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, 2000
[ ] 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 July 31,
2000 was 17,873,056.
<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 6
Item 3: Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, March 31,
2000 2000
--------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 99,079,066 $ 67,850,933
Short-term investments 2,000,000 15,760,000
Restricted investments 4,000,000 4,000,000
Trade receivables, net of allowance for doubtful accounts of $388,014
and $170,819 at June 30 and March 31, 2000, respectively 28,181,402 22,190,835
Maintenance deposits 21,186,642 19,637,128
Prepaid expenses and other assets 8,188,539 7,386,851
Inventories 2,682,228 2,235,183
Deferred tax assets 1,136,194 1,136,194
Deferred lease expenses 163,527 163,527
--------------- ----------------
Total current assets 166,617,598 140,360,651
Security, maintenance and other deposits 21,952,019 17,613,122
Property and equipment, net 24,263,473 21,654,262
Deferred lease and other expenses 63,361 104,243
Restricted investments 7,813,760 7,813,760
--------------- ----------------
$ 220,710,211 $ 187,546,038
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,807,630 $ 14,407,913
Air traffic liability 50,213,044 44,518,837
Other accrued expenses 16,576,712 12,058,755
Income taxes payable 10,886,272 5,483,264
Accrued maintenance expense 22,925,744 21,893,316
Current portion of obligations under capital leases 116,029 113,029
--------------- ----------------
Total current liabilities 113,525,431 98,475,114
Accrued maintenance expense 8,135,584 7,214,167
Deferred tax liability 483,514 483,514
Obligations under capital leases, excluding current portion 298,717 328,702
--------------- ----------------
Total liabilities 122,443,246 106,501,497
--------------- ----------------
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; 17,793,556 and 17,732,273 shares
issued and outstanding at June 30 and March 31, 2000, respectively 17,794 17,732
Additional paid-in capital 68,434,512 67,946,330
Unearned ESOP shares (571,875) (857,813)
Retained earnings 30,386,534 13,938,292
--------------- ----------------
Total stockholders' equity 98,266,965 81,044,541
--------------- ----------------
$ 220,710,211 $ 187,546,038
=============== ================
See accompanying notes to financial statements.
1
<PAGE>
FRONTIER AIRLINES, INC.
Statements of Income
(Unaudited)
Three Months Ended June 30,
2000 1999
---------------------------------
Revenues:
Passenger $ 110,967,395 $ 75,974,913
Cargo 1,225,494 1,441,084
Other 615,855 470,200
--------------- ----------------
Total revenues 112,808,744 77,886,197
--------------- ----------------
Operating expenses:
Flight operations 39,631,087 25,884,383
Aircraft and traffic servicing 13,647,785 10,845,139
Maintenance 14,390,883 13,438,091
Promotion and sales 12,461,773 11,691,510
General and administrative 6,229,618 3,687,623
Depreciation and amortization 1,074,342 574,211
--------------- ----------------
Total operating expenses 87,435,488 66,120,957
--------------- ----------------
Operating income 25,373,256 11,765,240
--------------- ----------------
Nonoperating income (expense):
Interest income 1,624,434 824,643
Interest expense (17,459) (21,901)
Other, net (15,900) (121,566)
--------------- ----------------
Total nonoperating income, net 1,591,075 681,176
--------------- ----------------
Income before income tax expense and
cumulative effect of change in method of
accounting for maintenance checks
26,964,331 12,446,416
Income tax expense 10,516,089 4,717,852
--------------- ----------------
Income before cumulative effect of
change in accounting principle 16,448,242 7,728,564
Cumulative effect of change in method of
accounting for maintenance checks - 549,009
--------------- ----------------
Net income $ 16,448,242 $ 8,277,573
=============== ================
(continued)
2
<PAGE>
FRONTIER AIRLINES, INC.
Statements of Income, continued
(Unaudited)
Three Months Ended June 30,
2000 1999
---------------------------------
Earnings per share:
Basic:
Income before cumulative effect of a
change in accounting principle $0.93 $0.47
Cumulative effect of change in method of
accounting for maintenance checks - 0.03
--------------- ----------------
Net income $0.93 $0.50
=============== ================
Diluted:
Income before cumulative effect of a
change in accounting principle $0.85 $0.42
Cumulative effect of change in method of
accounting for maintenance checks - 0.03
--------------- ----------------
Net income $0.85 $0.45
=============== ================
Weighted average shares of
common stock outstanding
Basic 17,744,447 16,539,582
=============== ================
Diluted 19,273,158 18,470,832
=============== ================
See accompanying notes to financial statements.
3
<PAGE>
FRONTIER AIRLINES, INC.
Statement of Cash Flows
(Unaudited)
Three Months Ended June 30,
2000 1999
---------------------------------
Cash flows from operating activities:
Net income $ 16,448,242 $ 7,728,564
Adjustments to reconcile net income to net cash
provided by operating activities:
Employee stock ownership plan compensation expense 285,938 203,125
Depreciation and amortization 1,115,224 648,393
Deferred tax expense - 4,580,352
Changes in operating assets and liabilities:
Trade receivables (5,990,567) 3,106,619
Security, maintenance and other deposits (2,057,911) (3,632,357)
Prepaid expenses and other assets (801,688) (768,785)
Inventories (447,045) (304,210)
Accounts payable (1,600,283) 111,918
Air traffic liability 5,694,207 5,519,987
Other accrued expenses 4,517,957 (404,894)
Income taxes payable 5,403,008 -
Accrued maintenance expense 1,953,845 3,808,931
--------------- ----------------
Net cash provided by operating activities 24,520,927 20,597,643
--------------- ----------------
Cash flows from investing activities:
Decrease (increase) in short-term investments, net 13,760,000 (41,378,295)
Aircraft lease and purchase deposits, net (3,830,500) 596,416
Increase in restricted investments - (860,000)
Capital expenditures (3,683,553) (1,661,600)
--------------- ----------------
Net cash provided (used) by investing activities 6,245,947 (43,303,479)
--------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 488,244 4,556,056
Principal payments on obligations under capital leases (26,985) (20,717)
--------------- ----------------
Net cash provided by financing activities 461,259 4,535,339
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 31,228,133 (18,170,497)
Cash and cash equivalents, beginning of period 67,850,933 47,289,072
--------------- ----------------
Cash and cash equivalents, end of period $ 99,079,066 $ 29,118,575
=============== ================
See accompanying notes to financial statements.
4
<PAGE>
</TABLE>
FRONTIER AIRLINES, INC.
Notes to Financial Statements
June 30, 2000
(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 Annual
Report on Form 10-K for the year ended March 31, 2000. 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,
2000 are not necessarily indicative of the results that will be realized
for the full year.
5
<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 Form 10-K for
the year ended March 31, 2000 as they may be modified by the disclosures
contained in this report.
General
We are a scheduled airline based in Denver, Colorado. As of July 31,
2000, we operate routes linking our Denver hub to 21 cities in 17 states
spanning the nation from coast to coast. We added Kansas City, Missouri to our
route system on June 15, 2000. We plan to commence service to Washington, D.C.'s
Ronald Reagan International Airport on September 7, 2000 with one daily nonstop
flight.
We were organized in February 1994 and we began flight operations in July
1994 with two leased Boeing 737-200 jets. We have since expanded our fleet to 24
leased jets, including seven Boeing 737-200s and 17 larger Boeing 737-300s. We
currently use up to nine gates at our hub, Denver International Airport ("DIA"),
where we operate approximately 112 daily system flight departures and arrivals.
Small fluctuations in our yield per revenue passenger mile ("RPM") or
expense per available seat mile ("ASM") can significantly affect operating
results because we, like other airlines, have high fixed costs in relation to
revenues. Airline operations are highly sensitive to various factors, including
the actions of competing airlines and general economic factors, which can
adversely affect our liquidity, cash flows and results of operations.
Results of Operations
We had net income of $16,448,000 or $.85 per diluted share for the
quarter ended June 30, 2000 as compared to income before cumulative effect of a
change in accounting principle of $7,729,000 or $.42 per diluted share for the
quarter ended June 30, 1999. During the quarter ended June 30, 2000, as compared
to the prior comparable periods, we experienced higher fares as a result of
increases in the number of business travelers, a general increase in fare levels
including increases intended to offset increased fuel costs, and an increase in
the number of passengers that a major competitor directed to us because of an
increase in the number of delays and cancellations that airline experienced. We
estimate that the additional passenger traffic received from that airline had
the effect of increasing each of our average fare and load factor by
approximately 1%.
6
<PAGE>
Our cost per ASM for the quarters ended June 30, 2000 and 1999 were
8.59(cent) and 8.10(cent), respectively, or an increase of .49(cent) or 6.05%.
Cost per ASM excluding fuel for the quarters ended June 30, 2000 and 1999 were
7.16(cent) and 7.13(cent), respectively, or an increase of .03(cent) or .4%. Our
cost per ASM increased during the quarter ended June 30, 2000 principally
because of increases in the cost of fuel which accounted for .46(cent) per ASM,
aircraft rentals for newer and larger aircraft of .18(cent) per ASM, general and
administrative expenses primarily due to accrued bonuses for all employees
resulting from increased profitability and a higher level of employee benefits
of .16(cent) per ASM, offset by a .21(cent) reduction in cost per ASM in
promotion and sales expense as a result of a decrease in the travel agency
commission rate from 8% to 5% commencing in November 1999, and decreased
advertising and communication expenses offset by an increase in credit card fees
associated with the increase in our average fare. A general wage rate increase
effective in January 2000 and an increase in pilots' salaries effective in May
2000 also contributed to the increase in cost per ASM during the quarter ended
June 30, 2000. Our cost per ASM during the quarter ended June 30, 1999 included
an unanticipated engine repair expense due to a premature failure, which
accounted for .18(cent) of cost per ASM. Our cost per ASM for the quarter ended
June 30, 1999 adjusted for this expense would have been 7.92(cent). During the
three months ended December 31, 1999, this accrual was reversed as the engine
manufacturer agreed to repair the engine at no cost to us.
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,
2000, our break-even load factor was 49.6% compared to our achieved passenger
load factor of 65.5%. For the quarter ended June 30, 1999, our break-even load
factor was 52% compared to our achieved passenger load factor of 62%. Our
break-even load factor decreased from the prior comparable period largely as a
result of an increase in our average fare to $149 during the quarter ended June
30, 2000 from $133 during the quarter ended June 30, 1999, and an increase in
our total yield per RPM from 15.38(cent) for the quarter ended June 30, 1999 to
16.92(cent) for the quarter ended June 30, 2000 offset by an increase in our
expense per ASM to 8.59(cent) for the quarter ended June 30, 2000 from
8.10(cent) for the quarter ended June 30, 1999.
7
<PAGE>
The following table provides certain of our financial and operating data
for the year ended March 31, 2000 and the quarters ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year
Ended
March 31, Quarters Ended June 30,
2000 2000 1999
--------------- --------------- ---------------
Passenger revenue (000s) (1) 320,850 110,967 75,975
Revenue passengers carried (000s) 2,284 712 553
Revenue passenger miles (RPMs) (000s) (2) 2,104,460 666,755 506,247
Available seat miles (ASMs) (000s) (3) 3,559,595 1,017,555 815,961
Passenger load factor (4) 59.1% 65.5% 62.0%
Break-even load factor (5) 51.1% 49.6% 52.0%
Block hours (6) 71,276 20,025 16,785
Departures 33,284 9,129 7,943
Average seats per departure 129 131 126
Average stage length 829 851 815
Average length of haul 921 937 916
Aircraft miles (000s) 27,594 7,768 6,476
Average daily block hour utilization (7) 9.9 9.4 10.2
Yield per RPM (cents) (8) 15.25 16.64 15.01
Total yield per RPM (cents) (9) 15.67 16.92 15.38
Total yield per ASM (cents) (10) 9.27 11.09 9.55
Cost per ASM (cents) 8.16 8.59 8.10
Cost per ASM excluding fuel (cents) 6.91 7.16 7.13
Passenger revenue per block hour 4,502 5,541 4,526
Average fare (11) 134 149 133
Average aircraft in fleet 19.7 23.5 18.0
Aircraft in fleet at end of period 23.0 24.0 19.0
Average age of aircraft at end of period 10.5 10.8 14.9
EBITDAR (000s) (12) 90,583 41,199 22,592
EBITDAR as a % of revenue 27.5% 36.5% 29.0%
</TABLE>
(1) "Passenger revenue" includes revenues for non-revenue passengers,
administrative fees, and revenue recognized for unused tickets that are
greater than one year from issuance date.
(2) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown.
(3) "Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(4) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(5) "Break-even load factor" is the passenger load factor that will result in
operating revenues being equal to operating expenses, assuming constant
revenue per passenger mile and expenses
(6) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(7) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(8) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(9) "Total Yield per RPM" is determined by dividing total revenues by revenue
passenger miles.
(10) "Total Yield per ASM" is determined by dividing passenger revenues by
available seat miles.
(11) "Average fare" excludes revenue included in passenger revenue for
non-revenue passengers, administrative fees, and revenue recognized for
unused tickets that are greater than one year from issuance date.
(12) "EBITDAR", or "earnings before interest, income taxes, depreciation,
amortization and aircraft rentals," is a supplemental financial measurement
many airline industry analysts and we use in the evaluation of our
business. However, EBITDAR should only be read in conjunction with all of
our financial statements appearing elsewhere herein, and should not be
construed as an alternative either to operating income (as determined in
accordance with generally accepted accounting principles) as an indicator
of our operating performance or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) as
a measure of liquidity.
8
<PAGE>
The following table provides our operating revenues and expenses
expressed as cents per total ASMs and as a percentage of total operating
revenues, as rounded, for the year ended March 31, 2000 and the quarters ended
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year ended March 31, Quarters ended June 30,
2000 2000 1999
------------------------ ------------------------ -------------------------
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- -------
Revenues:
Passenger 9.02 97.3% 10.91 98.4% 9.31 97.5%
Cargo 0.19 2.1% 0.12 1.1% 0.18 1.9%
Other 0.06 0.6% 0.06 0.5% 0.06 0.6%
------------ ----------- ------------ ----------- ------------ ------------
Total revenues 9.27 100.0% 11.09 100.0% 9.55 100.0%
Operating expenses:
Flight operations 3.53 38.1% 3.89 35.1% 3.17 33.2%
Aircraft and traffic servicing 1.38 14.8% 1.34 12.1% 1.33 13.9%
Maintenance 1.41 15.2% 1.41 12.8% 1.65 17.3%
Promotion and sales 1.29 14.0% 1.22 11.0% 1.43 15.0%
General and administrative 0.46 5.0% 0.61 5.5% 0.45 4.7%
Depreciation and amortization 0.09 1.0% 0.12 1.0% 0.07 0.7%
------------ ----------- ------------ ----------- ------------ ------------
Total operating expenses 8.16 88.1% 8.59 77.5% 8.10 84.9%
============ =========== ============ =========== ============ ============
Total ASMs (000s) 3,559,595 1,017,555 815,961
</TABLE>
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 may result in a decrease in
passenger demand in many markets. We cannot predict future fare levels, which
depend to a substantial degree on actions of competitors. When sale prices or
other price changes are initiated by competitors in our markets, we believe that
we must, in most cases, match those competitive fares in order to maintain our
market share. Passenger revenues are seasonal in leisure travel markets
depending on the markets' locations and when they are most frequently
patronized.
Our average fare for the quarters ended June 30, 2000 and 1999 was $149
and $133, respectively, an increase of 12%. We believe that the increase in the
average fare during the quarter ended June 30, 2000 over the prior comparable
period was a result of increases in the number of business travelers, a general
increase in fare levels including increases intended to offset increased fuel
costs, and an increase in the number of passengers that a major competitor
directed to us because of an increase in the number of delays and cancellations
that airline experienced. We estimate that the additional passenger traffic
received from that airline had the effect of increasing our average fare by
approximately 1% and our load factor by 1%.
Passenger Revenues. Passenger revenues totaled $110,967,000 for the
quarter ended June 30, 2000 compared to $75,975,000 for the quarter ended June
30, 1999, or an increase of 46.1%. Passenger revenues outpaced the increase in
ASMs of 201,594,000 or 24.7%. Passenger revenue includes revenues for
non-revenue passengers, administrative fees, and revenue recognized for tickets
that are not used within one year from their issue dates. We carried 712,000
revenue passengers during the quarter ended June 30, 2000 compared to 553,000 in
the quarter ended June 30, 1999 or an increase of 28.8%. We had an average of
23.5 aircraft in our fleet during the quarter ended June 30, 2000 compared to an
average of 18 aircraft during the quarter ended June 30, 1999, an increase of
30.6%. RPMs for the quarter ended June 30, 2000 were 666,755,000 compared to
506,247,000 for the quarter ended June 30, 1999, an increase of 31.7%.
9
<PAGE>
Cargo revenues, consisting of revenues from freight and mail service,
totaled $1,225,000 and $1,441,000 for the quarters ended June 30, 2000 and 1999,
representing 1.1% and 1.9% of total operating revenues, respectively, or a
decrease of 15%. During July 2000 an audit was performed on our contract cargo
sales and services provider. The audit disclosed that for a 15 month period
between January 1, 1999 and March 31, 2000 both cash and credit card sales were
remitted to us by our services provider, even though we had collected for the
cash sales directly from our customer. We therefore adjusted cargo revenue
downward $423,000 during the quarter ended June 30, 2000. Excluding the effect
of this adjustment, on the current and prior comparable period, cargo revenue
would have been $1,648,000 and $1,366,000 for the quarters ended June 30, 2000
and 1999, respectively, or an increase of 20.6%. 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 $616,000 and $470,000 or .5% and .6% of
total operating revenues for the quarters ended June 30, 2000 and 1999,
respectively.
Operating Expenses
Operating expenses include those related to flight operations, aircraft
and traffic servicing, maintenance, promotion and sales, general and
administrative and depreciation and amortization. Total operating expenses were
$87,435,000 and $66,121,000 for the quarters ended June 30, 2000 and 1999 and
represented 77.5% and 84.9% of total revenue, respectively. Operating expenses
decreased as a percentage of revenue during the quarter ended June 30, 2000 as a
result of the 46.1% increase in passenger revenues attributable to a 28.8%
increase in passengers and a 12% increase in the average fare offset by a 52.8%
increase in the average cost per gallon of fuel, a general wage rate increase
which became effective in January 2000 and an increase in pilots' salaries
effective in May 2000, and an increase in accrued bonuses based on increased
profitability.
Flight Operations. Flight operations expenses of $39,631,000 and
$25,884,000 were 35.1% and 33.2% of total revenue for the quarters ended June
30, 2000 and 1999, 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 are comprised of both the direct cost of fuel,
including taxes and the cost of delivering fuel into the aircraft. Aircraft fuel
costs of $14,537,000 for 15,700,000 gallons used and $7,955,000 for 13,129,000
gallons used resulted in an average fuel cost of 92.6(cent) and 60.6(cent) per
gallon and represented 36.7% and 30.7% of total flight operations expenses for
the quarters ended June 30, 2000 and 1999, respectively. The average fuel cost
per gallon increased for the quarters ended June 30, 2000 from the comparable
prior period due to an overall increase in the market price of fuel. Fuel prices
are subject to change weekly, as we do not purchase supplies in advance for
inventory. Fuel consumption for the quarters ended June 30, 2000 and 1999
averaged 784 and 782 gallons per block hour, respectively. Fuel consumption
increased over the prior comparable period because of an increase in our load
factor from 62.0% to 65.5%. Additionally, five aircraft were returned to their
lessor during the year ended March 31, 2000 and replaced with four aircraft that
are larger and have a higher fuel burn rate.
Aircraft lease expenses totaled $14,768,000 (13.1% of total revenue) and
$10,374,000 (13.3% of total revenue) for the quarters ended June 30, 2000 and
1999, respectively, or an increase of 42.4%. The increase is largely due to
higher lease expenses for larger and newer Boeing 737-300 aircraft added to the
fleet, which resulted in an increase for the quarter ended June 30, 2000 in the
average number of aircraft to 23.5 from 18, or 30.6%. The average age of our
fleet decreased from 14.9 years as of June 30, 1999 to 10.8 years as of June 30,
2000.
10
<PAGE>
Aircraft insurance expenses totaled $802,000 (.7% of total revenue) and
$605,000 (.8% of total revenue) for the quarters ended June 30, 2000 and
1999, respectively. Aircraft insurance expenses were .12 (cent) per RPM for each
of the quarters ended June 30, 2000 and 1999, respectively.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $4,923,000 and $3,452,000 or 4.4% and 4.5% of passenger revenue for each
of the quarters ended June 30, 2000 and 1999, or an increase of 42.6%. In
November 1998, our pilots voted to be represented by an independent union, the
Frontier Airline Pilots Association. The first bargaining agreement for the
pilots, which has a 5-year term, was ratified and made effective in May 2000.
Pilot and flight attendant compensation increased principally as a result of a
30.6% increase in the average number of aircraft in service, general wage rate
increases, and an increase of 19.3% 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 fuel expenses and flight catering the principal exception.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $13,648,000 and $10,845,000 (an increase of 25.8%) for the quarters ended
June 30, 2000 and 1999, respectively, and represented 12.1% and 13.9% 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 quarter ended June 30, 2000, we served 21
cities compared to 19 during the quarter ended June 30, 1999, or an increase of
10.5%. During the quarter ended June 30, 2000, our departures increased to 9,129
from 7,943 or 14.9%. Aircraft and traffic servicing expenses were $1,495 per
departure for the quarter ended June 30, 2000 as compared to $1,365 per
departure for the quarter ended June 30, 1999, or an increase of $130. Aircraft
and traffic servicing expenses increased as a result of a general wage rate
increase effective in January 2000, contract ground handling services in certain
of the cities we serve as a result of increased frequencies in existing markets
and introduction of service to new cities, and increased landing fees as a
result of the addition of larger aircraft. These increases were offset by a
decrease in interrupted trip expenses as a result of an improvement in our
completion factor from 98.5% for the quarter ended June 30, 1999 to 99.5% for
the quarter ended June 30, 2000.
Maintenance. Maintenance expenses of $14,391,000 and $13,438,000 were
12.8% and 17.3% of total revenue for the quarters ended June 30, 2000 and 1999,
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 airframe, engine, landing gear and auxiliary
power unit overhauls are accrued monthly. Maintenance cost per block hour was
$719 and $800 for the quarters ended June 30, 2000 and 1999, respectively.
During the quarter ended June 30, 1999, we accrued for an unanticipated engine
repair expense as a result of a premature failure totaling $1,500,000. During
the quarter ended December 31, 1999, this accrual was reversed as the engine
manufacturer agreed to repair the engine at no cost to us. Maintenance cost per
block hour for the quarter ended June 30, 1999 would have been $711 excluding
this engine repair expense and the maintenance cost per block hour for the
quarter ended June 30, 2000 compared to the quarter ended June 30, 1999 would
have been a 1.1% increase. Maintenance costs per block hour increased as a
result of increased facilities rentals as a result of additional space
requirements for the increase in aircraft coupled with an increase in the number
of aircraft simultaneously out of service for heavy maintenance, and a general
wage rate increase effective January 2000. Because of the increase in the number
of aircraft out of service for heavy maintenance, our average daily block hour
utilization decreased from 10.2 for the quarter ended June 30, 1999 to 9.4 for
the quarter ended June 30, 2000.
Promotion and Sales. Promotion and sales expenses totaled $12,462,000 and
$11,692,000 and were 11% and 15% of total revenue for the quarters ended June
30, 2000 and 1999, 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, 2000 over the prior comparable period largely as a result
of the increase in revenue and a decrease in travel agency commissions.
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During the quarter ended June 30, 2000, promotion and sales expenses per
passenger decreased to $17.50 from $21.14 for the quarter ended June 30, 1999.
Promotion and sales expenses decreased largely as a result of a decrease in
travel agency commissions from 8% to 5% effective in November 1999 matching the
decrease instituted by our competitors. Travel agency commissions and interline
service charges and handling fees, as a percentage of passenger revenue, before
non-revenue passengers, administrative fees and breakage (revenue from expired
tickets), decreased to 3.4% for the quarter ended June 30, 2000 from 5.1% for
the quarter ended June 30, 1999. The decrease in travel agency commissions was
offset by increased commission expense associated with the increase in our
average fare as we do not cap commissions. During the quarter ended June 30,
2000 we had an increase in computer reservations costs associated with the
expansion of our travel agency electronic ticketing capabilities. With increased
activity on our web site, our calls per passenger have decreased. Because of the
increase in web site activity, as well as a decrease in long distance rates, we
experienced a decrease in communications expense. These cost savings were offset
by an increase in credit card fees associated with the increase in our average
fare from $133 for the quarter ended June 30, 1999 to $149 for the quarter ended
June 30, 2000.
General and Administrative. General and administrative expenses for the
quarters ended June 30, 2000 and 1999 totaled $6,230,000 and $3,688,000,
respectively, and were 5.5% and 4.7% of total revenue, respectively. During the
quarters ended June 30, 2000 and 1999, we accrued for employee performance
bonuses totaling $1,951,000 and $742,000, respectively, or 1.7 % and 1% of total
revenue for each of these quarters. General and administrative expenses include
the wages and benefits for several of our executive officers and various other
administrative personnel including legal, accounting, information technology,
aircraft procurement, corporate communications, training and human resources and
other expenses associated with these departments. Employee health benefits,
accrued vacation and bonus expenses, general insurance expenses including
worker's compensation, and write-offs associated with credit card and check
fraud are also included in general and administrative expenses. We experienced
increases in our human resources, training and information technology expenses
as a result of an increase in employees from approximately 1,650 in June 1999 to
approximately 2,200 in June 2000, or an increase of 33.3%. We also experienced
personnel increases in the area of aircraft procurement as a result of the
purchase and lease agreements for Airbus aircraft. Because of the increase in
personnel, our health insurance benefit expenses and accrued vacation expense
increased accordingly. During the quarter ended June 30, 2000, our accrued
vacation expense increased as a result of the increase in pilot salaries and
vacation benefits due to a collective bargaining agreement concluded with the
pilots' union effective in May 2000.
Depreciation and Amortization. Depreciation and amortization expenses of
$1,074,000 and $574,000, an increase of 87.1%, were approximately 1% and .8% of
total revenue for the quarters ended June 30, 2000 and 1999, respectively. These
expenses include depreciation of office equipment, ground station equipment, and
other fixed assets. Amortization of start-up and route development costs are not
included as these expenses have been expensed as incurred. Depreciation expense
increased over the prior year as a result of an increase in our spare parts
inventory including a spare engine, leasehold improvements associated with 13
(seven additional and six replacement) aircraft brought into our fleet during
the past 15 months, ground handling equipment, and computers to support new
employees as well as replacement computers for those with outdated technology.
Nonoperating Income (Expense). Net nonoperating income totaled $1,591,000
for the quarter ended June 30, 2000 compared to $681,000 for the quarter ended
June 30, 1999. Interest income increased from $825,000 to $1,624,000 during the
quarter ended June 30, 2000 from the prior comparable period due to an increase
in cash balances as a result of an increase in cash provided by operating
activities.
Income Tax Expense: We accrued income taxes of $10,516,000 and $4,718,000
at 39% and 38.25% of taxable income during the quarters ended June 30, 2000 and
1999, respectively.
Liquidity and Capital Resources
Our balance sheet reflected cash and cash equivalents and short-term
investments of $101,079,000 and $83,611,000 at June 30, 2000 and March 31, 2000,
respectively. At June 30, 2000, total current assets were $166,618,000 as
compared to $113,525,000 of total current liabilities, resulting in working
capital of $53,093,000. At March 31, 2000, total current assets were
$140,361,000 as compared to $98,475,000 of total current liabilities, resulting
in working capital of $41,886,000. 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 quarter ended
June 30, 2000. We believe that our existing cash balances, combined with
improved operating results, are and will be adequate to fund our operations for
the foreseeable future. However, as discussed below, we will require financing
in order to fund our intended purchase of Airbus A319 and A318 aircraft.
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Cash provided by operating activities for the quarter ended June 30, 2000
was $24,521,000. This is attributable to our net income for the period,
increases in air traffic liability, other accrued expenses, income taxes
payable, and accrued maintenance expense, offset by increases in trade
receivables, security, maintenance and other deposits, prepaid expenses and
inventories, and a decrease in accounts payable. Cash provided by operating
activities for the quarter ended June 30, 1999 was $20,598,000. This was
attributable to our net income for the period, decreases in trade receivables,
utilization of deferred tax assets, and increases in air traffic liability and
accrued maintenance expenses, offset by increases in security, maintenance and
other deposits and prepaid expenses.
Cash provided by investing activities for the quarter ended June 30, 2000
was $6,246,000. We had maturities of $13,760,000 in short-term investments, net
of purchases, comprised of certificates of deposit and government-backed
agencies with maturities of one year or less. During the quarter ended June 30,
2000, we made cash security deposits totaling $3,831,000 associated with a
leased Boeing 737-300 delivered during the quarter and 16 Airbus aircraft we
have agreed to lease with delivery dates beginning in June 2001. During the
quarter ended June 30, 2000, we used $3,684,000 for capital expenditures for
rotable aircraft components, maintenance equipment and tools, aircraft leasehold
costs and improvements, computer equipment and software for enhancements to our
internet booking site and our reservation system. Cash used by investing
activities for the quarter ended June 30, 1999 was $43,303,000. We invested
$41,378,000 in short-term investments comprised of government-backed agencies
with maturities of one year or less. During the quarter ended June 30, 1999,
cash security deposits for aircraft totaling $596,000 were returned to us. We
had issued to certain of our aircraft lessors warrants to purchase 395,000
shares of our common stock at an aggregate purchase price of $2,391,600. During
May 1999 and June 1999, aircraft lessors exercised all of these warrants and we
received $2,391,600. To the extent that the aircraft lessors were able to
realize certain profit margins on their subsequent sale of our common stock,
they were required to refund a portion of the cash security deposits they were
holding. As a result of their sales of our common stock, the lessors returned
$486,000 in cash security deposits to us during the quarter ended June 30, 1999.
Other cash security deposits were replaced with letters of credit and these
deposits were returned to us. Additionally, we secured two aircraft delivered
during the quarter ended June 30, 1999 with letters of credit totaling $860,000.
Our restricted investments increased $860,000 to collateralize the letters of
credit. We used $1,662,000 for capital expenditures for rotable aircraft
components, maintenance equipment and tools, aircraft leasehold costs and
improvements, and computer equipment for the quarter ended June 30, 1999.
Cash provided by financing activities for the quarters ended June 30,
2000 and 1999 was $461,000 and $4,535,000, respectively. During the quarters
ended June 30, 2000 and 1999 we received $488,000 and $4,556,000, respectively,
from the exercise of common stock options and warrants.
As of July 31, 2000, we lease 24 Boeing 737 type aircraft under operating
leases with expiration dates ranging from 2001 to 2006. Under these leases, we
were required to make cash security deposits or issue letters of credit to
secure the lease obligations. At June 30, 2000, we had made cash security
deposits and had arranged for issuance of letters of credit totaling $7,088,000
and $7,284,000, respectively. Accordingly, our restricted cash balance includes
$7,284,000 that collateralize the outstanding letters of credit. Additionally,
we make deposits for maintenance of these aircraft. At June 30, 2000 and 1999,
we had made maintenance deposits of $28,893,000 and $22,296,405, respectively.
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In March 2000, we entered into an agreement, amended in July 2000, to
purchase up to 29 new Airbus aircraft. We have agreed to firm purchases of 12
aircraft, and have options to purchase up to an additional 17 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. The aggregate additional amounts due under this purchase commitment
and estimated amounts for buyer-furnished equipment and spare parts for both the
purchased and leased aircraft was approximately $374,046,000 as of July 2000.
Under the terms of the purchase agreement, we are required to make scheduled
pre-delivery payments. These payments are non-refundable with certain
exceptions. As of July 2000, the Company has made pre-delivery payments totaling
$10,837,000 to secure these aircraft and option aircraft. As a complement to
this purchase, in April and May 2000 we signed two agreements to lease 16 new
Airbus aircraft. As of June 30, 2000, we have made deposits totaling $3,389,000
to secure these aircraft. Upon completion of our fleet transition, we expect our
owned and leased fleet to be comprised of approximately two-thirds A319 aircraft
and one-third A318 aircraft. We expect to take delivery of our first purchased
Airbus aircraft in May 2001 and our first leased Airbus aircraft in June 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. In order to complete the purchase of these aircraft we
must secure acceptable aircraft financing. The amount of financing required will
depend on the number of aircraft purchase options we exercise and the amount of
cash generated by operations prior to delivery of the aircraft. We continue to
explore various financing alternatives, including but not limited to, domestic
and foreign bank financing, public debt financing such as enhanced equipment
trust certificates, and leveraged lease arrangements. We expect to develop a
financing plan and implement that plan coincident with the delivery of the first
purchased aircraft in 2001. While we believe that such financing will be
available to us, there can be no assurance that 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 result in delays in or our inability to
take delivery of Airbus aircraft we have agreed to purchase.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The 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 effect 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 year ended March 31, 2000. Based on
fiscal year 2000 actual fuel usage, such an increase would have resulted in an
increase to aircraft fuel expense of approximately $4,442,000 in that fiscal
year. Comparatively, based on projected fiscal year 2001 fuel usage, such an
increase would result in an increase to aircraft fuel expense of approximately
$5,343,000 in fiscal year 2001. The increase in exposure to fuel price
fluctuations in fiscal year 2001 is due to the increase of our average aircraft
fleet size during the year ended March 31, 2000, projected increases to our
fleet during the year ended March 31, 2001 and related gallons purchased.
Our average cost per gallon of fuel for the period ended June 30, 2000
increased 52.8% over the average cost for the quarter ended June 30, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Operating Expenses".
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PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
Exhibit
Numbers
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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 4, 2000 By: /s/ Steve B. Warnecke
----------------------
Steve B. Warnecke, Vice President and
Chief Financial Officer
Date: August 4, 2000 By: /s/ Elissa A. Potucek
----------------------
Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer
