the credit card processor requests that the
collateral be increased. There can be no assurance that the Company will be able
to meet these financial covenants. If it had been in default under this contract
as of August 8, 1997, the Company could have been required to increase the
collateral amount from its present level of $2,000,000 to approximately
$5,233,000, which would increase the Company's current restricted investment
balance accordingly.
The Company's suppliers currently provide goods, services and operating
equipment on open credit terms. If such terms were modified to require immediate
cash payments, the Company's cash position would be materially and adversely
affected.
Under the terms of the Merger Agreement with Western Pacific, additional
aircraft leases by the Company would require Western Pacific's approval. The
Company's goal is to lease a number of additional aircraft to serve additional
cities from Denver. The Company believes that such a 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. The proceeds from the private placement
completed in April 1996 and the exercise of the warrants in June 1996 have
provided additional working capital for the Company and, subject to aircraft
availability, will enable it to further expand its operations through the
leasing of additional aircraft. The expansion of the Company's operations will
entail the hiring of additional employees to staff flight and ground operations
in its new markets and significant initial costs such as deposits for airport
and aircraft leases. Because of
-14-
<PAGE>
the expansion of the Company's business, and competition within the airline
industry, which often requires quick reaction by management to changes in market
conditions, the Company may require additional capital to maintain or further
expand its business.
Effective February 11, 1997, United Airlines commenced service using its low
fare United "Shuttle" between Denver and Phoenix, Arizona, a market in which the
Company provides service, as well as additional United Airlines flights in
certain of the Company's other markets. United Airlines has announced its
intention to use "Shuttle" between Denver and Salt Lake City, Utah effective in
late October 1997. Additionally, effective June 29, 1997, Western Pacific began
operations at DIA. This additional competition, as well as other competitive
activities by United and other carriers, have had and could continue to have a
material adverse effect on the Company's revenues and results of operations.
The Company has incurred substantial operating losses in 1997 and 1996 and has a
working capital deficit at June 30, 1997. In addition, the Company has
substantial contractual commitments for leasing and maintaining aircraft. The
Company believes that its existing cash and cash generated from operations will
be adequate to fund the Company's operations at least through March 31, 1998.
There can be no assurances, however, that the Company will be successful in
improving its operating results in fiscal 1998. If its operating results do not
improve, or if the Merger Agreement with Western Pacific does not close, the
Company anticipates that it would be required to obtain additional capital or
other financing to fund its operations. There can be no assurance that such
additional capital or other financing would be available when needed or
available on acceptable terms.
-15-
<PAGE>
PART II. OTHER INFORMATION
Item 1: Not applicable
Item 2: Changes in Securities
---------------------
On June 30, 1997, the Board of Directors of the Company approved
an amendment to the Company's Shareholder Rights Agreement to provide
that a merger proposal approved by the Board of Directors Constitutes
a "Qualifying Offer". The effect of the modification was to clarify
that the proposed merger with Western Pacific constitutes a
"Qualifying Offer". See "Item 5: Market for Common Equity and Related
Stockholder Matters Rights Dividend Distribution" in the Company's
Form 10-KSB for the fiscal year ended March 31, 1997.
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
None
Exhibit
Numbers Description of Exhibits
- ------- -----------------------
27.1 Financial Data Schedule.
-16-
<PAGE>
SIGNATURES
In accordance with 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 12, 1997 By: /s/ Samuel D. Addoms
-----------------------------------------------
Samuel D. Addoms, Principal Executive
Officer and Principal Financial Officer
Date: August 12, 1997 By: /s/ Elissa A. Potucek
-----------------------------------------------
Elissa A. Potucek, Principal Accounting Officer
-17-
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<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997
<PERIOD-START> APR-01-1997 APR-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 8,531,252 10,286,453
<SECURITIES> 0 0
<RECEIVABLES> 7,182,810 7,582,105
<ALLOWANCES> 115,097 71,713
<INVENTORY> 994,433 997,102
<CURRENT-ASSETS> 31,012,912 31,470,014
<PP&E> 6,817,561 6,174,942
<DEPRECIATION> 2,183,547 1,833,690
<TOTAL-ASSETS> 44,408,199 44,092,545
<CURRENT-LIABILITIES> 34,895,160 32,744,835
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<INTEREST-EXPENSE> 4,537 7,428
<INCOME-PRETAX> (2,086,657) 1,336,410
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<INCOME-CONTINUING> (2,086,657) 1,336,410
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