- 15 -
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 August 4,
1998 was 13,792,064.
<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
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
------------- -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,295,600 $ 3,641,395
Short-term investments 4,932,533 -
Restricted investments 4,000,000 4,000,000
Trade receivables, net of allowance for doubtful accounts
of $180,666 and $139,096 at June 30, 1998 and March 31, 1998 9,287,698 11,661,323
Maintenance deposits 11,381,019 9,307,723
Prepaid expenses and other assets 5,067,638 3,843,694
Inventories 1,401,837 1,164,310
Deferred lease and other expenses 380,975 380,975
------------- -------------
Total current assets 45,747,300 33,999,420
Security, maintenance and other deposits 8,883,483 7,633,143
Property and equipment, net 5,609,636 5,579,019
Deferred lease and other expenses 685,185 780,429
Restricted investments 2,606,459 2,606,459
============= =============
$ 63,532,063 $ 50,598,470
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 10,443,630 $ 13,664,750
Air traffic liability 19,830,061 18,910,441
Other accrued expenses 4,090,275 5,157,640
Accrued maintenance expense 13,760,957 12,537,228
Note payable 179,663 -
Current portion of obligations under capital leases 70,475 54,346
------------- -------------
Total current liabilities 48,375,061 50,324,405
Senior secured notes payable 3,555,739 3,468,138
Accrued maintenance expense 3,052,149 2,381,354
Obligations under capital leases, excluding current portion 112,081 97,757
------------- -------------
Total liabilities 55,095,030 56,271,654
------------- -------------
Stockholders' equity (deficit)
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; 13,616,564 and 9,253,563 shares
issued and outstanding at June 30, 1998 and March 31, 1998 13,617 9,253
Additional paid-in capital 51,626,728 37,954,584
Accumulated deficit (43,203,312) (43,637,021)
------------- -------------
Total stockholders' equity (deficit) 8,437,033 (5,673,184)
------------- -------------
$ 63,532,063 $ 50,598,470
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
FRONTIER AIRLINES, INC.
Condensed Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
--------------------------------
(Unaudited)
<S> <C> <C>
Revenues:
Passenger $ 41,560,587 $ 33,621,450
Cargo 1,004,748 627,809
Other 322,218 307,411
------------- -------------
Total revenues 42,887,553 34,556,670
------------- -------------
Operating expenses:
Flight operations 17,853,706 14,244,102
Aircraft and traffic servicing 7,137,822 6,788,493
Maintenance 8,727,868 7,734,691
Promotion and sales 7,126,460 6,299,522
General and administrative 1,278,559 1,378,766
Depreciation and amortization 338,449 349,588
------------- -------------
Total operating expenses 42,462,864 36,795,162
------------- -------------
Operating income (loss) 424,689 (2,238,492)
------------- -------------
Nonoperating income:
Interest income 275,569 160,806
Interest expense (240,239) (4,537)
Other, net (26,310) (4,434)
------------- -------------
Total nonoperating income, net 9,020 151,835
------------- -------------
Net income (loss) $ 433,709 $ (2,086,657)
============= =============
Earnings (loss) per share (note 2):
Basic $ 0.03 $ (0.24)
============= =============
Diluted $ 0.03 $ (0.24)
============= =============
Weighted average shares of common stock outstanding 12,513,827 8,844,375
============= =============
Weighted average shares of common stock and
common stock equivalents outstanding 13,689,997 8,844,375
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
FRONTIER AIRLINES, INC.
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
--------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 433,709 $ (2,086,657)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 521,294 419,482
Changes in operating assets and liabilities:
Restricted investments - (129)
Trade receivables 2,373,625 383,629
Security, maintenance and other deposits (3,323,636) (1,641,471)
Prepaid expenses and other assets (1,223,944) (451,618)
Inventories (237,527) 2,669
Note receivable - 6,703
Accounts payable (3,221,120) (1,254,908)
Air traffic liability 919,620 331,488
Other accrued expenses (1,067,365) 1,103,056
Accrued maintenance expense 1,894,524 2,088,735
------------- -------------
Net cash used by operating activities (2,930,820) (1,099,021)
------------- -------------
Cash flows used in investing activities:
Increase in short-term investments (4,932,533) -
Aircraft lease deposits - (147,500)
Capital expenditures (328,162) (642,620)
------------- -------------
Net cash used in investing activities (5,260,695) (790,120)
------------- -------------
Cash flows provided by financing activities:
Net proceeds from issuance of common stock 13,676,508 -
Proceeds from short-term borrowings 179,663 170,318
Principal payments on short-term borrowings - (27,830)
Principal payments on obligations under capital leases (10,451) (8,548)
------------- -------------
Net cash provided by financing activities 13,845,720 133,940
------------- -------------
Net increase (decrease) in cash and cash equivalents 5,654,205 (1,755,201)
Cash and cash equivalents, beginning of period 3,641,395 10,286,453
------------- -------------
Cash and cash equivalents, end of period $ 9,295,600 $ 8,531,252
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
FRONTIER AIRLINES, INC.
Notes to Condensed Financial Statements
June 30, 1998
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the 1998 Annual
Report on Form 10-K. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for
a fair presentation have been included. The results of operations for the
three months ended June 30, 1998 and 1997 are not necessarily indicative of
the results that will be realized for the full year.
(2) Common Stock
In April 1998, the Company sold 4,363,001 shares of its common stock, no
par value, through a private placement to an institutional investor. Gross
proceeds to the Company from the transaction were $14,179,753, of which the
Company received net proceeds of $13,676,508. The Company issued a warrant
to this investor to purchase 716,929 shares of common stock of the Company
at a purchase price of $3.75 per share, which warrant expires in April
2002.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 that describe the business and
prospects of Frontier Airlines, Inc. (the "Company") and the expectations of the
Company and management. When used in this document, the words "estimate,"
"anticipate," "project" and similar expressions are intended to identify
forward-looking statements. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
set forth. These risks and uncertainties include, but are not limited to: the
timing of, and expense associated with, expansion and modification of the
Company's operations in accordance with its business strategy or in response to
competitive pressures or other factors such as the Company's commencement of
passenger service and ground handling operations at several airports and
assumption of maintenance and ground handling operations at DIA with its own
employees; general economic factors and behavior of the fare-paying public and
the federal government, such as the crash in May 1996 of another low-fare
carrier's aircraft that resulted in a federal investigation of the carrier,
suspension of the carrier's operations and increased federal scrutiny of
low-fare carriers generally that may increase the Company's operating costs or
otherwise adversely affect the Company; actions of competing airlines, such as
increasing capacity and pricing actions of United Airlines and other
competitors; the current limited supply of Boeing 737 aircraft and the higher
lease and maintenance costs associated with such aircraft, which may inhibit the
Company's ability to achieve operating economies and implement its business
strategy; recent changes to the former air transportation excise tax of 10% to a
combination of a percentage tax and flight segment fee; and uncertainties
regarding aviation fuel prices. Because the Company's business, like that of the
airline industry generally, is characterized by high fixed costs relative to
revenues, small fluctuations in the Company's yield per RPM or expense per ASM
can significantly affect operating results.
General
The Company is a low-fare, full-service commercial airline based in
Denver, Colorado. The Company currently operates routes linking its Denver hub
to 15 cities in 12 states spanning the nation from coast to coast. The Company's
current route system extends from Denver to Los Angeles, San Francisco and San
Diego, California; Chicago and Bloomington/Normal, Illinois; Boston,
Massachusetts; Baltimore, Maryland; Seattle/Tacoma, Washington; Phoenix,
Arizona; Minneapolis/St. Paul, Minnesota; Salt Lake City, Utah; Omaha, Nebraska;
Albuquerque, New Mexico, New York (LaGuardia), New York; and El Paso, Texas. At
present, the Company utilizes approximately five gates at Denver International
Airport ("DIA") for approximately 66 daily flight departures and arrivals.
Organized in February 1994, the Company commenced flight operations in
July 1994 with two leased Boeing 737-200 jet aircraft. It has since expanded its
fleet to 14 leased jets, including seven Boeing 737-200s and seven larger Boeing
737-300s.
The Company's senior management team includes executives with substantial
experience in the airline industry, including persons who occupied similar
positions at a former airline called Frontier Airlines that served regional
routes to and from Denver from 1950 to 1986. From time to time, the former
Frontier Airlines served most of the Company's current and intended markets with
jet equipment from its Denver hub.
The Company expanded operations during the quarters ended June 30, 1997
and June 30, 1998. Therefore, the Company's results of operations for the
quarters ended June 30, 1997 and 1998 are not necessarily comparable or
indicative of future operating results.
Terminated 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 Airlines ("Western Pacific"), a low-fare airline that had
previously used Colorado Springs, Colorado as its base of flight operations. The
Merger Agreement was signed following Western Pacific's shift of a portion of
its flight operations to DIA, and its announced intent to further expand its
operations at DIA. Pursuant to the Merger Agreement, a "code share" marketing
alliance between the Company and Western Pacific went into effect on August 1,
1997, in effect integrating the route networks of the two airlines.
On September 29, 1997, both companies mutually agreed to terminate the
Merger Agreement and the code-share arrangement. The separation of the two
carriers required the Company to implement a costly restructuring of its flight
schedule and route system to support a stand-alone operation competing against
both Western Pacific and United Airlines, the dominant air carrier at DIA. On
October 5, 1997, Western Pacific filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. Western Pacific ceased operations on February 4, 1998 and
is in the process of liquidating its business.
Results of Operations
The Company had net income of $434,000 or $.03 per basic and diluted
share for the quarter ended June 30, 1998 as compared to a net loss of
$2,087,000 or $.24 per share for the quarter ended June 30, 1997. During the
quarter ended June 30, 1998 as compared to the prior comparable quarter, the
Company experienced higher fares as a result of increases in business travelers,
decreased competition as a result of the demise of Western Pacific, and an
increase in the average length of haul and stage length. The Company was able to
reduce its cost per ASM to 7.80(cent) during the quarter ended June 30, 1998
from 9.08(cent) for the prior comparable period. The Company benefited from a
significant reduction in fuel prices, a reduction in maintenance costs per block
hour as a result of four new aircraft, and operating efficiencies and the
economies of scale as the Company's fixed costs were spread across a larger base
of operations.
Small fluctuations in the Company's yield per RPM or expense per ASM can
significantly affect operating results because the Company, like other airlines,
has high fixed costs and low operating margins in relation to revenues. Airline
operations are highly sensitive to various factors, including the actions of
competing airlines and general economic factors, which can adversely affect the
Company's liquidity, cash flows and results of operations.
<PAGE>
The following table sets forth certain quarterly financial and operating
data regarding the Company for the fifteen months of operations ended June 30,
1998.
<TABLE>
<CAPTION>
Selected Financial and Operating Data
Quarter Ended
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, September 30, December 31, March 31, June 30,
1997 1997 1997 1998 1998
Passenger revenue $33,622,000 $36,021,000 $31,922,000 $40,454,000 $41,561,000
Revenue passengers 339,000 347,000 301,000 370,000 368,000
carried
Revenue passenger
miles (RPMs)(1) 249,436,000 282,190,000 259,443,000 328,309,000 337,555,000
Available seat miles
(ASMs)(2) 405,395,000 490,810,000 524,686,000 575,294,000 544,557,000
Passenger load factor(3) 61.5% 57.5% 49.4% 57.1% 62.0%
Break-even load factor(4) 65.3% 60.8% 67.3% 60.0% 61.3%
Block hours(5) 9,087 10,507 11,059 12,114 11,255
Average daily block hour
utilization(6) 10.28 9.89 10.52 10.30 10.27
Yield per RPM(7) (cents) 13.48 12.76 12.30 12.32 12.31
Yield per ASM(8) (cents) 8.52 7.66 6.31 7.28 7.88
Expense per ASM (cents) 9.08 8.12 8.52 7.70 7.80
Passenger revenue per
block hour $3,700.01 $3,428.29 $2,886.52 $3,339.44 $3,692.63
Average fare(9) $94 $99 $101 $105 $108
Average aircraft in fleet 11.0 11.8 13.0 13.6 14.0
Operating income (loss) ($2,238,000) ($2,253,000) ($11,626,000) ($2,437,000) $425,000
Net income (loss) ($2,087,000) ($2,048,000) ($11,519,000) ($2,092,000) $434,000
</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 total 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.
<PAGE>
The following table provides operating revenues and expenses for the
Company expressed as cents per total available seat miles ("ASM") and as a
percentage of total operating revenues, as rounded, for the year ended March 31,
1998 and the quarters ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Quarters Ended June 30,
Year Ended March 31, -------------------------------------------------
1998 1998 1997
----------------------- ------------------------ ------------------------
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Passenger 7.11 96.5% 7.63 96.9% 8.29 97.3%
Cargo 0.15 2.0% 0.18 2.3% 0.15 1.8%
Other 0.11 1.4% 0.06 0.8% 0.08 0.9%
----------- ---------- ----------- ----------- ------------ ----------
Total revenues 7.37 100.0% 7.88 100.0% 8.52 100.0%
Operating expenses:
Flight operations 3.32 45.1% 3.28 41.6% 3.51 41.2%
Aircraft and traffic
servicing 1.54 20.9% 1.31 16.6% 1.67 19.6%
Maintenance 1.59 21.6% 1.60 20.4% 1.91 22.4%
Promotion and sales 1.47 19.9% 1.31 16.6% 1.55 18.2%
General and administrative 0.32 4.3% 0.23 3.0% 0.34 4.0%
Depreciation and
amortization 0.06 0.9% 0.06 0.8% 0.09 1.0%
=========== ========== =========== =========== ============ ==========
Total operating expenses 8.30 112.6% 7.80 99.0% 9.08 106.5%
=========== ========== =========== =========== ============ ==========
Total ASMs (000s) 1,996,185 544,557 405,395
</TABLE>
Revenues
The Company's revenues are highly sensitive to changes in fare levels.
Fare pricing policies have a significant impact on the Company's revenues.
Because of the elasticity of passenger demand, the Company believes that
increases in fares will result in a decrease in passenger demand in many
markets. The Company cannot predict future fare levels, which depend to a
substantial degree on actions of competitors. When sale prices or other price
changes are initiated by competitors in the Company's markets, the Company
believes that it must, in most cases, match those competitive fares in order to
maintain its market share. Passenger revenues are seasonal in leisure travel
markets depending on the markets' locations and when they are most frequently
patronized.
The Company's average fare for the quarters ended June 30, 1998 and 1997
were $108 and $94, respectively. Management believes that the increase in the
average fare during the quarter ended June 30, 1998 over the prior comparable
period was largely a result of the Company's focus on increasing the number of
business travelers, decreased competition as a result of the demise of Western
Pacific, and an increase in the average length of haul and stage length. The
average length of haul increased from 737 miles for the quarter ended June 30,
1997 to 917 miles for the quarter ended June 30, 1998. Effective October 1,
1997, the U.S. Congress reduced the 10% excise tax to 9%, but added 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 effective
October 1, 2002.
Passenger Revenues. Passenger revenues totaled $41,561,000 for the
quarter ended June 30, 1998 compared to $33,621,000 for the quarter ended June
30, 1997, or an increase of 23.6%. The number of revenue passengers carried was
368,000 for the quarter ended June 30, 1998 compared to 339,000 for the quarter
ended June 30, 1997 or an increase of 8.6%. The Company had an average of 14
aircraft in its fleet during the quarter ended June 30, 1998 compared to an
average of 11 aircraft in its fleet during the quarter ended June 30, 1997, or
an increase of 27.3% and an increase in ASMs of 139,162,000 or 34.3%.
During the quarter ended June 30, 1998, the Company had eight or 57.1% of
its fleet out for scheduled major maintenance compared to five or 45.4% of its
fleet during the quarter ended June 30, 1997. In order to complete this
maintenance cycle so that the entire fleet would be fully operational during the
summer months, the Company was required to rotate two aircraft out of service at
a time. Because of this, the Company was unable to provide additional scheduled
service during the quarter ended June 30, 1998. Management believes that the
number of revenue passengers and related revenue would have been higher during
the quarter ended June 30, 1998 had it not been for the volume of heavy
maintenance performed.
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,
1998, the Company's break-even load factor was 61.3% compared to a passenger
load factor of 62%. For the quarter ended June 30, 1997 the Company's break-even
load factor was 65.3% compared to a passenger load factor of 61.5%. The
Company's break-even load factor decreased from the prior comparable period
largely as a result of an increase in its average fare to $108 during the
quarter ended June 30, 1998 from $94 during the quarter ended June 30, 1997 and
a decrease in its expenses per ASM to 7.80(cent) for the quarter ended June 30,
1998 from 9.08(cent) for the quarter ended June 30, 1997.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $1,005,000 and $628,000 for the quarters ended June 30, 1998 and 1997,
representing 2.3% and 1.8% of total operating revenues or an increase of 60%,
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 $322,000 and $307,000 or less than 1% of total operating revenues
for each of the quarters ended June 30, 1998 and 1997, 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
decreased to 99% of revenue for the quarter ended June 30, 1998 compared to
106.5% of revenue for the quarter ended June 30, 1997. Operating expenses
decreased as a percentage of revenue during the quarter ended June 30, 1998 as
the Company experienced a significant reduction in fuel prices, decreased
maintenance costs per block hour as a result of four new aircraft, and operating
efficiencies and the economies of scale as the Company's fixed costs were spread
across a larger base of operations.
Flight Operations. Flight operations expenses of $17,854,000 and
$14,244,000 were 41.6% and 41.2% of total revenue for the quarters ended June
30, 1998 and 1997, respectively. Flight operations expenses include all expenses
related directly to the operation of the aircraft including fuel, lease and
insurance expenses, pilot and flight attendant compensation, in flight catering,
crew overnight expenses, flight dispatch and flight operations administrative
expenses.
Aircraft fuel expenses include both the direct cost of fuel including
taxes as well as the cost of delivering fuel into the aircraft. Aircraft fuel
costs of $5,191,000 for 8,667,000 gallons used and $5,520,000 for 7,169,000
gallons used resulted in an average fuel cost of 59.9(cent) and 77(cent) per
gallon and represented 30.9% and 38.8% of total flight operations expenses for
the quarters ended June 30, 1998 and 1997, respectively. The average fuel cost
per gallon decreased for the quarter ended June 30, 1998 from the comparable
prior period due to an overall decrease in the cost of fuel. Fuel prices are
subject to change weekly as the Company does not purchase supplies in advance
for inventory. Fuel consumption for the quarters ended June 30, 1998 and 1997
averaged 770 and 789 gallons per block hour, respectively. Fuel consumption per
block hour decreased as a result of more fuel efficient aircraft and an increase
in the average length of haul.
Aircraft lease expenses totaled $7,591,000 (17.7% of total revenue) and
$4,616,000 (13.4% of total revenue) for the quarters ended June 30, 1998 and
1997, respectively, or an increase of 44.6%. The increase is partially
attributable to the increase in the average number of aircraft in service to 14
from 11, or 27.3%, for the quarters ended June 30, 1998 and 1997, respectively,
and largely due to higher lease expenses for larger and newer Boeing 737-300
aircraft added to the fleet.
Aircraft insurance expenses totaled $647,000 (1.5% of total revenue)
for the quarter ended June 30, 1998 offset by a profit commission of $153,000
for the policy period ended June 6, 1998. The profit commission was earned
because the Company had no aircraft hull insurance claims during the 1997-1998
policy year. Aircraft insurance expenses for the quarter ended June 30, 1997
were $634,000 (1.8% of total revenue). Aircraft insurance expenses decreased as
a percentage of revenue as a result of competitive pricing in the aircraft
insurance industry, the Company's favorable experience rating since it began
flight operations in July 1994 and economies of scale due to the increase in
fleet size. For the policy period June 7, 1998 to June 6, 1999, the Company has
reduced its aircraft insurance rates by approximately 44.8% or an estimated
annual savings of $1,787,000 at its present fleet levels.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $2,316,000 and $1,967,000 or 5.6% and 5.9% of passenger revenue for each
of the quarters ended June 30, 1998 and 1997, or an increase of 17.7%. Pilot and
flight attendant compensation increased principally as a result of a 27.3%
increase in the average number of aircraft in service and an increase of 23.9%
in block hours. Pilot and flight attendant salaries decreased as a percentage of
passenger revenue because the Company did not add additional aircraft during the
quarter ended June 30, 1998. The Company pays pilot and flight attendant
salaries for training consisting of approximately six and three weeks,
respectively, prior to scheduled increases in service which can cause the
compensation expense during that period to appear high in relationship to the
average number of aircraft in service. When the Company is not in the process of
adding aircraft to its system, pilot and flight attendant expense per aircraft
normalizes. With a scheduled passenger operation, and with salaried rather than
hourly crew compensation, the Company's expenses for flight operations are
largely fixed, with flight catering and fuel expenses the principal exception.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $7,138,000 and $6,788,000 for the quarters ended June 30, 1998 and 1997,
respectively, and represented 16.6% and 19.6% 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, 1998 over the quarter ended June 30, 1997 as a
result of the Company's rental costs (in particular, the gate rentals at DIA and
other cities where the Company added additional frequencies) which are largely
fixed costs, remaining relatively constant as compared to the increase in
revenue. Aircraft and traffic servicing expenses will increase with the addition
of new cities to the Company's route system; however, the increased existing
gate utilization at DIA is expected to reduce per unit expenses.
Maintenance. Maintenance expenses of $8,728,000 and $7,735,000 were 20.4%
and 22.4% of total revenue for the quarters ended June 30, 1998 and 1997,
respectively. These include all labor, parts and supplies expenses related to
the maintenance of the aircraft. Routine maintenance is charged to maintenance
expense as incurred while major engine overhauls and heavy maintenance check
expense is accrued monthly. Maintenance cost per block hour was $775 and $851
per block hour for the quarters ended June 30, 1998 and 1997, respectively.
Maintenance costs per block hour decreased as a result of the four new aircraft
added to the Company's fleet during the past year and the fixed rental cost of
the hangar facility being spread over a larger aircraft fleet offset by
corrosion inspections on two of the Company's 737-200s. The newer aircraft
require fewer routine repairs and are generally covered by a warranty period of
approximately three years on standard Boeing components. Management believes
that these costs will continue to normalize as additional aircraft are added to
the fleet.
Promotion and Sales. Promotion and sales total expenses totaled
$7,126,000 and $6,300,000 and were 16.6% and 18.2% of total revenue for the
quarters ended June 30, 1998 and 1997, respectively. These include advertising
expenses, telecommunications expenses, wages and benefits for reservationists
and reservations supervision as well as marketing management and sales
personnel, credit card fees, travel agency commissions and computer reservations
costs. Promotion and sales expenses decreased as a percentage of revenue
for the quarter ended June 30, 1998 over the prior comparable period largely as
a result of an increase in the average fare; however, promotion and sales
expenses per passenger increased to $19.36 from $18.58 from the quarter ended
June 30, 1997, due to increased reservations costs including communications,
computer reservation fees and reservation personnel, as well as an increase in
credit card fees. The costs of reservation personnel increased as a result
of outsourcing part of the Company's reservations requirements. These increased
costs were offset by a decrease in travel agency commissions. During the month
of April 1998, the Company reduced travel commissions to 8% from 10% matching an
8% commission instituted by the Company's competitors in the fall of 1997.
Additionally, the Company's direct sales, which are not subject to commissions,
increased as a percentage of passenger revenue. Travel agency commissions as a
percentage of passenger revenue, before non-revenue passengers, administrative
fees and breakage (revenue from expired tickets), decreased to 5.7% for the
quarter ended June 30, 1998 from 7.2% for the quarter ended June 30, 1997.
Advertising expenses of $854,000 were 2.1% of passenger revenue for the
quarter ended June 30, 1998, compared to $725,000 or 2.2% of passenger revenue
for the quarter ended June 30, 1997. Advertising expenses normalized and
decreased to some extent as the Company did not incur advertising expenses to
introduce new markets during the quarters ended June 30, 1998 and 1997.
General and Administrative. General and administrative expenses for the
quarters ended June 30, 1998 and 1997 totaling $1,279,000 and $1,379,000 were 3%
and 4% of total revenue, respectively. During the quarter ended June 30, 1998,
the Company relieved approximately $240,000 of its employee health insurance
liability which was determined to be overfunded with a corresponding credit to
general and administrative expenses. Without this adjustment, general and
administrative expenses would have been approximately $1,519,000 or 3.5% of
revenue. 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
$338,000 and $350,000 were approximately 1% of total revenue for the quarters
ended June 30, 1998 and 1997, 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. Depreciation expenses
decreased from the prior comparable period as the Company matured and certain
assets, acquired around the time of the Company's inception and which the
Company has not found necessary to replace, have been fully depreciated.
Nonoperating Income (Expenses). Total net nonoperating income totaled
$9,000 for the quarter ended June 30, 1998 compared to $152,000 for the quarter
ended June 30, 1997. Interest income increased from $161,000 to $276,000 during
the quarter ended June 30, 1998 from the prior comparable period due to an
increase in cash balances as a result of the sale of Common Stock in April 1998.
Interest income was offset by interest expense of $240,000 during the quarter
ended June 30, 1998. In December 1997, the Company sold $5,000,000 of 10% senior
notes. In connection with this transaction, the Company issued the lender
warrants to purchase 1,750,000 shares of Common Stock. Interest expense paid in
cash and the accretion of the warrants and deferred loan expenses totaled
$234,000 during the quarter ended June 30, 1998.
Expenses per ASM. The Company's expenses per ASM for the quarters ended
June 30, 1998 and 1996 were 7.80(cent) and 9.08(cent), respectively, or a
decrease of 14.1%. Expenses per ASM decreased from the prior comparable period
as a result of the economies of scale as fixed costs were spread across a larger
base of operations, a decrease in fuel prices, and the average ASMs per aircraft
having increased as the Company added aircraft with more seating capacity as
compared to its earlier fleet additions. 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. The Company's average seats per aircraft for the quarter
ended June 30, 1998 were 124 as compared to 120 seats per aircraft for the
quarter ended June 30, 1997.
Liquidity and Capital Resources
The Company's balance sheet reflected cash and cash equivalents and
short-term investments of $14,228,000 at June 30, 1998 and $3,641,000 at March
31, 1998. At June 30, 1998, total current assets were $45,747,000 as compared to
$48,375,000 of total current liabilities, resulting in a working capital deficit
of $2,628,000. At March 31, 1998, total current assets were $33,999,000 as
compared to $50,324,000 of total current liabilities, resulting in a working
capital deficit of $16,325,000. The $13,697,000 reduction in the working capital
deficit is a result of the sale of 4,363,001 shares of the Company's common
stock with net proceeds to the Company totaling approximately $13,677,000.
Cash used by operating activities for the quarter ended June 30, 1998 was
$2,931,000. This is attributable to increases in security, maintenance and other
deposits, prepaid expenses and other assets and decreases in accounts payable
and other accrued expenses, offset by decreases in trade receivables and
increases in air traffic liability and accrued maintenance expenses. 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 used in investing activities for the quarter ended June 30, 1998 was
$5,261,000. The Company invested $4,933,000 in short-term investments comprised
of government backed agencies with maturities of one year or less. These
short-term investments matured in August 1998 and are presently included in the
Company's cash position. The Company used $328,000 for capital expenditures for
rotable aircraft components and aircraft leasehold costs and improvements. 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 an aircraft delivered in May 1997.
Cash provided by financing activities for the quarters ended June 30,
1998 and 1997 was $13,846,000 and $134,000, respectively. During the quarter
ended June 30, 1998, the Company sold 4,363,001 shares of its common stock
through a private placement to an institutional investor. Gross proceeds to the
Company from the transaction were approximately $14,180,000, of which the
Company received net proceeds of approximately $13,677,000. The Company issued a
warrant to this investor to purchase 716,929 shares of common stock of the
Company at a purchase price of $3.75 per share, which warrant expires in April
2002.
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 $2,991,000, respectively, at June 30, 1998.
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
$3,606,000, respectively, at June 30 1998. 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. In November 1997, the
Company renegotiated one of these leases extending the lease term by one year to
2002 in return for a slight reduction in the monthly rental payment. The Company
was required to make security deposits for these aircraft totaling $858,000.
Commencing July 1996 the Company was required to make monthly deposits for
maintenance of these leased aircraft. At June 30, 1998, these deposits totaled
$2,497,000. 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.
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, 1998, the Company had made maintenance deposits
associated with this leased aircraft totaling $1,598,000.
During the 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 year ended March 31, 1998. The Company
took delivery of these aircraft in May, August and September 1997 and in
February 1998. In connection with the Boeing 737-300 aircraft delivered in
September 1997, the Company has issued to the lessor a warrant to purchase
55,000 shares of Common Stock at an aggregate purchase price of $385,000. As of
June 30, 1998, the Company had made cash security deposits totaling $1,616,000
with respect to these aircraft. During the year ended March 31, 1998, the
Company secured lease obligations for two of these aircraft with letters of
credit totaling $1,500,000 and, in turn, $650,000 of cash security deposits was
returned to the Company. The Company's restricted cash increased by $1,500,000
to collateralize the letters of credit. Two each of the four lease agreements
have seven and eight year terms from date of delivery, respectively. Two of the
four leases have up to two one year renewal terms and a third may be renewed for
up to three one year terms. The Company is required to pay monthly cash deposits
to each aircraft lessor based on flight hours and cycles operated to provide
funding of future scheduled maintenance costs. As of June 30, 1998, the Company
had maintenance deposits associated with these aircraft totaling $3,168,000.
The Company's aircraft fleet is currently in compliance with Stage 3
noise level requirements. However, 75% of the Company's fleet must be in
compliance by January 1, 1999 and 100% must be in compliance by January 1, 2000.
If the Company is unable to secure three additional Stage 3 aircraft by
December 31, 1998, it will be required by December 31, 1998 to retrofit an
existing Stage 2 aircraft to Stage 3 compliance or add a Stage 3 aircraft an
remove a Stage 2 aircraft from its certificate, (permitting it to maintain a 14
aircraft fleet), or remove one of its Stage 2 aircraft from its certificate
(resulting n a 13 aircraft fleet).
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 given the
option of receiving a paper ticket or a confirmation number in lieu of a paper
ticket. Electronic ticketing decreases certain costs including postage and
handling costs, ticket stock, and reduced revenue accounting fees because the
accounting for electronic ticketing is automated. The Company also has
implemented and maintains a booking capability on its Internet site.
The Company has announced its intention to perform its own ground
handling operations at DIA effective September 1, 1998, a function which is
currently being provided by an independent contractor. The Company is in the
process of acquiring certain ground handling equipment with total capital
expenditures estimated to be $850,000. The Company is seeking financing for
these expenditures but there can be no assurance that it will be successful in
obtaining the necessary financing.
The Company is exploring various means to increase revenues and reduce
expenses. The Company is considering revenue enhancement initiatives with new
marketing alliances and ad hoc charters. Expense reduction programs include the
installation of an upgraded flight operations, maintenance, and parts inventory
management information system which will be installed by the end of the fiscal
year ending March 31, 1999. Other potential cost savings programs include an
in-house revenue accounting system and conducting certain heavy maintenance
checks in-house. The latter program would require capital expenditures and will
be implemented if the Company is able to increase its capital resources.
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. As of September 30, 1997, the Company did not meet the
financial covenant requirements. In November 1997, the credit card processor
required an increase in the collateral amount from its present level of
$2,000,000 to $4,000,000, which increased the Company's current restricted
investment balance accordingly. As of July 31, 1998, the Company could be
required to increase the collateral amount to $5,738,000.
Most of 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.
The Company's goal is to lease a number of additional aircraft to serve
additional cities from Denver. The Company believes that expanding its route
system would facilitate a greater volume of connecting traffic as well as a
stable base of local traffic and offset the impact of higher DIA-related
operating costs through more efficient gate utilization. The expansion of the
Company's operations will entail the hiring of additional employees to staff
flight and ground operations in new markets, and significant initial costs such
as deposits for airport and aircraft leases. Because of the expansion of the
Company's business, and competition within the airline industry which often
requires quick reaction by management to changes in market conditions, the
Company likely will require additional capital to further expand its business.
Effective February 11, 1997, United Airlines commenced service using its
low fare United "Shuttle" between Denver and Phoenix, Arizona, and on October
31, 1997 such service to Salt Lake City was added by United. These are both
markets in which the Company provides service, in addition to other markets
where United Airlines provides flights. 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 since its inception
and has a working capital deficit at June 30, 1998. In addition, the Company has
substantial contractual commitments for leasing and maintaining aircraft. The
Company believes that its existing cash balances coupled with improved operating
results will be adequate to fund the Company's operations at least through March
31, 1999. There can be no assurances however, that the Company will be
successful in improving its operating results in fiscal 1999. If its operating
results do not improve, the Company anticipates that it would be required to
obtain additional capital or other financing to fund its operations.
Year 2000 Compliance
The Company uses information systems in managing and conducting certain
aspects of its business. The Company's systems are currently not Year 2000
compliant, and the Company is in the process of ascertaining the modifications
that will be necessary for its systems to attain Year 2000 compliance. The
Company is taking measures to address this problem and has created a Year 2000
committee, headed by an officer of the Company, to manage and coordinate the
Company's efforts to identify and fix critical date-sensitive systems. While the
Company believes it will be able to perform or obtain the necessary
modifications on a timely basis, the Company has not determined the costs that
will be necessary for attaining compliance, and there is no assurance that such
costs will not be significant. Failure by the Company and its key business
partners (e.g., the FAA, DOT, airport authorities, suppliers, and data
providers) to achieve Year 2000 compliance on a timely basis could have a
significant adverse impact on the Company's business, financial condition and
operating results.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
In December 1997 the City of New York filed a petition with the
United States Court of Appeals for the Second Circuit for a
review of an order of the Secretary of Transportation challenging
the Secretary's award of landing and takeoff slots to the Company
at New York City's LaGuardia Airport. The Court of Appeals denied
the Petition in July 1998.
Item 5: Other Information
Shareholders are entitled to submit proposals on matters
appropriate for shareholder action consistent with regulations of
the Securities and Exchange Commission and the Company's bylaws.
Should a shareholder wish to have a proposal appear in the
Company's proxy statement for next year's annual meeting, under
the regulations of the Securities and Exchange Commission it must
be received by the corporate secretary at 12015 East 46th Avenue,
Denver, CO 80239 on or before May 30, 1999. If a shareholder
intends to submit a proposal at the meeting that is not included
in the Company's proxy statement, and the Shareholder fails to
notify the Company prior to June 31, 1998 of such proposal, then
the proxies appointed by the Company's management would be
allowed to use their discretionary voting authority when the
proposal is raised at the annual meeting, without any discussions
of the matter in the proxy statement.
Item 6: Exhibits and Reports on Form 8-K
Exhibit
Numbers
(a) Exhibits
27.1 Financial Data Schecule
(b) The Registrant filed two Reports on form 8-K during the quarter
for which this report is being filed.
1. Report filed on May 4, 1998 included information under Item
Nos. 5 (Other Events) and 7 (Financial Statements). The
financial statements consisted of Unaudited Pro Forma
Condensed Financial Statements.
2. Report filed on May 28, 1998 included information under
Item No. 5 (Other Events).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FRONTIER AIRLINES, INC.
Date: August 7, 1998 By: /s/ Samuel D. Addoms
---------------------
Samuel D. Addoms, Principal Executive
Officer and Principal Financial Officer
Date: August 7, 1998 By: /s/ Elissa A. Potucek
----------------------
Elissa A. Potucek, Vice Presdent,
Controller, Treasurer and Principal
Accounting Officer
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<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
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