FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporated or organization)
12015 E. 46th Avenue, Denver, CO 80239
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (303) 371-7400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the Company's Common Stock outstanding as of January 28,
2000 was 17,694,709.
<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 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<S> <C> <C>
December 31, March 31,
1999 1999
--------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 50,848,999 $ 47,289,072
Short-term investments 18,260,000 -
Restricted investments 4,000,000 4,000,000
Trade receivables 12,148,082 16,930,038
Maintenance deposits 17,414,135 13,018,466
Prepaid expenses and other assets 6,575,918 5,439,834
Inventories 2,148,344 1,203,916
Deferred tax assets 968,850 6,041,576
Deferred lease expenses 185,727 285,636
--------------- ----------------
Total current assets 112,550,055 94,208,538
Security, maintenance and other deposits 12,565,379 11,834,457
Property and equipment, net 18,953,368 8,733,778
Deferred lease and other expenses 145,124 267,762
Restricted investments 6,359,760 4,575,760
=============== ================
$ 150,573,686 $ 119,620,295
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 11,301,522 $ 14,011,238
Air traffic liability 27,533,095 28,887,692
Other accrued expenses 12,085,876 10,781,509
Accrued maintenance expense 19,576,257 14,933,568
Current portion of obligations under capital leases 110,107 106,833
--------------- ----------------
Total current liabilities 70,606,857 68,720,840
Accrued maintenance expense 6,424,469 6,042,958
Deferred tax liability 1,269,150 30,928
Obligations under capital leases, excluding current portion 357,912 434,920
--------------- ----------------
Total liabilities 78,658,388 75,229,646
--------------- ----------------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares;
none issued - -
Common stock, no par value, stated value of $.001 per share,
authorized 40,000,000 shares; 17,693,709 and 16,141,172 shares
issued and outstanding at December 31, 1999 and March 31, 1999 17,693 16,141
Additional paid-in capital 66,302,012 58,054,844
Unearned ESOP shares (1,143,750) (609,375)
Retained earnings (accumulated deficit) 6,739,343 (13,070,961)
--------------- ----------------
Total stockholders' equity 71,915,298 44,390,649
--------------- ----------------
$ 150,573,686 $ 119,620,295
=============== ================
See accompanying notes to financial statements.
</TABLE>
1
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FRONTIER AIRLINES, INC.
Statements of Income
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
--------------- ---------------- --------------- ----------------
Revenues:
Passenger $ 71,663,224 $ 49,112,767 $ 231,050,921 $ 146,175,655
Cargo 1,767,542 1,279,175 4,686,118 3,250,994
Other 543,143 301,646 1,576,332 1,007,405
--------------- ---------------- --------------- ----------------
Total revenues 73,973,909 50,693,588 237,313,371 150,434,054
--------------- ---------------- --------------- ----------------
Operating expenses:
Flight operations 32,338,722 19,894,445 88,599,352 56,526,799
Aircraft and traffic servicing 12,225,498 8,584,155 34,846,102 24,175,968
Maintenance 10,752,059 9,178,653 36,649,604 27,317,001
Promotion and sales 10,204,796 8,365,827 34,681,764 23,788,720
General and administrative 3,577,780 1,989,114 11,436,318 5,025,693
Depreciation and amortization 780,732 438,380 1,988,384 1,154,354
--------------- ---------------- --------------- ----------------
Total operating expenses 69,879,587 48,450,574 208,201,524 137,988,535
--------------- ---------------- --------------- ----------------
Operating income 4,094,322 2,243,014 29,111,847 12,445,519
--------------- ---------------- --------------- ----------------
Nonoperating income (expense):
Interest income 1,172,868 422,217 3,119,990 1,042,189
Interest expense (46,599) (203,789) (94,615) (661,870)
Other, net (70,435) (1,911) (55,414) (63,040)
--------------- ---------------- --------------- ----------------
Total nonoperating income, net 1,055,834 216,517 2,969,961 317,279
--------------- ---------------- --------------- ----------------
Income before income tax expense 5,150,156 2,459,531 32,081,808 12,762,798
Income tax expense 1,970,135 - 12,271,504 -
=============== ================ =============== ================
Net income $ 3,180,021 $ 2,459,531 $ 19,810,304 $ 12,762,798
=============== ================ =============== ================
Earnings per share:
Basic $ 0.18 $ 0.17 $ 1.15 $ 0.93
=============== ================ =============== ================
Diluted $ 0.17 $ 0.15 $ 1.05 $ 0.86
=============== ================ =============== ================
Weighted average shares of
common stock outstanding
Basic 17,585,736 14,697,983 17,195,012 13,726,675
=============== ================ =============== ================
Diluted 19,053,879 16,117,426 18,778,260 14,875,968
=============== ================ =============== ================
See accompanying notes to financial statements.
</TABLE>
2
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FRONTIER AIRLINES, INC.
Condensed Statements of Cash Flows
For the Nine Months Ended December 31, 1999 and 1998
(Unaudited)
<TABLE>
<S> <C> <C>
1999 1998
--------------- ----------------
Cash flows from operating activities:
Net income $ 19,810,304 $ 12,762,798
Adjustments to reconcile net income to net cash
provided by operating activities:
Employee stock option plan compensation expense 609,375 645,750
Depreciation and amortization 2,210,930 1,640,062
Loss on sale of equipment - 6,793
Deferred tax expense 6,310,948 -
Changes in operating assets and liabilities:
Restricted investments 500,000 (828,873)
Trade receivables 4,781,956 1,496,891
Security, maintenance and other deposits (4,867,552) (5,089,869)
Prepaid expenses and other assets (1,136,084) (2,952,729)
Inventories (944,428) (27,767)
Accounts payable (2,709,716) (3,822,367)
Air traffic liability (1,354,597) 1,391,317
Other accrued expenses 3,246,009 200,003
Accrued maintenance expense 5,024,200 6,024,828
--------------- ----------------
Net cash provided by operating activities 31,481,345 11,446,837
--------------- ----------------
Cash flows from investing activities:
Increase in short-term investments (18,260,000) -
Aircraft lease deposits, net (259,039) (284,000)
Increase in restricted investments (2,284,000) (1,120,000)
Capital expenditures (12,207,973) (2,447,096)
--------------- ----------------
Net cash used by investing activities (33,011,012) (3,851,096)
--------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,163,328 14,064,381
Proceeds from short-term borrowings - 179,664
Principal payments on short-term borrowings - (118,658)
Principal payments on obligations under capital leases (73,734) (40,100)
--------------- ----------------
Net cash provided by financing activities 5,089,594 14,085,287
--------------- ----------------
Net increase in cash and cash equivalents 3,559,927 21,681,028
Cash and cash equivalents, beginning of period 47,289,072 3,641,395
--------------- ----------------
Cash and cash equivalents, end of period $ 50,848,999 $ 25,322,423
=============== ================
See accompanying notes to financial statements.
</TABLE>
3
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FRONTIER AIRLINES, INC.
Notes to Financial Statements
December 31, 1999
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the Company's 1999 Annual
Report on Form 10-K. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for
a fair presentation have been included. The results of operations for the
nine months ended December 31, 1999 are not necessarily indicative of the
results that will be realized for the full year.
(2) Income Tax Expense
Income tax expense for the three and nine months ended December 31, 1999
consists of:
Three months Nine months
ended ended
----------------- -----------------
Current expense 700,842 5,960,556
Deferred expense 1,269,293 6,310,948
================= =================
1,970,135 12,271,504
================= =================
4
<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. ("Frontier" or the "Company") and the
expectations of our Company and management. All statements, other than
statements of historical facts, included in this report that address activities,
events or developments that we expect, believe, intend or anticipate will or may
occur in the future, are forward-looking statements. When used in this document,
the words "estimate," "anticipate," "project" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. These risks and
uncertainties include, but are not limited to: the timing of, and expense
associated with, expansion and modification of our operations in accordance with
our business strategy or in response to competitive pressures or other factors
such as our commencement of passenger service and ground handling operations at
several airports and assumption of maintenance and ground handling operations at
DIA with our own employees; general economic factors and behavior of the
fare-paying public; increased federal scrutiny of low-fare carriers generally
that may increase our operating costs or otherwise adversely affect us; actions
of competing airlines, such as increasing capacity and pricing actions of United
Airlines and other competitors; the availability of suitable aircraft, which may
inhibit our ability to achieve operating economies and implement our business
strategy; the unavailability of, or inability to secure, upon acceptable terms,
financing necessary to purchase aircraft which we have ordered; and
uncertainties regarding aviation fuel prices. Because our business, like that of
the airline industry generally, is characterized by high fixed costs relative to
revenues, small fluctuations in our yield per RPM or expense per ASM can
significantly affect operating results. See "Risk Factors" in our 1999 Form 10-K
as they may be modified by the disclosures contained in this report.
General
We are a scheduled airline based in Denver, Colorado. We currently
operate routes linking our Denver hub to 20 cities in 17 states spanning the
nation from coast to coast. At present, we use up to eight gates at Denver
International Airport ("DIA") for approximately 90 daily flight departures and
arrivals. During the nine months ended December 31, 1999, we added Portland,
Oregon to our route system on June 14, 1999 and Orlando, Florida on September 9,
1999 and added frequencies to certain existing markets we serve. On November 4,
1999 we added a second daily nonstop flight between DIA and Orlando, Florida.
During the nine months ended December 31, 1998, we added San Diego, California
to our route system on July 31, 1998 and Atlanta, Georgia, Dallas/Forth Worth,
Texas, and Las Vegas, Neveda on December 17, 1998. On November 1, 1998, we
initiated complimentary shuttle bus service between Boulder, Colorado and DIA.
An additional flight is scheduled to commence on February 17, 2000 to Baltimore,
Maryland.
Organized in February 1994, we commenced flight operations as a regional
carrier in July 1994 with two leased Boeing 737-200 jet aircraft. We currently
operate 22 leased jets as of January 28, 2000, including 7 Boeing 737-200s and
15 larger Boeing 737-300s. Of our 22 leased jets, 20 are presently in scheduled
service and 2 are in the process of induction and will be placed in scheduled
service in February 2000.
As a result of the expansion of our operations during the nine months
ended December 31, 1999, our results of operations are not necessarily
indicative of future operating results or comparable to the prior period ended
December 31, 1998.
Small fluctuations in our yield per RPM or expense per ASM can
significantly affect operating results because we, like other airlines, have
high fixed costs in relation to revenues. Airline operations are highly
sensitive to various factors, including the actions of competing airlines and
general economic factors, which can adversely affect our liquidity, cash flows
and results of operations.
5
<PAGE>
Results of Operations
We had net income of $19,810,000 or $1.05 per diluted share for the nine
months ended December 31, 1999 as compared to net income of $12,763,000 or
86(cent) per diluted share for the nine months ended December 31, 1998. We had
net income of $3,180,000 or 17(cent) per diluted share for the three months
ended December 31, 1999 as compared to net income of $2,460,000 or 15(cent) per
diluted share for the three months ended December 31, 1998. During the three and
nine months ended December 31, 1999, we reported a provision for income taxes
which totaled $1,970,000 and $12,272,000 or 10(cent) and 65(cent) per diluted
share, respectively. During the three and nine months ended December 31, 1998,
we had the benefit of tax loss carryforwards that offset tax expense for the
period. During the three and nine months ended December 31, 1999 as compared to
the prior comparable periods, we experienced higher fares as a result of
increases in the number of business travelers and a general increase in fare
levels. Our cost per ASM increased to 7.96(cent) during the nine months ended
December 31, 1999 from 7.72(cent) principally because of our accrual for
potential employee performance bonuses, which accounted for .08(cent) of expense
per ASM, and an overall increase in the cost of fuel which accounted for
.22(cent) per ASM, offset by a decrease of .13(cent) of expense per ASM in
maintenance expenses as a result of bringing certain aircraft heavy maintenance
checks in-house which were previously outsourced to third party vendors.
An airline's break-even load factor is the passenger load factor that
will result in operating revenues being equal to operating expenses, assuming
constant revenue per passenger mile and expenses. For the nine months ended
December 31, 1999, our break-even load factor was 51.1% compared to the
passenger load factor achieved of 59.3%. For the nine months ended December 31,
1998, our break-even load factor was 54.4% compared to the achieved passenger
load factor of 59.6%. Our break-even load factor decreased from the prior
comparable period largely as a result of an increase in our average fare to $132
during the nine months ended December 31, 1999 from $119 during the nine months
ended December 31, 1998, an increase in our total yield per RPM from 14.14(cent)
for the nine months ended December 31, 1998 to 15.29(cent) for the nine months
ended December 31, 1999 offset by an increase in our expense per ASM to
7.96(cent) for the nine months ended December 31, 1999 from 7.72(cent) for the
nine months ended December 31, 1998.
The following table sets forth certain of our quarterly financial and
operating data for the 15 months of operations ended December 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Selected Financial and Operating Data
Quarter Ended
---------------------------------------------------------------------------------------
December 31, March 31, June 30, September 30, December 31,
1998 1999 1999 1999 1999
Passenger revenue (1) $49,113,000 $68,136,000 $75,975,000 $83,413,000 $71,663,000
Revenue passengers carried 373,000 503,000 553,000 617,000 509,000
Revenue passenger miles (RPMs)(2) 338,691,000 442,541,000 506,247,000 575,476,000 470,484,000
Available seat miles (ASMs)(3) 632,754,000 751,081,000 815,961,000 900,524,000 900,328,000
Passenger load factor (4) 53.5% 58.9% 62.0% 63.9% 52.3%
Break-even load factor (5) 50.8% 48.3% 52.0% 52.7% 48.5%
Block hours (6) 13,325 15,666 16,785 17,987 17,660
Average daily block hour
utilization (7) 9.57 10.24 10.80 10.80 10.62
Yield per RPM (cents) (8) 14.50 15.40 15.01 14.49 15.23
Total yield per RPM (cents) (9) 14.97 15.86 15.38 14.85 15.72
Total yield per ASM (cents) (10) 8.01 9.34 9.55 9.49 8.22
Expense per ASM (cents) 7.66 7.71 8.12 8.01 7.76
Expense per ASM (excluding
fuel) (cents) 6.73 6.91 7.14 6.83 6.49
Passenger revenue per
block hour $3,685.78 $4,349.23 $4,526.36 $4,637.40 $4,057.93
Average fare (11) $124 $131 $133 $130 $135
Average aircraft in service 14.4 17.0 18.0 19.1 19.7
EBITDAR (12) $10,886,000 $21,923,000 $22,479,000 $25,779,000 $17,348,000
EBITDAR as a % of revenue 21.5% 31.2% 28.9% 30.2% 23.5%
Operating income $2,243,000 $12,234,000 $11,653,000 $13,364,000 $4,094,000
Net income $2,460,000 $17,802,000 $7,616,000 $9,014,000 $3,180,000
</TABLE>
6
<PAGE>
(1) "Passenger revenue" includes revenues for non-revenue passengers,
administrative fees, and revenue recognized for unused tickets that are
greater than one year from issuance date.
(2) "Revenue passenger miles,"or RPMs, are determined by multiplying the number
of fare-paying passengers carried by the distance flown.
(3) "Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(4) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(5) "Break-even load factor" is the passenger load factor that will result in
operating revenues being equal to operating expenses, assuming constant
revenue per passenger mile and expenses
(6) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(7) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(8) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(9) "Total Yield per RPM" is determined by dividing total revenues by revenue
passenger miles.
(10) "Total Yield per ASM" is determined by dividing total revenues by available
seat miles.
(11) "Average fare" excludes revenue included in passenger revenue for
non-revenue passengers, administrative fees, and revenue recognized for
unused tickets that are greater than one year from issuance date.
(12) "EBITDAR", or "earnings before interest, income taxes, depreciation,
amortization and aircraft rentals," is a supplemental financial measurement
many airline industry analysts and we use in the evaluation of our
business. However, EBITDAR should only be read in conjunction with all of
our financial statements appearing elsewhere herein, and should not be
construed as an alternative either to operating income (as determined in
accordance with generally accepted accounting principles) as an indicator
of our operating performance or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) as
a measure of liquidity.
The following table provides our operating revenues and expenses
expressed as cents per total available seat miles ("ASM") and as a percentage of
total operating revenues, as rounded, for the three and nine months ended
December 31, 1999 and 1998.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the three months ended December 31, For the nine months ended December 31,
1999 1998 1999 1998
-------------------- -------------------- ---------------------- --------------------
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 7.96 96.9% 7.76 96.9% 8.83 97.4% 8.18 97.2%
Cargo 0.20 2.4% 0.20 2.5% 0.18 2.0% 0.18 2.1%
Other 0.06 0.7% 0.05 0.6% 0.06 0.6% 0.06 0.7%
========= ========= ========= ========= ========== ========== ========== =========
Total revenues 8.22 100.0% 8.01 100.0% 9.07 100.0% 8.42 100.0%
========= ========= ========= ========= ========== ========== ========== =========
Operating expenses:
Flight operations 3.59 43.7% 3.15 39.3% 3.39 37.3% 3.17 37.5%
Aircraft and traffic
servicing 1.36 16.5% 1.36 16.9% 1.33 14.7% 1.35 16.1%
Maintenance 1.19 14.5% 1.45 18.1% 1.40 15.4% 1.53 18.2%
Promotion and sales 1.13 13.8% 1.32 16.5% 1.32 14.6% 1.33 15.8%
General and
administrative 0.40 4.8% 0.31 3.9% 0.44 4.8% 0.28 3.3%
Depreciation and
amortization 0.09 1.1% 0.07 0.9% 0.08 0.9% 0.06 0.8%
========= ========= ========= ========= ========== ========== ========== =========
Total operating expenses 7.76 94.4% 7.66 95.6% 7.96 87.7% 7.72 91.7%
========= ========= ========= ========= ========== ========== ========== =========
Total ASMs (000s) 900,328 632,754 2,616,813 1,786,422
</TABLE>
7
<PAGE>
Revenues
Our revenues are highly sensitive to changes in fare levels. Fare pricing
policies have a significant impact on our revenues. Because of the elasticity of
passenger demand, we believe that increases in fares will result in a decrease
in passenger demand in many markets. We cannot predict future fare levels, which
depend to a substantial degree on actions of competitors. When sale prices or
other price changes are initiated by competitors in our markets, we believe that
we must, in most cases, match those competitive fares in order to maintain our
market share. Passenger revenues are seasonal in leisure travel markets
depending on the markets' locations and when they are most frequently
patronized.
Our average fare for the nine months ended December 31, 1999 and 1998 was
$132 and $119, respectively. We believe that the increase in the average fare
during the nine months ended December 31, 1999 over the prior comparable periods
was largely a result of our focus on increasing the number of business travelers
and a general increase in fare levels. Additionally, during the nine months
ended December 31, 1998, we honored certain Western Pacific Airlines flight
coupons at a significantly reduced fare, which depressed the average fare for
the period. Western Pacific Airlines operated out of DIA until it ceased
operations on February 4, 1998.
Passenger Revenues. Passenger revenues totaled $231,051,000 for the nine
months ended December 31, 1999 compared to $146,176,000 for the nine months
ended December 31, 1998, or an increase of 58.1%. The number of revenue
passengers carried was 1,679,000 for the nine months ended December 31, 1999
compared to 1,161,000 for the nine months ended December 31, 1998 or an increase
of 44.6%. We had an average of 18.9 aircraft in our fleet during the nine months
ended December 31, 1999 compared to an average of 14.4 aircraft during the nine
months ended December 31, 1998, an increase of 31.3%, and an increase in ASMs of
830,391,000 or 46.5%. RPMs for the nine months ended December 31, 1999 were
1,552,207,000 compared to 1,064,060,000 for the nine months ended December 31,
1998, an increase of 45.9%. We believe that our passenger traffic and related
revenues during the nine months ended December 31, 1999 were adversely affected
by late deliveries of aircraft and consumer concerns over the Year 2000 issue.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $4,686,000 and $3,251,000 for the nine months ended December 31, 1999
and 1998, respectively, representing 2.0% and 2.2%, respectively, of total
operating revenues and an increase of 44.1%. This adjunct to the passenger
business is highly competitive and depends heavily on aircraft scheduling,
alternate competitive means of same day delivery service and schedule
reliability.
Other revenues, comprised principally of interline handling fees, liquor
sales and excess baggage fees, totaled $1,576,000 and $1,007,000, or .7% of
total operating revenues, for the nine months ended December 31, 1999 and 1998,
an increase of 56.5%.
Operating Expenses
Operating expenses include those related to flight operations, aircraft
and traffic servicing, maintenance, promotion and sales, general and
administrative and depreciation and amortization. Total operating expenses were
$208,202,000 and $137,989,000 for the nine months ended December 31, 1999 and
1998 and represented 87.7% and 91.7% of revenue, respectively. Operating
expenses decreased as a percentage of revenue during the nine months ended
December 31, 1999 as a result of the 58.1% increase in passenger revenues
attributable to a 44.6% increase in passengers and a 10.9% increase in the
average fare offset by an increase in the cost of fuel and an accrual for
potential employee performance bonuses. Total operating expenses for the three
months ended December 31, 1999 and 1998 were $69,880,000 and $48,451,000 and
represented 94.5% and 95.6% of revenue, respectively. Operating expenses
increased as a percentage of revenue during the three months ended December 31,
1999 principally as a result of an increase in the cost of fuel .
Flight Operations. Flight operations expenses of $58,610,000 and
$39,836,000 were 24.7% and 26.5% of total revenue for the nine months ended
December 31, 1999 and 1998, respectively. Flight operations expenses of
$20,861,000 and $14,011,000 were 28.2% and 27.6% of total revenue for the three
months ended December 31, 1999 and 1998, respectively. Flight operations
expenses include all expenses related directly to the operation of the aircraft
including fuel, lease and insurance expenses, pilot and flight attendant
compensation, in-flight catering, crew overnight expenses, flight dispatch and
flight operations administrative expenses.
8
<PAGE>
Aircraft fuel expenses include both the direct cost of fuel, including
taxes, as well as the cost of delivering fuel into the aircraft. Aircraft fuel
expense of $29,990,000 for 40,928,000 gallons used and $16,691,000 for
28,964,000 gallons used resulted in an average fuel cost of 73.3(cent) and
57.6(cent) per gallon, for the nine months ended December 31, 1999 and 1998,
respectively. Aircraft fuel expense represented 51.2% and 41.9% of total flight
operations expenses or 12.6% and 11.1% of total revenue for the nine months
ended December 31, 1999 and 1998, respectively. Aircraft fuel expense of
$11,478,000 for 13,524,000 gallons used and $5,883,000 for 10,343,000 gallons
used resulted in an average fuel expense of 84.9(cent) and 56.9(cent) per gallon
for the three months ended December 31, 1999 and 1998, respectively. Aircraft
fuel costs represented 55.0% and 42.0% of total flight operations expenses for
the three months ended December 31, 1999 and 1998, respectively, or 15.5% and
11.6% of total revenue. The average fuel cost per gallon increased for the nine
months ended December 31, 1999 from the comparable prior period due to an
overall increase in the cost of fuel. Fuel prices are subject to change weekly
as we do not purchase supplies in advance for inventory. Fuel consumption for
the nine months ended December 31, 1999 and 1998 averaged 781 and 780 gallons
per block hour, respectively. Fuel consumption increased over the prior
comparable period because of increased flap speed settings mandated by the FAA,
which required more fuel to maintain air speed at normal operating levels,
offset by fuel efficiencies with the increase in more fuel efficient aircraft.
The requirement for increased flap speed settings will be lifted when a fleet
modification is completed, which is required to be completed by August 1, 2000.
Fuel consumption for the three months ended December 31, 1999 and 1998 averaged
766 and 776 gallons per block hour, respectively. Fuel consumption decreased
over the prior comparable period as a result of an increase in more fuel
efficient aircraft and completion of approximately one half of the fleet
modification requirement.
Aircraft lease expenses totaled $34,661,000 (14.6% of total revenue) and
$23,387,000 (15.6% of total revenue) for the nine months ended December 31, 1999
and 1998, respectively, or an increase of 48.2%. The increase is largely due to
higher lease expenses for larger newer Boeing 737-300 aircraft added to the
fleet and an increase in the average number of aircraft to 18.9 from 14.4, or
23.8%, for the nine months ended December 31, 1999 and 1998, respectively.
Aircraft insurance expenses totaled $1,963,000 (.8% of total revenue) for
the nine months ended December 31, 1999. Aircraft insurance expenses for the
nine months ended December 31, 1998 were $1,774,000 (1.2% of total revenue).
Aircraft insurance expenses were .13(cent) and .17(cent) per RPM for the nine
months ended December 31, 1999 and 1998, respectively. Aircraft insurance
expenses decreased per RPM as a result of competitive pricing in the aircraft
insurance industry and our favorable experience rating since we began flight
operations in July 1994.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $11,142,000 and $7,570,000, or 4.8% and 5.2% of passenger revenue for
the nine months ended December 31, 1999 and 1998, or an increase of 47.2%. Pilot
and flight attendant compensation increased principally as a result of a 23.8%
increase in the average number of aircraft in service, general wage rate
increases, and an increase of 41.2% in block hours. We pay pilot and flight
attendant salaries for training consisting of approximately six and three weeks,
respectively, prior to scheduled increases in service which can cause the
compensation expense during that period to appear high in relationship to the
average number of aircraft in service. When we are not in the process of adding
aircraft to our system, pilot and flight attendant expense per aircraft
normalizes. With a scheduled passenger operation, and with salaried rather than
hourly crew compensation, our expenses for flight operations are largely fixed,
with flight catering and fuel expenses the principal exceptions.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $34,846,000 and $24,176,000 (an increase of 44.1%) for the nine months
ended December 31, 1999 and 1998, respectively, and represented 14.7% and 16.1%
of total revenue. Aircraft and traffic servicing expenses include all expenses
incurred at airports including landing fees, facilities rental, station labor,
ground handling expenses, and interrupted trip expenses associated with delayed
or cancelled flights. Interrupted trip expenses are amounts paid to other
airlines to protect passengers as well as hotel, meal and other incidental
expenses. Aircraft and traffic servicing expenses will increase with the
addition of new cities to our route system. During the nine months ended
December 31, 1999 we served 20 cities compared to 18 cities during the nine
months ended December 31, 1998, or an increase of 11.1%. Three of the four
cities added during the nine months ended December 31, 1998 were not added until
mid-December 1998. Aircraft and traffic servicing expenses were $1,415 and
$1,325 per departure for the nine months ended December 31, 1999 and 1998,
respectively, or an increase of $90. During the nine months ended December 31,
1998, DIA issued a credit memo of $331,000 (or $18 per departure) in
anticipation of the revenue credit to be distributed to its signatory carriers
for its fiscal year ended December 31, 1998. DIA has not issued a credit memo
for its fiscal year ended December 31, 1999. An additional DIA revenue credit
for its fiscal year ended December 31, 1997 above amounts previously estimated
and accrued, totaling $371,000 (or $20 per departure) was included in aircraft
and traffic servicing expenses during the nine months ended December 31, 1998.
After adjusting the cost per departure for these credits for the nine months
ended December 31, 1998, the cost per departure would have been $1,363 and the
cost per departure for the nine months ended December 31, 1999 would have been a
$52 increase over the prior comparable period. Aircraft and traffic servicing
expenses increased as a result of a drop in the completion factor for the nine
months ended December 31, 1999 to 98.5% from 99.2% for the nine months ended
December 31, 1998 which increased interrupted trip expenses, and expenses
associated with the Boulder, Colorado-DIA shuttle bus service, which is
complimentary to our passengers. The increase in aircraft and traffic expenses
was offset by savings as a result of conducting our own ground operations at DIA
beginning September 1, 1998, rather than having them performed by a third party
contractor.
9
<PAGE>
Maintenance. Maintenance expenses of $36,650,000 and $27,317,000 were
15.4% and 18.2% of total revenue for the nine months ended December 31, 1999 and
1998, respectively. These include all labor, parts and supplies expenses related
to the maintenance of the aircraft. Routine maintenance is charged to
maintenance expense as incurred while major engine overhauls and heavy
maintenance check expense is accrued monthly. Maintenance cost per block hour
was $699 and $736 for the nine months ended December 31, 1999 and 1998,
respectively. During the nine months ended December 31, 1999, we incurred higher
than usual borrowed parts fees. During the nine months ended December 31, 1999
these fees were approximately $1,303,000 compared to $222,000 during the nine
months ended December 31, 1998 or $25 and $6 per block hour, respectively.
During the three months ended December 31, 1999, we increased our spare parts
inventory in an effort to mitigate this expense in the future. We anticipate
that we will be required to make additional spare parts acquisitions in the
future. During the nine months ended December 31, 1998, we were outsourcing
certain aircraft heavy maintenance checks. Effective March 1999, we began to
conduct the majority of these checks in-house which we expect will continue to
reduce maintenance expenses in future periods. Additionally, maintenance costs
per block hour have decreased as certain fixed costs are spread over a larger
fleet. Maintenance expenses totaled $10,752,000 and $9,179,000 and were 14.5%
and 18.1% of total revenues for the three months ended December 31, 1999 and
1998, respectively. Maintenance cost per block hour was $609 and $689 for the
three months ended December 31, 1999 and 1998, respectively. During the three
months ended December 31, 1999, a previous accrual recorded during the three
months ended June 30, 1999 totaling $1,340,000 for an engine repair expense
estimate as a result of a premature failure was reversed as the engine
manufacturer agreed to repair the engine at no cost to us. Maintenance cost per
block hour for the three months ended December 31, 1999 would have been $685
without this adjustment.
Promotion and Sales. Promotion and sales expenses totaled $34,682,000 and
$23,789,000 and were 14.6% and 15.8% of total revenue for the nine months ended
December 31, 1999 and 1998, respectively. These include advertising expenses,
telecommunications expenses, wages and benefits for reservationists and
reservations supervision as well as marketing management and sales personnel,
credit card fees, travel agency commissions and computer reservations costs.
During the nine months ended December 31, 1999, promotion and sales
expenses per passenger increased to $20.65 from $20.49 for the nine months ended
December 31, 1998. Promotion and sales expenses increased largely as a result of
increases in travel agency commissions and credit card fees associated with the
increase in our average fare from $119 for the nine months ended December 31,
1998 to $132 for the nine months ended December 31, 1999. We had an increase in
computer reservations costs associated with the expansion of our travel agency
electronic ticketing capabilities, an increase in reservation costs as a result
of outsourcing more of our reservation requirements, offset by a decrease in
advertising costs per passenger. We are hopeful that this expansion for travel
agent electronic ticketing capability will increase travel agency sales. During
the three months ended December 31, 1999, promotion and sales expenses per
passenger decreased to $20.03 from $22.44 for the three months ended December
31, 1998. During the three months ended December 31, 1998, we added three new
markets and none during the three months ended December 31, 1999; therefore, we
experienced a decrease in advertising expenses per passenger. With increased
activity on our web site, our calls per passenger and the length of calls per
passenger have decreased. Because of this web site activity, we experienced
decreases in communications and wages and benefits for reservationists as well
as contract reservation services. These cost savings were partially offset by an
increase in credit card fees as a result of the increase in the average fare.
During November 1999, we reduced travel commissions to 5% from 8%, matching a 5%
commission instituted by our competitors. Travel agency commissions as a
percentage of passenger revenue, before non-revenue passengers, administrative
fees and breakage (revenue from expired tickets), decreased to 4.3% for the
three months ended December 31, 1999 from 5% for the three months ended December
31, 1998. We believe that promotion and sales expenses per passenger will
continue to decrease but there can be no assurance that this will occur.
10
<PAGE>
General and Administrative. General and administrative expenses for the
nine months ended December 31, 1999 and 1998 totaled $11,436,000 and $5,026,000
and represented 4.8% and 3.3% of total revenues, respectively. General and
administrative expenses include the wages and benefits for several of our
executive officers and various other administrative personnel including legal,
accounting, IT including costs associated with Y2K, aircraft procurement,
corporate communications, and human resources and other expenses associated with
these departments. Employee health benefits, accrued vacation and bonus
expenses, and general insurance expenses are also included in general and
administrative expenses. Included in general and administrative expenses for the
nine months ended December 31, 1999 was an accrual of $2,183,000 for potential
employee performance bonuses and represented .9% of total revenues. This expense
was not accrued during the nine months ended December 31, 1998. We also
experienced increases in our human resources and MIS expenses as a result of an
increase in employees from approximately 1,240 in December 1998 to approximately
1,950 in December 1999, or an increase of 57.3%. In addition to the usual
increases in crew and station personnel associated with additional aircraft and
cities, we had significant increases in maintenance personnel as a result of
bringing certain heavy maintenance checks in-house which began in March 1999.
Because of the increase in personnel, our health insurance benefit expenses and
accrued vacation expense increased accordingly.
Depreciation and Amortization. Depreciation and amortization expenses of
$1,988,000 and $1,154,000 were approximately .8% of total revenue for the nine
months ended December 31, 1999 and 1998. These expenses include depreciation of
office equipment, ground station equipment, and other fixed assets of the
Company.
Nonoperating Income (Expense). Net nonoperating income totaled $2,970,000
for the nine months ended December 31, 1999 compared to $317,000 for the nine
months ended December 31, 1998. Interest income increased from $1,042,000 to
$3,120,000 during the nine months ended December 31, 1999 from the prior period
due to an increase in cash balances as a result of an increase in cash provided
by operating activities and proceeds from stock option and warrant exercises.
Interest expense decreased to $95,000 during the nine months ended December 31,
1999 from $662,000 in the prior period. In December 1997, we sold $5,000,000 of
10% senior notes. In connection with this transaction, we issued warrants to
purchase 1,750,000 shares of Common Stock to the lender. Interest expense paid
in cash and the accretion of the warrants and deferred loan expenses associated
with the senior secured notes totaled $562,000 during the nine months ended
December 31, 1998. In January 1999, we paid the note in full.
Income Tax Expense: We accrued income taxes of $12,272,000 at 38.25% of
pre-tax income during the nine months ended December 31, 1999. During the nine
months ended December 31, 1998, we had the benefit of tax loss carryforwards
that offset tax expense for the period.
Expenses per ASM. Our expenses per ASM for the nine months ended December
31, 1999 and 1998 were 7.96(cent) and 7.72(cent), respectively, or an increase
of 3%. Our cost per ASM increased during the nine months ended December 31, 1999
from 7.72(cent) principally because of our accrual for potential employee
performance bonuses, which accounted for .08(cent) of expense per ASM, and an
overall increase in the cost of fuel which accounted for .22(cent) per ASM
offset by a decrease of .13(cent) of expense per ASM in maintenance expenses as
a result of bringing certain aircraft heavy maintenance checks in-house that
were previously outsourced to third party vendors.
Liquidity and Capital Resources
Our balance sheet reflected cash and cash equivalents and short-term
investments of $69,109,000 and $47,289,000 at December 31, 1999 and March 31,
1999, respectively. At December 31, 1999, total current assets were $112,550,000
and total current liabilities were $70,607,000, resulting in working capital of
$41,943,000. At March 31, 1999, total current assets were $94,209,000 and total
current liabilities were $68,721,000, resulting in working capital of
$25,488,000. The increase in our working capital is largely a result of cash
flows provided by operating activities and proceeds from exercises of common
stock options and warrants during the nine months ended December 31, 1999.
Cash provided by operating activities for the nine months ended December
31, 1999 was $31,481,000. This is attributable to our net income for the period,
the utilization of deferred tax assets, decreases in trade receivables,
increases in other accrued expenses and accrued maintenance expenses, offset by
increases in security, maintenance and other deposits, prepaid expenses and
inventories and decreases in accounts payable and air traffic liability. Cash
provided by operating activities for the nine months ended December 31, 1998 was
$11,447,000. This is attributable to our net income for the period, a decrease
in receivables and increases in air traffic liability, other accrued expenses
and accrued maintenance expenses, offset by increases in restricted investments,
security, maintenance and other deposits and prepaid expenses and other assets,
and decreases in accounts payable.
11
<PAGE>
Cash used in investing activities for the nine months ended December 31,
1999 was $33,011,000. We invested $18,260,000 in short-term investments, net of
maturities, comprised of government-backed agencies and commercial paper with
maturities of one year or less. During the nine months ended December 31, 1999,
cash security deposits for aircraft totaling $2,491,000 were returned to us or
replaced with letters of credit. During the nine months ended December 31, 1999,
we made cash security deposits totaling $200,000 in connection with a letter of
intent on an Airbus lease and $2,550,000 in down payments associated with a
letter of intent to purchase Airbus aircraft. We had issued to certain of our
aircraft lessors warrants to purchase 395,000 shares of our Common Stock at an
aggregate purchase price of $2,391,600. During May 1999 and June 1999, aircraft
lessors exercised all of these warrants and we received $2,391,600. To the
extent that the aircraft lessors were able to realize certain profit margins on
their subsequent sale of our Common Stock, they were required to refund a
portion of the cash security deposits they were holding. As a result of their
sales of our Common Stock, $1,024,000 in cash security deposits were returned to
us during the six months ended September 30, 1999. Other cash security deposits
were replaced with letters of credit and these deposits were returned to us. We
also received $625,000 in cash security deposits for aircraft returned to the
lessor during the nine months ended December 31, 1999. Additionally, we secured
five aircraft delivered during the nine months ended December 31, 1999 with
letters of credit totaling $2,284,000 and restricted investments increased by
this amount to collateralize the letters of credit. We used $12,208,000 for
capital expenditures for rotable aircraft components including a spare CFM
engine, maintenance equipment and tools, aircraft leasehold costs and
improvements, and computer equipment during the nine months ended December 31,
1999. Cash used by investing activities for the nine months ended December 31,
1998 was $3,851,000. We used $2,447,000 for capital expenditures for ground
handling equipment, rotable aircraft components and aircraft leasehold costs and
improvements. We used cash of $284,000 for initial lease acquisition security
deposits for one Boeing 737-200 aircraft delivered in October 1998.
Additionally, we secured two aircraft delivered in December 1998 with letters of
credit totaling $1,120,000, and our restricted investments increased by this
amount to collateralize the letters of credit.
Cash provided by financing activities for the nine months ended December,
1999 and 1998 was $5,090,000 and $14,085,000, respectively. During the nine
months ended December 31, 1999, we received $5,163,000 from the exercise of
Common Stock options and warrants. During the nine months ended December 31,
1998, we sold 4,363,001 shares of our Common Stock through a private placement
to an institutional investor. Gross proceeds to us from the transaction were
approximately $14,180,000, of which we received net proceeds of approximately
$13,650,000. We issued a warrant to this investor to purchase 716,929 shares of
Common Stock of the Company at a purchase price of $3.75 per share. This warrant
expires in April 2002. Additionally, during the nine months ended December 31,
1998, we received $208,000 from the exercise of Common Stock options.
We operate 20 Boeing 737 type aircraft under operating leases with
expiration dates ranging from 2000 to 2006. Under these leases, we were required
to make cash security deposits or issue letters of credit to secure the lease
obligations. At December 31, 1999, we had made cash security deposits and had
outstanding letters of credit totaling $3,058,000 and $5,928,000, respectively.
Our restricted cash balance includes $5,928,000 that collateralizes the
outstanding letters of credit. Additionally, we make deposits for maintenance of
these aircraft. At December 31, 1999, we had maintenance deposits of
$23,508,000.
In October 1999, we signed a letter of intent to purchase 11 new Airbus
aircraft, with options to purchase an additional nine new Airbus aircraft. This
order contemplates a fleet replacement plan by which we will phase out our
Boeing 737 aircraft and replace them with a combination of Airbus A319 and A318
aircraft. As of January 28, 2000, we have made deposits totaling $2,550,000 to
secure these aircraft. As a complement to this purchase, in November 1999, we
signed two letters of intent to lease 16 new Airbus aircraft. When combined with
the purchase agreement and upon completion of our fleet transition, we expect
our fleet to be comprised of approximately two-thirds A319 aircraft and
one-third A318 aircraft. We expect to take delivery of our first Airbus aircraft
during the middle part of calendar 2001 and plan to complete our fleet
transition by the end of 2004. The A319 and A318 aircraft will be configured
with 132 and 114 passenger seats, respectively, with a 32-inch seat pitch. We
believe that operating newer Airbus aircraft will result in significant cost
savings and an improved product for our customers. In order to complete the
purchase of the Airbus aircraft, it will be necessary for us to secure
acceptable aircraft financing. While we believe that such financing will be
available to us, there can be no assurance that the financing will be available
when required, or on acceptable terms. The inability to secure such financing
could have a material adverse effect on us and could result in delays in or our
inability to take delivery of purchased Airbus aircraft.
12
<PAGE>
Principally to provide for capacity growth pending delivery of our
purchased and leased Airbus aircraft, we have entered into operating leases to
lease two Boeing 737-300 aircraft and a letter of intent to lease two additional
such aircraft. Two of these aircraft were delivered in January 2000, will be
placed into service in mid-February and have lease terms of 44 months from their
delivery dates. The second two aircraft, one of which will replace another
aircraft whose lease expires, will have 48 month lease terms commencing
approximately March and April, 2000. It is expected that these aircraft will be
placed in service during April and May, 2000.
In November 1998, our pilots voted to be represented by an independent
union, the Frontier Airlines Pilots Association. In September 1999, our
dispatchers elected to be represented by the Transport Workers Union of America.
The resulting impact of these unions on labor costs is unknown at this time as
the first bargaining agreements have not been negotiated.
The International Association of Machinists has filed an application to
represent our ramp service agents. The National Mediation Board ("NMB")
certified this election and the ballots will be counted at the office of the NMB
in Washington D.C. on February 4, 2000. The Association of Flight Attendants on
January 20, 2000 filed an application to represent our flight attendants. No
election has yet been certified.
We are exploring various means to increase revenues and reduce expenses.
We have added electronic ticketing capabilities for travel agencies that we
anticipate will increase travel agency sales. We have performed ad hoc charters
and will consider them in the future depending on the availability of our fleet.
We are considering revenue enhancement initiatives with new marketing alliances.
We began our own ground handling operations at DIA effective September 1, 1998,
a function that had previously been provided by an independent contractor.
Ground handling equipment required to perform these operations necessitated
capital expenditures of approximately $800,000. Effective March 1, 1999, we
began to conduct certain aircraft heavy maintenance checks in-house that we
expect will reduce maintenance expenses. Effective November 5, we reduced travel
agency commissions from 8% to 5% in response to our competitors.
We currently sublease from Continental Airlines, on a preferential-use
basis, four departure gates on Concourse A at DIA. In addition, we use, on a
non-preferential use basis, another four gates under the direct control of the
City and County of Denver ("CCD"). Our sublease with Continental expires on
February 29, 2000, as does Continental's lease with CCD for these four gates and
an additional six gates it leases on Concourse A. Continental has an option to
renew its lease for five years and reduce its lease obligation to three gates
and related space. United Airlines, which occupies all of DIA's Concourse B
gates, has a right of first refusal on any of the ten Continental gates for
which Continental does not renew its lease, and has stated its intention to
occupy at least eight gates on Concourse A. Continental's lease and lease
renewal option for gates on Concourse A, as well as United's right of first
refusal on Continental's Concourse A gates, are provided for in a 1995 agreement
between CCD, Continental and United (the "1995 Agreement"). We have requested of
CCD a lease, effective March 1, 2000, for the four gates we currently sublease
from Continental and an additional five gates contiguous to those we now use.
However, our request is contingent upon the implementation of a rate making
methodology for DIA terminal facilities that remedies what we consider to be
unfair and discriminatory aspects of the current methodology, as established by
the 1995 Agreement. Under the present methodology costs related to a
non-functioning Concourse A automated baggage system and associated equipment
and space ("AABS") are allocated exclusively to Concourse A, causing rental
rates on Concourse A to be higher than those on DIA's Concourse C. Our sublease
for Concourse A gates with Continental, which expires in February 2000, provides
that Continental pays, on our behalf, a significant portion of the AABS costs
that would otherwise be payable by us under the current rate-making methodology.
13
<PAGE>
CCD and the signatory airlines at DIA, including us, are discussing
possible changes to the rate-making methodology to deal with the AABS costs,
although CCD has stated that absent an agreement with a majority-in-interest of
the DIA signatory airlines, CCD will unilaterally impose a solution to the
issue. Unless agreement of CCD and a majority-in-interest of the signatory
airlines resolve the issue, there is a possibility that the 1995 Agreement, or
any rate-making methodology unilaterally imposed by CCD, could be subject to
litigation. In these circumstances, there is uncertainty as to the rates and
charges that we will be required to pay for Concourse A facilities after
February 2000. If the rate-making methodology is not amended or the rates are
increased, it could have a material adverse effect on our business and results
of operations. A majority-in-interest of the airlines, as required by the
airline lease, has agreed to an amendment of certain rate-making provisions to
the lease, which significantly reduces the impact of the AABS costs to us. CCD
has indicated it will agree to the terms of these proposed changes in
rate-making methodology, and is in the process of preparing a lease amendment
which reflects such changes. We expect a satisfactory resolution of this issue
in the near term. However, the possibility continues to exist that if agreement
on this amendment is not finalized, CCD may impose a resolution.
Our goal is to continue to lease or purchase additional aircraft to serve
additional cities and to add flights on existing routes from Denver. We added
routes to San Diego, California, Atlanta, Georgia, Dallas/Ft. Worth, Texas and
Las Vegas, Nevada during the year ended March 31, 1999. During the nine months
ended December 31, 1999 we added routes to Portland, Oregon and Orlando,
Florida. We believe that expanding our route system would facilitate a greater
volume of connecting traffic as well as a stable base of local traffic and
offset the impact of higher DIA-related operating costs through more efficient
gate utilization. Expansion of our operations will entail the hiring of
additional employees to staff flight and ground operations in new markets, and
significant initial costs such as deposits for airport and aircraft leases.
Because of the expansion of our business, and competition within the airline
industry that often requires quick reaction by management to changes in market
conditions, we may require additional capital to further expand our business.
In October 1999, the U.S. Senate approved the Air Transportation
Improvement Act. Among other matters, this Act calls for additional slot
allocations (one slot is one take-off or landing right) at Washington's Ronald
Reagan National Airport ("DCA"), New York's LaGuardia Airport and Chicago's
O'Hare International Airport. In addition, the bill calls for exemptions to the
perimeter rule at DCA, which currently limits non-stop flights into or out of
DCA to a maximum of 1,250 miles. Our present intent is to request permission to
provide service between Denver and DCA if access becomes available to us.
However, there can be no assurance that this bill will be passed.
We believe that our existing cash balances coupled with improved
operating results are and will be adequate to fund our operations for the
foreseeable future. However, as discussed above, we will require financing in
order to fund our intended purchase of Airbus A319 and A318 aircraft.
Year 2000 Compliance
We undertook actions intended to permit our computer systems and other
equipment to properly process and function on and after January 1, 2000. These
actions were generally described in our 10-Q report for the quarter ended
September 30, 1999. As of January 28, 2000, we have not experienced any material
Year 2000 systems or equipment failures, either by our suppliers or us. However,
Year 2000 compliance has many elements and potential consequences, some of which
may not be foreseeable or may be realized in future periods. Therefore, there
can be no assurance that unforeseen circumstances may not arise, or that we will
not in the future identify equipment or systems which are not Year 2000
compliant.
In connection with our Year 2000 compliance efforts we utilized existing
resources (with the exception of four temporary personnel) and required limited
use of outside consultants, incurring approximately $200,000 of expenses as of
December 31, 1999.
14
<PAGE>
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The significant risk inherent in our market risk sensitive position is the
potential loss arising from an adverse change in the price of fuel as described
below. The sensitivity analysis presented does not consider either the effects
that such an adverse change may have on overall economic activity or additional
action management may take to mitigate our exposure to such a change. Actual
results may differ from the amounts disclosed. At the present time, we do not
utilize fuel price hedging instruments to reduce our exposure to fluctuations in
fuel prices.
Our earnings are affected by changes in the price and availability of
aircraft fuel. Market risk is estimated as a hypothetical 10 percent increase in
the average cost per gallon of fuel for the fiscal year ended March 31, 1999.
Based on fiscal year 1999 actual fuel usage, such an increase would have
resulted in an increase to aircraft fuel expense of approximately $2,300,000 in
fiscal year 1999. Comparatively, based on projected fiscal year 2000 fuel usage,
such an increase would result in an increase to aircraft fuel expense of
approximately $3,100,000 in fiscal year 2000. The increase in exposure to fuel
price fluctuations in fiscal year 2000 is due to our plan to increase our
average aircraft fleet size and related gallons purchased.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
Exhibit
Numbers
(a) Exhibits
27.1 Financial Data Schedule (1)
(1) Filed herewith.
(b) Reports on Form 8-K
None.
16
<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: January 31, 2000 By: /s/ Steve B. Warnecke
-----------------------------------
Steve B. Warnecke, Vice President
and Chief Financial Officer
Date: January 31, 2000 By: /s/ Elissa A. Potucek
-----------------------------------
Elissa A. Potucek, Vice President,
Controller, Treasurer and Principal
Accounting Officer
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<NAME> Frontier Airlines, Inc.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
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