Frontier Airlines, Inc 10Q
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, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction of incorporated or organization) (I.R.S. Employer Identification No.)
7001 Tower Road, Denver, CO 80249
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (720) 374-4200
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
Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule
12b-2 of the Exchange Act). Yes X No
The number of shares of the Company's Common Stock outstanding as of July 30, 2003 was 30,037,018.
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 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
PART I. FINANCIAL INFORMATION
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited)
June 30, March 31,
2003 2003
Assets
Current assets:
Cash and cash equivalents $ 126,266,821 $ 102,880,404
Short-term investments 2,000,000 2,000,000
Restricted investments 18,230,000 14,765,000
Receivables, net of allowance for doubtful accounts of $254,000
and $237,000 at June 30, 2003 and March 31, 2003, respectively 24,992,761 25,856,692
Income taxes receivable 24,534,331 24,625,616
Security and other deposits 912,399 912,399
Prepaid expenses 9,851,736 9,032,084
Inventories, net of allowance of $2,408,000 and $2,478,000
at June 30, 2003 and March 31, 2003, respectively 5,998,147 5,958,836
Deferred tax asset 7,184,056 4,788,831
Other assets 603,207 18,587
Total current assets 220,573,458 190,838,449
Property and equipment, net 331,414,188 334,492,983
Security and other deposits 8,629,108 6,588,023
Aircraft pre-delivery payments 37,718,605 30,531,894
Restricted investments 10,704,411 9,324,066
Deferred loan fees and other assets, net 15,062,077 16,068,361
$ 624,101,847 $ 587,843,776
====================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 19,321,012 $ 26,388,621
Air traffic liability 72,912,822 58,875,623
Other accrued expenses 33,483,171 22,913,659
Current portion of long-term debt 20,609,732 20,473,446
Deferred revenue and other liabilities 1,372,273 1,396,143
Total current liabilities 147,699,010 130,047,492
Long-term debt 258,756,510 261,738,503
Deferred tax liability 29,090,209 20,017,787
Deferred revenue and other liabilities 17,798,353 17,072,868
Total liabilities 453,344,082 428,876,650
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 100,000,000; 30,022,018 and 29,674,050 issued and
outstanding at June 30, 2003 and March 31, 2003, respectively 30,022 29,674
Additional paid-in capital 98,717,285 96,424,525
Unearned ESOP shares (1,146,555) -
Other comprehensive loss (289,604) -
Retained earnings 73,446,617 62,512,927
Total stockholders' equity 170,757,765 158,967,126
$ 624,101,847 $ 587,843,776
======================= ==================
FRONTIER AIRLINES, INC.
Statements of Operations
For the Three Months Ended June 30, 2003 and 2002
(Unaudited)
June 30, June 30,
2003 2002
Revenues:
Passenger $138,890,562 $109,291,882
Cargo 1,689,025 1,579,936
Other 1,786,363 940,589
Total revenues 142,365,950 111,812,407
Operating expenses:
Flight operations 42,165,321 37,083,404
Fuel expense 23,352,435 17,395,991
Aircraft and traffic servicing 23,997,510 19,349,109
Maintenance 17,877,972 16,442,071
Promotion and sales 14,719,997 14,719,308
General and administrative 8,935,636 6,121,871
Depreciation and amortization 5,187,198 3,798,412
Total operating expenses 136,236,069 114,910,166
Operating income (loss) 6,129,881 (3,097,759)
Nonoperating income (expense):
Interest income 413,363 706,962
Interest expense (3,834,393) (1,259,311)
Unrealized derivative gain 751,666 -
Emergency Wartime Supplemental
Appropriations Act compensation 15,024,188 -
Aircraft lease exit costs (686,295) -
Other, net (176,093) (151,550)
Total nonoperating income (expense), net 11,492,436 (703,899)
Income (loss) before income tax expense (benefit) and
cumulative effect of change in method of
accounting for maintenance checks 17,622,317 (3,801,658)
Income tax expense (benefit) 6,688,627 (1,329,237)
Income (loss) before cumulative effect of change
in method of accounting for maintenance checks $10,933,690 $(2,472,421)
Cumulative effect of change in method of accounting
for maintenance checks, net of tax - 2,010,672
Net income (loss) $10,933,690 $(461,749)
================= =================
(continued)
FRONTIER AIRLINES, INC.
Statements of Operations
For the Three Months Ended June 30, 2003 and 2002
(Unaudited)
June 30, June 30,
2003 2002
Earnings (loss) per share:
Basic:
Income (loss) before cumulative effect of a
change in accounting principle $0.37 ($0.09)
Cumulative effect of change in method of
accounting for maintenance checks - 0.07
Net income (loss) $0.37 ($0.02)
=================================
Diluted:
Income (loss) before cumulative effect of a
change in accounting principle $0.36 ($0.09)
Cumulative effect of change in method of
accounting for maintenance checks - 0.07
Net income (loss) $0.36 ($0.02)
=================================
Weighted average shares of
common stock outstanding
Basic 29,823,179 29,534,304
=================================
Diluted 30,172,499 29,534,304
=================================
FRONTIER AIRLINES, INC.
Statements of Stockholders' Equity and Other Comprehensive Loss
For the Year Ended March 31, 2003 and the Three Months Ended June 30, 2003
(unaudited)
Accumulated
Additional Unearned Other Total
Common paid-in ESOP Comprehensive Retained stockholders'
Stock capital shares Loss earnings equity
Balances, March 31, 2002 $ 29,422 85,867,486 (2,119,670) - 85,356,055 169,133,293
Exercise of common stock options 252 616,695 - - - 616,947
Warrants issued in conjunction
with debt agreement - 9,282,538 - - - 9,282,538
Tax benefit from exercises of
common stock options and
warrants - 657,806 - - - 657,806
Contribution of common stock to
employees stock ownership plan - - - - - -
Amortization of employee stock
compensation - - 2,119,670 - - 2,119,670
Net income - - - - (22,843,128) (22,843,128)
Balances, March 31, 2003 29,674 96,424,525 - - 62,512,92 158,967,126
Contribution of common stock to
employees stock ownership plan 348 2,292,760 - - - 2,293,108
Amortization of employee stock
compensation - - (1,146,555) - - (1,146,555)
Other comprehensive loss -
Unrealized loss on derivative
instruments - - - (289,604) - (289,604)
-
Net income - - - - 10,933,690 10,933,690
Balances, June 30, 2003 $ 30,022 98,717,285 (1,146,555) (289,604) 73,446,617 170,757,765
================================================================================================
FRONTIER AIRLINES, INC.
Statements of Cash Flows
For the Three Months Ended June 30, 2003 and 2002
(Unaudited)
June 30, June 30,
2003 2002
Cash flows from operating activities:
Net income (loss) $ 10,933,690 $ (461,749)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Employee stock option plan compensation expense 624,601 706,556
Depreciation and amortization 6,193,479 4,005,197
Loss on disposal of equipment 19,365 -
Unrealized derivative gain (751,666) -
Deferred tax expense 6,677,197 2,773,635
Changes in operating assets and liabilities:
Restricted investments (5,051,245) (5,654,516)
Receivables 863,931 3,739,412
Income taxes receivable 91,285 3,306,720
Security and other deposits (1,629,285) (420,600)
Prepaid expenses (819,652) 843,438
Inventories (39,311) (389,143)
Deferred loan fees and other assets - (1,111,487)
Accounts payable (7,067,609) (6,362,652)
Air traffic liability 14,037,199 4,888,006
Other accrued expenses 10,968,909 2,607,245
Accrued maintenance expense - (3,063,885)
Refundable stabilization act compensation - (4,000,000)
Deferred revenue and other liabilities 701,615 1,001,481
Net cash provided by operating activities 35,752,503 2,407,658
Cash flows from investing activities:
(Increase) decrease in aircraft lease and purchase
deposits, net (7,598,511) 2,499,965
Decrease in restricted investments 205,900 205,900
Capital expenditures (2,127,768) (65,005,760)
Net cash used by investing activities (9,520,379) (62,299,895)
Cash flows from financing activities:
Net proceeds from issuance of common stock - 971,588
Proceeds from long-term borrowings - 49,200,000
Principal payments on long-term borrowings (2,845,707) (784,280)
Net cash (used) provided by financing activities (2,845,707) 49,387,308
Net increase (decrease) in cash and cash equivalents 23,386,417 (10,504,929)
Cash and cash equivalents, beginning of period 102,880,404 87,555,189
Cash and cash equivalents, end of period $ 126,266,821 $ 77,050,260
===================================
FRONTIER AIRLINES, INC.
Notes to Financial Statements
June 30, 2003
(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, 2003. 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, 2003 are not necessarily indicative of the results
that will be realized for the full year.
(2) Summary of Significant Accounting Policies
StockBased Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations in accounting for its employee stock options
and follows the disclosure provisions of Statement of Financial Accounting Standards No.123
(SFAS 123). The Company applies APB 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost is recognized for options granted at a price equal to the
fair market value of the Common Stock on the date of grant. Pro forma information regarding net
income and earnings per share is required by SFAS 123, which also requires that the information
be determined as if the Company has accounted for its employee stock options under the fair
value method of that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-average assumptions
for the quarters ended June 30, 2003 and 2002, respectively: risk-free interest rates of 2.7% and
4.7%, dividend yields of 0% and 0%; volatility factors of the expected market price of the Company's
common stock of 99.97% and 74.46%, and a weighted-average expected life of the options of 5.0 years
and 2.5 years. Had compensation cost for the Company's stock-based compensation plan been determined
using the fair value of the options at the grant date, the Company's pro forma net income (loss) and
earnings (loss) per share would be as follows:
2003 2002
Net income (loss):
As Reported $10,933,690 $ (461,749)
Pro Forma $10,480,094 $ (2,537,374)
Earnings (loss) per share, basic:
As Reported $ 0.37 $ (0.02)
Pro Forma $ 0.35 $ (0.09)
Earnings (loss) per share, diluted:
As Reported $ 0.36 $ (0.02)
Pro Forma $ 0.35 $ (0.09)
Interest Rate Hedging Program
During the three months ending June 30, 2003, the Company designated certain interest rate swaps
as qualifying cash flow hedges. Under these hedging arrangements, the Company is hedging the
interest payments associated with a portion of its LIBOR-based borrowings. Under the swap
agreements, the Company pays a fixed rate of interest on the notional amount of the contracts of
$27 million, and it receives a variable rate if interest based on the three month LIBOR rate, which is
reset quarterly. Interest expense for the quarter ended June 30, 2003 includes $79,000 of settlement
amounts payable to the counter party for the period. Changes in the fair value of interest rate swaps
designated as hedging instruments are reported in accumulated other comprehensive income. These
amounts are subsequently reclassified into interest expense as a yield adjustment in the same
period in which the related interest payments on the LIBOR-based borrowings affects earnings.
Approximately $290,000 of losses are included in accumulated other comprehensive income at June 30,
2003, are expected to be reclassified into interest expense as a yield adjustment of the hedged interest
payments over the next 12 months.
(3) Government Assistance
The Emergency Wartime Supplemental Appropriations Act (the Appropriations Act), enacted on
April 16, 2003, made available approximately $2.3 billion to U.S. flag air carriers for
expenses and revenue foregone related to aviation security. The payment received by each
carrier was for the reimbursement of the TSA security fees, the September 11th Security Fee
and/or the Aviation Security Infrastructure Fee paid by the carrier as of the date of enactment
of the Appropriations Act. According to the Appropriations Act, an air carrier may use the amount
received as the air carrier determines. Pursuant to the Appropriations Act, the Company received
$15,573,000 in May 2003, of which $549,000 was paid to Mesa Air Group for the revenue passengers
Mesa carried as Frontier JetExpress.
The Appropriations Act provides for additional reimbursements to be made to U.S.flag air carriers
for costs incurred related to the FAA requirements for enhanced flight deck door security measures
that were mandated as a result of the September 11 terrorist attacks. The Company is unable to
determine how much of the costs it incurred will be reimbursed.
(4) Subsequent Event
In July 2003, the Company received a federal income tax refund from the Internal Revenue Service.
The Company prepaid $10,000,000 on its government guaranteed loan upon receipt of this refund as
required by the terms of the loan agreement.
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. 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; the inability to obtain sufficient gates at Denver International Airport
to accommodate the expansion of our operations; general economic factors and behavior of the fare-paying
public and its potential impact on our liquidity; terrorist attacks or other incidents that could cause
the public to question the safety and/or efficiency of air travel; operational disruptions, including weather;
industry consolidation; the impact of labor disputes; enhanced security requirements; changes in the
government's policy regarding relief or assistance to the airline industry; the economic environment of the
airline industry generally; 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 and other actions taken by United Airlines
either in or out of bankruptcy protection; 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; issues relating to our transition to an Airbus aircraft fleet; uncertainties regarding aviation
fuel prices; and uncertainties as to when and how fully consumer confidence in the airline industry will
be restored, if ever. 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 available seat mile ("RASM")
or cost per available seat mile ("CASM") can significantly affect operating results
General
We are a scheduled passenger airline based in Denver, Colorado. We are the second largest jet
service carrier at Denver International Airport ("DIA"). As of July 31, 2003, we, in conjunction
with Frontier JetExpress operated by Mesa Air Group ("Mesa"), operate routes linking our Denver hub
to 37 cities in 22 states spanning the nation from coast to coast and to one city in Mexico. We are a
low cost, affordable fare airline operating in a hub and spoke fashion connecting points coast to coast.
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 in service to 38 jets (27 of which are leased jets and 11
of which are owned); consisting of one Boeing 737-200, 16 Boeing 737-300s, 19 Airbus A319s, and two Airbus
A318s. In May 2001, we began a fleet replacement plan to replace our Boeing aircraft with new purchased
and leased Airbus jet aircraft, a transition we expect to complete by approximately of the end of calendar
year 2005. As of July 31, 2003, we ceased using two of the three remaining Boeing 737-200s we lease and
intend to terminate the use of the last Boeing 737-200 in September 2003. During the three months ended
June 30, 2003 and 2002, we increased capacity by 22.3% and 19.2%, respectively. In the June 2003
quarter, we increased passenger traffic by 30.9%, outpacing our increase in capacity for the quarter.
We currently lease 10 gates at DIA. Together with our regional jet codeshare partner, Frontier Jet
Express, we use up to 16 gates at DIA, where we operate approximately 198 daily system flight departures
and arrivals and 30 Frontier JetExpress daily system flight departures and arrivals. We are currently
in discussions with DIA to access additional gates in order to accommodate planned expansion of our
operations. We intend to begin service to Orange County, California and Milwaukee, Wisconsin on August 31,
2003 with two and three daily round-trips, respectively, and we intend to add a third round-trip to
Orange County, California on October 1, 2003. Additionally, we intend to provide service to St. Louis,
Missouri on November 1, 2003 with two daily round-trip flights. We have applied for and received
authority to provide service to Cabo San Lucas and Puerto Vallarta, Mexico and we intend to begin
service to these markets on November 1, 2003 with one weekly round-trip frequency, increasing to three
weekly round-trip frequencies beginning on November 22, 2003.
In June 2003, we entered into an agreement with Kinetics, Inc., a provider of enterprise and
self-service technology to the U.S. airline industry, to deploy their new automated check-in
system. The launch of "FlexCheck," our suite of airport and web-based automated check-in services,
utilizes Kinetics' TouchPort self-service terminals and associated Kinetics software solutions for
airport and Internet check-in. We plan for FlexCheck to be available via the Internet in early August
2003 with deployment of self-service kiosks at our hub at DIA in early September 2003. The system will
allow our customers to check in for their flights using a standard credit card for identification purposes
only, their EarlyReturns frequent flyer number, E-ticket number or confirmation number.
In March 2003, we entered into an agreement with Juniper Bank (WWW.JUNIPERBANK.COM), a full-
service credit card issuer, to exclusively offer Frontier MasterCard products to consumers, customers
and Frontier's EarlyReturns frequent flyer members. We launched the co-branded credit card in May
2003. As of June 30, 2003, Juniper Bank has issued 6,300 of these credit cards. We believe that the
Frontier/Juniper Bank co-branded MasterCard will offer one of the most aggressive affinity card programs
because free travel can be earned for as little as 15,000 miles.
In October 2002, we signed a purchase and long-term services agreement with LiveTV to bring
DIRECTV AIRBORNE(TM) satellite programming to every seatback in our Airbus fleet. In February 2003,
we completed the installation of the LiveTV system on all Airbus aircraft. The installed systems
became operational upon receipt of regulatory approval in December 2002. We have implemented a $5 per
segment usage charge for access to the system to offset the costs for the system equipment,
programming and services. We believe the DIRECTV(TM)product represents a significant value to our
customers and offers a competitive advantage for our company.
In September 2001, we entered into a codeshare agreement with Mesa. Under the terms of the
agreement, we market and sell flights operated by Mesa as Frontier JetExpress using five 50-passenger
Bombardier CRJ-200 regional jets. Effective May 4, 2003, Frontier Jet Express replaced our mainline service
to Tucson, Arizona, Oklahoma City, Oklahoma and Boise, Idaho and terminated service to Oakland, California.
Frontier JetExpress also provides service to Ontario, California and Wichita, Kansas, and supplements
our mainline service to San Jose, California, Albuquerque, New Mexico and Austin, Texas. In February 2003
and subsequently modified in June 2003, we amended our codeshare agreement with Mesa from a prorate-based
compensation method to a "cost plus" compensation method effective March 1, 2003 through January 1,2004.
We are currently considering various options to extend or replace this service as of January 1, 2004.
Effective July 9, 2001, we began a codeshare agreement with Great Lakes Aviation, Ltd.
("Great Lakes"). The codeshare agreement recently added two additional markets to Rapid City, South
Dakota on July 30, 2003 and to Grand Junction, Colorado on August 1, 2003. Including these two new
cities, Great Lakes will provide service to 36 regional markets located in Arizona, Colorado,
Kansas, New Mexico, Nebraska, North Dakota, South Dakota, Texas, Utah, and Wyoming under this codeshare
agreement.
Our filings with the Securities and Exchange Commission are available at no cost on our website,
WWW.FRONTIERAIRLINES.COM, in the Investor Relations folder contained in the section titled "About Frontier".
These reports include our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports
on Form 8-K, Section 16 reports on Forms 3, 4 and 5, and any related amendments or other documents,
and are typically available within two days after we file the materials with the SEC.
Our corporate headquarters are located at 7001 Tower Road, Denver, Colorado 80249. Our
administrative office telephone number is 720-374-4200 and our reservations telephone number is
800-432-1359.
Results of Operations
We had net income of $10,934,000 or 36(cent)per diluted share for the quarter ended June
30, 2003 as compared to a net loss of $2,472,000, before cumulative effect of change in accounting
for maintenance checks, or 9(cent)per share for the quarter ended June 30, 2002. The Company's
fiscal first quarter 2004 net income included $15,024,000 received under the Appropriations
Act and an unrealized gain on fuel hedges of $752,000, offset by aircraft lease exit costs of $686,000.
The net effect of these items, net of income taxes and related profit sharing contributions, aggregated
was $0.29 per diluted share.
Our average fare was $105 for the quarter ended June 30, 2003 as compared to $108 for the
quarter ended June 30, 2002. The quarter ended June 30, 2003 was the first full quarter in which
our newly implemented fare structure was in place. As part of the new structure, which we implemented
in February 2003, our highest-level business fares were reduced by 25 to 45 percent, and our lowest
available walk-up fares were reduced by 38 to 77 percent. The new fare structure, which is comprised
of six fare categories, caps all fares to and from Denver at $399 or $499 one-way, excluding passenger
facility, security or segment fees, depending on length of haul. Unlike some other airlines, these fares
can be booked each way, allowing customers to get the best price on both the inbound and outbound portion
of their itinerary with no round-trip purchase required. Our new fare structure removes the advance
purchase requirements of past pricing structures, and there are no Saturday night stayovers required.
Although, this may have created downward pressure on our average fare, we believe this was offset by an
increase in passenger traffic. Additionally, , we believe that our average fare during the quarter
ended June 30, 2003 continued to be adversely impacted by the economy and the war with Iraq in March
and April 2003.
Our cost per available seat mile ("CASM") for the quarters ended June 30, 2003 and 2002 were 8.13
(cent)and 8.39(cent), respectively, a decrease of .26(cent)or 3.1%. Our CASM decreased during the
quarter ended June 30, 2003 as a result of an increase in the average number of owned aircraft
from 3.5 to 9, a decrease in the maintenance cost as a result of the reduction in our Boeing fleet
which were replaced with new Airbus A319 aircraft, an increase in aircraft utilization, a decrease
in our distribution expenses in relation to the reduction in the average fare and a reduction in travel
agency commissions as a result of the elimination of substantially all travel agency commissions effective
June 1, 2002, an increase in aircraft utilization, and economies of scale associated with lower increases
in indirect costs compared to the 22.3% increase in ASMs over the prior comparable period.
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, 2003, our break-even load factor excluding the $15,024,000 proceeds
from the Appropriations Act, the $752,000 unrealized derivative gain, and the $686,000 charge for
accelerated rents for an airplane lease that we ceased using during the quarter was 66.2% compared to
our achieved passenger load factor of 67.2%. For the quarter ended June 30, 2002, our break-even load
factor was 65.0% compared to our achieved passenger load factor of 62.8%. Our break-even load factor
increased from the prior comparable period as a result of a decrease in our average fare to $105 during
the quarter ended June 30, 2003 from $108 during the quarter ended June 30, 2002, partially offset
by a decrease in our CASM.
Small fluctuations in our RASM or CASM 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.
As a result of the expansion of our operations during the quarter ended June 30, 2003, our results
of operations are not necessarily indicative of future operating results or comparable to the prior quarter
ended June 30, 2002.
The following table provides certain of our financial and operating data for the year ended March
31, 2003 and the quarters ended June 30, 2003 and 2002.
Year
Ended
March 31, Quarters Ended June 30,
2003 2003 2002
Passenger revenue (000s) (1) 460,188 138,891 109,292
Revenue passengers carried (000s) 3,926 1,227 928
Revenue passenger miles (RPMs) (000s) (2) 3,599,553 1,125,233 859,604
Available seat miles (ASMs) (000s) (3) 6,013,261 1,675,050 1,369,399
Passenger load factor (4) 59.9% 67.2% 62.8%
Break-even load factor (5) 64.4% 65.9% 65.0%
Block hours (6) 120,297 33,127 27,680
Departures 53,081 14,610 12,184
Average seats per departure 132 132 132
Average stage length 858 869 851
Average length of haul 917 917 926
Average daily block hour utilization (7) 9.8 10.2 9.9
Yield per RPM (cents) (8)(11) 12.74 12.29 12.71
Yield per ASM (cents) (9)(11) 7.63 8.26 7.98
Total yield per ASM (cents) (10) 7.81 8.50 8.17
Cost per ASM (cents) 8.32 8.13 8.39
Fuel cost per ASM (cents) 1.42 1.39 1.27
Cost per ASM excluding fuel (cents)(12) 6.90 6.74 7.12
Average fare (13) $ 109 $ 105 $ 108
Average aircraft in fleet 33.8 35.6 30.6
Aircraft in fleet at end of period 36.0 36.0 33.0
Average age of aircraft at end of period 7.4 6.7 9.6
(1) "Passenger revenue" includes revenues for non-revenue passengers, administrative fees, and revenue
recognized for unused tickets that are greater than one year from issuance date.
(2) "Revenue passenger miles," or RPMs, are determined by multiplying the number of fare-paying passengers
carried by the distance flown.
(3) "Available seat miles," or ASMs, are determined by multiplying the number of seats available for
passengers by the number of miles flown.
(4) "Passenger load factor" is determined by dividing revenue passenger miles by available seat miles.
(5) "Break-even load factor" is the passenger load factor that will result in operating passenger revenues
being equal to operating expenses, adjusted for other revenues and net nonoperating income (expense)
and excluding unusual items, assuming constant yield per RPM and ASMs. See table below for calculation
of adjusted expenses. This may be deemed a non-GAAP financial measure under Regulation G issued by the
Securities and Exchange Commission. We believe that presentation of break-even load factor using
certain adjustments is useful to investors because the elimination of special and nonoperating items
allows a meaningful period-to-period comparison. Furthermore, in preparing operating plans and forecasts,
we rely on an analysis of break-even load factor exclusive of these special and nonoperating items.
Our presentation of non-GAAP results should not be viewed as a substitute for our financial or
statistical results based on GAAP, and other airlines may not necessarily compute break-even load
factor in a manner that is consistent with our computation.
(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 number of aircraft
days in service, divided by the weighted average of aircraft in our fleet during that period. The number
of aircraft includes all aircraft on our operating certificate, which includes scheduled aircraft, as
well as aircraft out of service for maintenance and operation spare aircraft, and excludes aircraft
removed permanently from revenue service or new aircraft not yet placed in revenue service.
(8) "Yield per RPM" is determined by dividing passenger revenues excluding charter revenues by revenue
passenger miles. FOr purposes of calculating yield per RPM, charter revenue is excluded from passenger
revenue.
(9) "Yield per ASM" is determined by dividing passenger revenues excluding charter revenues by available seat
miles.
(10) "Total yield per ASM" is determined by dividing passenger revenues by available seat miles.
(11) For purposes of these yield calculations, charter revenue is excluded from passenger revenue. See table
below for calculation of passenger revenue excluding charter revenue. This may be deemed a non-GAAP
financial measure under Regulation G issued by the Securities and Exchange Commission. We believe that
presentation of yield excluding charter revenue is useful to investors because charter flights are not
included in RPMs or ASMs. Furthermore, in preparing operating plans and forecasts, we rely on an analysis
of yield exclusive of charter revenue. Our presentation of non-GAAP results should not be viewed as a
substitute for our financial or statistical results based on GAAP.
(12) This may be deemed a non-GAAP financial measure under Regulation G issued by the Securities and Exchange
Commission. We believe the presentation of financial information excluding fuel expense is useful to
investors because we believe that fuel expense tends to fluctuate more than other operating expenses, it
facilitates comparison of results of operations between current and past periods and enables investors
to better forecast future trends in our operations. Furthermore, in preparing operating plans and
forecasts, we rely, in part, on trends in our historical results of operations excluding fuel expense.
However, our presentation of non-GAAP results should not be viewed as a substitute for our financial
results determine in accordance with GAAP.
(13) "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.
Year
Ended
March 31, Quarters Ended June 30,
(In thousands) 2003 2003 2002
Passenger revenues, as reported $ 460,188 $ 138,891 $ 109,292
Charter revenue 1,515 614 58
Passenger revenues, excluding charter revenue $ 458,673 $ 138,277 $ 109,234
=============== =============== ===============
Operating expenses, as reported $ 500,560 $ 136,236 $ 114,910
Less: charter revenue (1,515) (614) (58)
Less: cargo revenue (5,557) (1,689) (1,580)
Less: other revenue (4,191) (1,786) (941)
Less: interest income (1,883) (413) (707)
Add: interest expense 8,041 3,835 1,259
Less: write-down of inventory (2,478) - -
Add: nonoperating expense -- other,net 653 176 152
Adjusted expenses for break-even load factor
calculation $ 493,630 $ 135,745 $ 113,035
=============== =============== ===============
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, 2003 and the quarters
ended June 30, 2003 and 2002.
Year Ended March 31, Quarters Ended June 30,
2003 2003 2002
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 7.65 97.9% 8.29 97.6% 7.98 97.7%
Cargo 0.09 1.2% 0.10 1.2% 0.12 1.4%
Other 0.07 0.9% 0.11 1.2% 0.07 0.8%
Total revenues 7.81 100.0% 8.50 100.0% 8.17 100.0%
Operating expenses:
Flight operations 2.59 33.2% 2.52 29.6% 2.71 33.2%
Fuel expense 1.43 18.3% 1.39 16.4% 1.27 15.6%
Aircraft and traffic servicing 1.44 18.4% 1.43 16.9% 1.41 17.3%
Maintenance 1.26 16.1% 1.07 12.6% 1.20 14.7%
Promotion and sales 0.88 11.3% 0.88 10.3% 1.07 13.2%
General and administrative 0.43 5.5% 0.53 6.3% 0.45 5.5%
Depreciation and amortization 0.29 3.7% 0.31 3.6% 0.28 3.4%
Total operating expenses 8.32 106.5% 8.13 95.7% 8.39 102.8%
====================== ====================== ========================
Revenues
Industry fare pricing behavior has a significant impact on our revenues. Because of the elasticity of
passenger demand, we believe that increases in fares may at certain levels 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 and the economy. 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.
Our average fare for the quarters ended June 30, 2003 and 2002 was $105 and $108, respectively, a
decrease of 2.8%. We believe that our new fare structure that was implemented in February 2003 may have had
a downward effect on the average fare offset by an increase in passenger traffic. Our load factor of 75.6%
during the month of June 2003 represents the highest monthly load factor in our nine-year operating history.
We cannot predict whether or for how long these higher load factors will continue.
Passenger Revenues. Passenger revenues totaled $138,891,000 for the quarter ended June 30, 2003
compared to $109,292,000 for the quarter ended June 30, 2002, an increase of 27.1%. 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 1,227,000 revenue passengers during the
quarter ended June 30, 2003 compared to 928,000 in the quarter ended June 30, 2002, an increase of 32.2%.
We had an average of 35.6 aircraft in service during the quarter ended June 30, 2003 compared to an average
of 30.6 aircraft during the quarter ended June 30, 2002, an increase of 16.3%. ASMs increased to 1,675,050,000
for the quarter ended June 30, 2003 from 1,369,399,000 for the quarter ended June 30, 2002, an increase of
22.3%. RPMs for the quarter ended June 30, 2003 were 1,125,233,000 compared to 859,604,000 for the quarter
ended June 30, 2002, an increase of 30.9%, outpacing the increase in ASMs. Our load factor increased to 67.2%
for the quarter ended June 30, 2003 from 62.8% for the prior comparable period. Recently, we launched a unique
branding campaign, `A Whole Different Animal,' and we believe customer response to both of those initiatives
is a positive contributor to our results for the quarter ended June 30, 2003.
Cargo revenues, consisting of revenues from freight and mail service, totaled $1,689,000 and
$1,580,000 for the quarters ended June 30, 2003 and 2002, representing 1.2% and 1.4% of total operating
revenues, respectively, or an increase of 6.9%. 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, LiveTV sales and
excess baggage fees, totaled $1,786,000 and $941,000 or 1.3% and .8% of total operating revenues for
the quarters ended June 30, 2003 and 2002, respectively, an increase of 89.8%. Other revenue increased
over the prior comparable period as a result of an increase in interline handling fees primarily due to the
Mesa codeshare agreement and an increase in ground handling for other airlines.
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 $136,236,000 and $114,910,000 for the quarters ended June 30, 2003 and 2002 and
represented 95.7% and 102.8% of total revenue, respectively. Operating expenses decreased as a percentage
of revenue during the quarter ended June 30, 2003 as a result of a 27.3% increase in total revenues
during the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002 coupled with a
decrease in our CASM from 8.39(cent)to 8.13(cent), a decrease of 3.1%.
Flight Operations. Flight operations expenses of $42,165,000 and $37,084,000 were 29.6% and 33.2%
of total revenue for the quarters ended June 30, 2003 and 2002, respectively. Flight operations expenses
include all expenses related directly to the operation of the aircraft including lease and insurance
expenses, pilot and flight attendant compensation, in-flight catering, crew overnight expenses, flight
dispatch and flight operations administrative expenses.
Aircraft lease expenses totaled $17,192,000 (12.1% of total revenue) and $16,929,000 (14.6% of
total revenue) for the quarters ended June 30, 2003 and 2002, respectively, or an increase of less
than 1.0%. The average number of leased aircraft decreased to 26.7 from 27.1, a decrease of 1.5%.
Aircraft lease expense increased slightly as a result of newer and larger aircraft leased during
the 12 months ended June 30, 2003 compared to the leased aircraft that rotated out of our fleet during
that same period.
Aircraft insurance expenses totaled $2,746,000 (1.9% of total revenue) and $2,618,000 (2.3%
of total revenue) for the quarters ended June 30, 2003 and 2002, respectively. Aircraft insurance
expenses were .24(cent)and .30(cent)per RPM for the quarters ended June 30, 2003 and 2002, respectively.
Aircraft insurance decreased per RPM as a result of less expensive war risk coverage that is presently
provided by the FAA than during the period ended June 30, 2002 that was previously provided by
commercial underwriters combined with a 30% decrease in our basic hull and liability insurance rates
effective June 7, 2003. Although the FAA is authorized to offer both policies through August 31, 2004,
the current policies are in effect until August 12, 2003. We do not know whether the government will
extend the coverage, and if it does, how long the extension will last. We expect that if the
government stops providing excess war risk coverage to the airline industry, the premiums charged by
aviation insurers for this coverage will be substantially higher than the premiums currently charged
by the government or the coverage will not be available from reputable underwriters.
Pilot and flight attendant salaries before payroll taxes and benefits totaled $12,485,000 and
$9,859,000 or 9.0% of passenger revenue for each of the quarters ended June 30, 2003 and 2002,
respectively, or an increase of 26.6%. Pilot and flight attendant compensation increased as a result
of a 16.3% increase in the average number of aircraft in service, an increase of 19.7% in block
hours, a general wage increase in pilot and flight attendant salaries, and additional crew required
to replace those who were attending training on the Airbus equipment. 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 such periods to appear high in
relationship to the average number of aircraft in service. We expect these costs to continue to
increase as we place additional aircraft into service and continue to retire Boeing equipment.
Aircraft fuel expense. Aircraft fuel expenses include both the direct cost of fuel including
taxes as well as the cost of delivering fuel into the aircraft. Aircraft fuel costs of $23,352,000
for 24,412,000 gallons used and $17,396,000 for 20,858,000 gallons used resulted in an average fuel
cost of 95.7(cent)and 83.4(cent)per gallon for the quarters ended June 30, 2003 and 2002, respectively.
Fuel prices are subject to change weekly, as we purchase a very small portion in advance for inventory.
We initiated a fuel hedging program in late November 2002, which increased fuel expense by $213,000 for
the quarter ended June 30, 2003. Fuel consumption for the quarters ended June 30, 2003 and 2002 averaged
737 and 754 gallons per block hour, respectively, or a decrease of 2.3%. Fuel consumption per block hour
decreased during the quarter ended June 30, 2003 from the prior comparable period because of the more
fuel-efficient Airbus aircraft added to our fleet coupled with the reduction in our Boeing fleet which
had higher fuel burn rates.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $23,998,000 and
$19,349,000 (an increase of 24.0%) for the quarters ended June 30, 2003 and 2002, respectively, and
represented 18.4% and 17.3% 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, 2003, we served
33 cities compared to 31 during the quarter ended June 30, 2002, or an increase of 6.5%. During the
quarter ended June 30, 2003, our departures increased to 14,610 from 12,184, or an increase of
19.9%. Aircraft and traffic servicing expenses were $1,644 per departure for the quarter ended June 30,
2003 as compared to $1,588 per departure for the quarter ended June 30, 2002, or an increase of
3.5%. Aircraft and traffic servicing expenses increased per departure as a result of general increases
in airport rents and landing fees.
Maintenance. Maintenance expenses of $17,873,000 and $16,442,000 were 12.6% and 14.7% of total
revenue for the quarters ended June 30, 2003 and 2002, respectively. These include all labor, parts
and supplies expenses related to the maintenance of the aircraft. Maintenance is charged to maintenance
expense as incurred. Maintenance cost per block hour was $540 and $594 for the quarters ended June 30,
2003 and 2002, respectively, a decrease of 9.1%. Maintenance cost per block hour decreased as a result
of a decrease in our Boeing fleet coupled with the additional new Airbus aircraft that are less costly
to maintain than our older Boeing aircraft.
Promotion and Sales. Promotion and sales expenses totaled $14,720,000 and $14,719,000 and were 10.3%
and 13.2% of total revenue for the quarters ended June 30, 2003 and 2002, respectively. These include
advertising expenses, telecommunications expenses, wages and benefits for reservation agents and related
supervision as well as marketing management and sales personnel, credit card fees, travel agency
commissions and computer reservations costs. During the quarter ended June 30, 2003, promotion and sales
expenses per passenger decreased to $12.00 from $15.86 for the quarter ended June 30, 2002. Promotion
and sales expenses per passenger decreased as a result of variable expenses that are based on lower average
fares, the elimination of substantially all travel agency commissions effective on tickets sold after May 31,
2002, and economies of scale associated with our growth.
General and Administrative. General and administrative expenses for the quarters ended June 30,
2003 and 2002 totaled $8,936,000 and $6,122,000, respectively, and were 6.3% and 5.5% of total revenue,
respectively. During the quarter ended June 30, 2003, we accrued for employee performance bonuses totaling
$1,125,000 or .8% of total revenue. Bonuses are based on profitability. As a result of our pre-tax loss
for the quarter ended June 30, 2002, we did not accrue bonuses. 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. Our
employees increased from approximately 2,960 in June 2002 to approximately 3,400 in June 2003, an increase of
14.9%. Accordingly we experienced increases in our human resources, training, information technology, and
health insurance benefit expenses.
Depreciation and Amortization. Depreciation and amortization expenses of $5,187,000 and $3,798,000,
an increase of 36.6%, were approximately 3.6% and 3.4% of total revenue for the quarters ended June 30, 2003
and 2002, respectively. These expenses include depreciation of aircraft and aircraft components, office
equipment, ground station equipment, and other fixed assets. Depreciation expense increased over the
prior year largely as a result of an increase in the average number of Airbus A319 aircraft owned from
3.5 at June 30, 2002 to nine at June 30, 2003.
Nonoperating Income (Expense). Net nonoperating income totaled $11,492,000 for the quarter
ended June 30, 2003 compared to net nonoperating expense of $704,000 for the quarter ended June 30,
2002. During the quarter ended June 30, 2003, we recognized $15,024,000 of compensation as a result
of payments under the Appropriations Act for expenses and revenue foregone related to aviation
security. We received a total of $15,573,000 in May 2003, of which we paid $549,000 to Mesa for the
revenue passengers Mesa carried as Frontier JetExpress.
Interest income decreased to $413,000 from $707,000 during the quarter ended June 30, 2003 from
the prior comparable period as a result of a decrease in interest rates. Interest expense increased to
$3,834,000 for the quarter ended June 30, 2003 from $1,259,000 as a result of interest expense
associated with the financing of additional aircraft purchased since June 30, 2002 and the $70,000,000
government guaranteed loan we obtained in February 2002.
The results of operations for the quarter ended June 30, 2003 include an unrealized derivative
gain of $752,000 representing the change in the fair value of our fuel derivative agreements between
March 31, 2003 and June 30, 2003.
In May 2003, we ceased using one of our Boeing 737-200 leased aircraft that had a lease
termination in October 2005 and recorded a charge of $686,000. This amount recognizes theremaining
fair value of the lease payments and the unamortized leasehold improvements on the aircraft.
Income Tax Expense. Income tax expense totaled $6,689,000 during the quarter ended June
30, 2003 at a 38.0% rate, compared to an income tax benefit of $1,581,000 for the quarter ended June
30, 2002, at a 35.0% rate.
Liquidity and Capital Resources
Our liquidity depends to a large extent on the number of passengers who fly with us, the
fares we charge, our operating and capital expenditures, and our financing activities. We
depend on lease or mortgage financing to acquire all of our aircraft, including six firm
additional Airbus aircraft as of June 30, 2003 scheduled for delivery through April 2004.
In July 2003, we signed a term sheet with Airbus to amend the aircraft
purchase agreement subject to successful negotiation of a purchase agreement amendment for the
engines with a third party engine manufacturer and other conditions. If these negotiations are
successful, the amendment provides for 15 additional firm Airbus A319 aircraft purchases with
deliveries scheduled beginning in calendar year 2004 and continuing through 2008.
We had cash and cash equivalents and short-term investments of $128,267,000 at June 30, 2003
and $104,880,000 at March 31, 2003, respectively. At June 30, 2003, total current assets were
$219,656,000 as compared to $147,699,000 of total current liabilities, resulting in working capital
of $71,957,000. At March 31, 2003, total current assets were $190,838,000 as compared to $130,047,000
of total current liabilities, resulting in working capital of $60,791,000. The increase in our cash
and working capital from March 31, 2003 is largely a result of cash provided by operating activities
The cash provided by operating activities was offset by cash used for investing activities, principally
as a result of pre-delivery payments for the purchase of six additional Airbus aircraft.
In July 2003, we received our income tax refund from the Internal Revenue Service totaling
$26,574,000. We prepaid $10,000,000 on our government guaranteed loan upon receipt of this refund
as required by the loan agreement.
Cash provided by operating activities for the year ended June 30, 2003 was $35,753,000.
This is attributable to our net income for the period which includes compensation received
under the Appropriations Act, an increase in air traffic liability and other accrued expenses,
offset by increases in restricted investments, security and other deposits and prepaid expenses,
and a decrease in accounts payable. Cash provided by operating activities for the quarter ended
June 30, 2002 was $2,408,000. This is attributable to an increase in deferred tax expense, a
decrease in receivables, and increases in air traffic liability, other accrued expenses,
accrued maintenance expenses, and deferred rent, offset by our net loss for the period and
increases in restricted investments, security, maintenance and other deposits, and decreases
in accounts payable and deferred Stabilization Act compensation. Included in cash provided by
operating activities for the 2002 period is a $4,000,000 repayment of the excess amounts received
under the Stabilization Act.
Cash used in investing activities for the quarter ended June 30, 2003 was $9,520,000. Net
aircraft lease and purchase deposits increased by $7,599,000 during this period, principally
for pre-delivery payments for six additional Airbus aircraft we have committed to purchase.
We used $2,135,000 to purchase rotable aircraft components and other general equipment purchases.
Cash used by investing activities for the quarter ended June 30, 2002 was $62,300,000. Net
aircraft lease and purchase deposits decreased by $2,500,000 during this quarter. During the
quarter ended June 30, 2002, we took delivery of two purchased Airbus aircraft and applied
their respective pre-delivery payments to the purchase of those aircraft. We also used
$65,006,000 for the purchase of these additional Airbus aircraft and to purchase rotable aircraft
components, leasehold improvements and other general equipment.
Cash used by financing activities for the quarter ended June 30, 2003 was $2,846,000 for
principal payments on loans obtained to finance the purchase of Airbus aircraft. Cash provided
by financing activities for the quarter ended June 30, 2002 was $49,387,000. During the quarter
ended June 30, 2002, we borrowed $49,200,000 to finance the purchase of Airbus aircraft, of
which $784,000 was repaid during the quarter. During the quarter ended June 30, 2002 we received
$992,000 from the exercise of common stock options.
DIA, our primary hub for operations, has developed preliminary plans for a significant
expansion of Concourse A, where our aircraft gates are located. The expansion will add as
many as 10 gates for full-size commercial jet aircraft and several more gates for smaller
regional jets. We have expressed preliminary interest in entering into a long-term lease arrangement
with the airport authority for the use of additional aircraft gates in connection with our overall
expansion plans. The amount we would be charged under this lease will depend on the ultimate cost
of the project, the amount of space to which we commit, the financing structure and interest cost
and the final method by which the airport authority allocates the construction costs among the
airlines. The current state of the industry and uncertainties involving United Airlines, DIA's
dominant carrier, together with changes in Denver's administration with the election of a new mayor,
have placed these expansion plans on hold. In the meantime, we are working with DIA to address current
facility needs through additional access to existing gates and the construction of two temporary gates
on Concourse A. The construction costs for these facilities would be financed by DIA and recouped
from us on a long-term basis through rates and charges.
We have been assessing our liquidity position in light of the potential expansion of our
facilities at DIA, including the gate expansion discussed above and the potential for building or
acquiring our own hangar space, our aircraft purchase commitments and other capital needs,
the economy, our competition, the events of September 11, and other uncertainties surrounding
the airline industry. Prior to applying for a government guaranteed loan under the Stabilization
Act, we filed a shelf registration with the Securities and Exchange Commission in April 2002 that
would allow us to sell equity or debt securities from time to time as market conditions permit.
Subsequent to this shelf registration filing, our financial performance along with bankruptcies
and the threat of bankruptcies of other airlines has had a significant adverse effect on our
access to the capital markets. Although the government guaranteed loan has improved our liquidity,
we may need to continue to explore avenues to enhance our liquidity in the current economic and
operating environment. We intend to continue to examine domestic or foreign bank aircraft
financing, bank lines of credit and aircraft sale-leasebacks, the sale of equity or debt
securities, and other transactions as necessary to support our capital and operating needs. For
further information on our financing plans and activities, see "Contractual Obligations:" below.
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2003:
Less than 1-3 4-5 After
1 year years years 5 years Total
Long-term debt (1) 20,610,000 41,948,000 66,211,000 150,597,000 279,366,000
Operating leases (2) 82,180,000 141,263,000 119,986,000 360,817,000 704,246,000
Unconditional purchase obligations(3) 121,730,000 7,614,000 - - 129,344,000
Total contractual cash obligations 224,520,000 190,825,000 186,197,000 511,414,000 1,112,956,000
==========================================================================
(1) In February 2003, we obtained a $70,000,000 guaranteed loan of which $69,300,000 was guaranteed
by the Air Transportation Stabilization Board ("ATSB") and two other parties. The loan has three
tranches, Tranche A, Tranche B and Tranche C, in amounts totaling $63,000,000, $6,300,000 and
$700,000, respectively. At June 30, 2003, the interest rates were 1.80%, 2.15%, and 3.6%,
respectively. The interest rates on each tranche of the loan adjust quarterly based on LIBOR rates.
The loan requires quarterly installments of approximately $2,642,000 beginning in December 2003 with a
final balloon payment of $33,000,000 due in June 2007. Upon receipt of an income tax refund,
which was pledged under this loan agreement, we were required to make a pre-payment of $10,000,000,
which was to be applied against the next successive installments due. In July 2003, we received
our income tax refund and made the required pre-payment. Interest is payable quarterly, in arrears.
Guarantee fees of 4.5% annually are payable quarterly in advance to the guarantors of the Tranche A
and Tranche B loans. The loan facility is secured by certain assets of ours as described in the loan
agreement, consisting primarily of Boeing rotable fixed assets, all expendable inventory and 50% of other
property and equipment. In connection with this transaction, we issued warrants to purchase of 3,833,946
shares of our common stock at $6.00 per share to the ATSB and to two other guarantors. The warrants
had an estimated fair value of $9,282,538 when issued and expire seven years after issuance. The fair
value for these options was estimated at the date of grant using a Black-Scholes option pricing model.
This amount is being amortized to interest expense over the life of the loan. The effective interest rate
on the notes is approximately 9.99% including the value of the warrants and other costs associated with
obtaining the loan, assuming that the variable interest rates payable on the notes at June 30, 2003. The
notes contain certain covenants that require us to maintain certain ratios with respect to indebtedness to
earnings before income taxes, depreciation and amortization, and rents ("EBITDAR") and EBITDAR to fixed
charges beginning January 1, 2004. We are not required to meet certain liquidity tests until the quarter
ending March 31, 2004. Unrestricted cash balances cannot be less than $25,000,000 at any time through
September 30, 2004 or $75,000,000 thereafter. We are in compliance with these requirements at June 30, 2003.
During the year ended March 31, 2002, we entered into a credit agreement to borrow up to $72,000,000 for
the purchase of three Airbus aircraft with a maximum borrowing of $24,000,000 per aircraft. During the year
ended March 31, 2003, we entered into a sale-leaseback transaction for one of these purchased aircraft and
repaid the remaining loan with the proceeds of the sale. Each remaining aircraft loan has a term of 10
years and is payable in equal monthly installments, including interest, payable in arrears. The
aircraft secure the loans. Each of the remaining loans require monthly principal and interest payments
of $215,000 and $218,110, bears interest with rates of 6.71% and 6.54%, with maturities in May and August
2011, at which time a balloon payment totaling $10,200,000 is due with respect to each loan.
During the year ended March 31, 2003, we entered into additional loans to finance seven additional Airbus
aircraft with interest rates based on LIBOR plus margins that adjust quarterly or semi-annually. At June
30, 2003 interest rates for these loans ranged from 2.313% to 2.913%, each loan has a term of 12 years and
each loan has balloon payments ranging from $4,800,000 to $7,770,000 at the end of the term. The loans are
secured by the aircraft.
(2) As of June 30, 2003, we lease nine Airbus 319 type aircraft and 19 Boeing 737 type aircraft under operating
leases with expiration dates ranging from 2003 to 2014. Under these leases, we have made cash security
deposits or arranged for letters of credit representing approximately two months of lease payments per aircraft.
At June 30, 2003, we had made cash security deposits of $6,733,000 and had arranged for letters of credit of
$6,105,800 collateralized by restricted cash balances. Additionally, we are required to make supplemental
rent payments to cover the cost of major scheduled maintenance overhauls of these aircraft. These
supplemental rent payments are based on the number of flight hours flown and/or flight departures and are not
included as an obligation in the table above.
As a complement to our Airbus purchase agreement, in April 2000 we signed an agreement, as subsequently amended,
to lease 15 new Airbus aircraft for a term of 12 years. As of June 30, 2003, we had arranged for issuance
of letters of credit on the remaining eight aircraft we agreed to lease totaling $1,647,000, to secure these
leases, collateralized by restricted cash balances.
In June 2003, we agreed to a term sheet for the lease two additional Airbus A318 aircraft, scheduled for
delivery in May 2004 and March 2005, and one additional Airbus A319 aircraft, scheduled for delivery in
February 2005.
We also lease office and hangar space, spare engines and office equipment for our headquarters and airport
facilities, and certain other equipment with expiration dates ranging from 2003 to 2014. In addition,
we lease certain airport gate facilities on a month-to-month basis. Amounts for leases that are on a
month-to-month basis are not included as an obligation in the table above.
(3) We have adopted a fleet replacement plan to phase out our Boeing 737 aircraft and replace them with a
combination of Airbus A319 and A318 aircraft. In March 2000, we entered into an agreement, as subsequently
amended, to purchase up to 17 new Airbus aircraft. Included in the purchase commitment are amounts for spare
aircraft components to support the aircraft. We are not under any contractual obligations with respect
to spare parts. As of June 30, 2003, we had taken delivery of 11 of these aircraft, one of which we sold
in December 2002 and assigned one purchase commitment to a lessor in February 2003. We agreed to lease
each of these two aircraft over a five-year term. As of June 30, 2003, we have remaining firm purchase
commitments for six additional aircraft which are scheduled to be delivered in fiscal years 2003 through 2005.
Under the terms of the purchase agreement, we are required to make scheduled pre-delivery payments for these
aircraft. These payments are non-refundable with certain exceptions. As of June 30, 2003, we had made
pre-delivery payments on future deliveries totaling $37,119,000 to secure these aircraft.
In July 2003, we signed a term sheet with Airbus to amend the aircraft purchase agreement subject to
successful negotiations of a purchase agreement amendment for the engines with a third party engine
manufacturer and other conditions. If these negotiations are successful, the amendment provides for
15 additional firm Airbus A319 aircraft purchases with purchase rights for up to an additional 23 A319
aircraft. The firm Airbus A319 aircraft have scheduled delivery dates beginning in calendar year 2004
and continuing through 2008. Under the terms of the amendment, we have rights to convert some or all
of these additional aircraft into A320 aircraft by providing Airbus notice prior to December 31, 2004.
The amendment also requires us to lease at least three new Airbus A319 or A320 aircraft from operating
lessors for delivery in calendar year 2004. Including these three, we intend to lease as many as 14
additional A318 and A319 aircraft from third party lessors over the next five years. As this amendment
and other required conditions are not yet completed, we have not included any purchase commitment amounts
in the table above.
We signed a term sheet with a European financial institution to provide debt financing for four
of our five A318 aircraft scheduled for delivery from Airbus in fiscal year 2004. The terms permit us
to borrow up to $25,500,000 per aircraft over a period of either 120 or 144 months at floating
interest rate with either a $7,650,000 balloon payment due at maturity if we elect a 120 month term
or $3,060,000 if we elect a 144 month term. We are also in discussions with various parties for the
debt financing or for a sale-leaseback of the A319 aircraft delivery scheduled in September 2003.
There are no other purchased aircraft due for delivery in fiscal year 2004. The inability to close on the
A318 financing could result in delays in or our inability to take delivery of Airbus aircraft we have agreed to
purchase, which would have a material adverse effect on us. As of July 31, 2003, two of these A318 aircraft
were purchased and financed under this facility.
In October 2002 we entered into a purchase and long-term services agreement with LiveTV to bring
DIRECTV AIRBORNE(TM) satellite programming to every seatback in our Airbus fleet. We completed the
installation of the LiveTV system on all Airbus aircraft in our fleet in February 2003. We have agreed
to the purchase of 46 units of the hardware; however, we have the option to cancel up to a total of
11 units by providing written notice of cancellation at least 12 months in advance of installation.
As of June 30, 2003, we have purchased 19 units. The table above includes the remaining purchase
commitment amounts not yet paid for remaining firm 16 units.
Commercial Commitments
As we enter new markets, increase the amount of space leased, or add leased aircraft, we are
often required to provide the airport authorities and lessors with a letter of credit, bond or cash
security deposits. These generally approximate up to three months of rent and fees. As of June 30,
2003, we had outstanding letters of credit, bonds, and cash security deposits totaling $12,908,000,
$4,267,000, and $9,542,000, respectively. In order to meet these requirements, we have a credit
agreement with a financial institution for up to $1,500,000, which expires August 31, 2003, and
another credit agreement with a second financial institution for up to $20,000,000, which expires
November 30, 2003. These credit lines can be used solely for the issuance of standby letters of credit.
Any amounts drawn under the credit agreements are fully collateralized by certificates of deposit,
which are carried as restricted investments on our balance sheet. As of June 30, 2003, we have drawn
$12,908,000 under these credit agreements for standby letters of credit that collateralize certain
leases. In the event that these credit agreements are not renewed beyond their present expiration dates,
the certificates of deposit would be redeemed and paid to the various lessors as cash security deposits
in lieu of standby letters of credit. As a result there would be no impact on our liquidity if these
agreements were not renewed. In the event that the surety companies determined that issuing bonds on
our behalf were a risk they were no longer willing to underwrite, we would be required to collateralize
certain of these lease obligations with either cash security deposits or standby letters of credit,
which would decrease our liquidity.
We use the Airline Reporting Corporation ("ARC") to provide reporting and settlement services
for travel agency sales and other related transactions. In order to maintain the minimum bond
(or irrevocable letter of credit) coverage of $100,000, ARC requires participating carriers to
meet, on a quarterly basis, certain financial tests such as, but not limited to, net profit margin
percentage, working capital ratio, and percent of debt to debt plus equity. As of June 30, 2003, we
met these financial tests and presently are only obligated to provide the minimum amount of $100,000 in
coverage to ARC. If we were to fail the minimum testing requirements, we would be required to increase our
bonding coverage to four times the weekly agency net cash sales (sales net of refunds and agency commissions).
Based on net cash sales remitted to us for the week ended July 31, 2003, the coverage would be increased to
$12,710,000 if we failed the tests. If we were unable to increase the bond amount as a result of our then
financial condition, we could be required to issue a letter of credit that would restrict cash in an amount
equal to the letter of credit.
In November 2002, we initiated a fuel hedging program comprised of swap and collar agreements. Under
a swap agreement, we receive the difference between a fixed swap price and a price based on an agreed upon
published spot price for jet fuel. If the index price is higher than the fixed price, we receive the difference
between the fixed price and the spot price. If the index price is lower, we pay the difference. A collar
agreement has a cap price, a primary floor price, and a secondary floor price. When the U.S. Gulf Coast
Pipeline Jet index price is above the cap, we receive the difference between the index and the cap. When
the index price is below the primary floor but above the secondary floor, we pay the difference between
the index and the primary floor. However, when the price is below the secondary floor, we are only
obligated to pay the difference between the primary and secondary floor prices.
In November 2002, we entered into a swap agreement with a notional volume of 770,000 gallons per
month of jet fuel for the period from December 1, 2002 to May 31, 2003. The fixed price under this
agreement is 72.25 cents per gallon. The volumes were estimated to represent 10% of our fuel purchases
for that period. We entered into a second contract a three-way collar in November 2002 with a
notional volume of 385,000 gallons per month for the period December 1, 2002 to November 30, 2003.
The cap prices for this agreement is 82 cents per gallon, and the primary and secondary floor prices
are at 72 and 64.5 cents per gallon, respectively. The volume of fuel covered by this contract is
estimated to represent 5% of our fuel purchases for that period. In March 2003, we entered into a
second swap agreement with a notional volume of 1,260,000 gallons per month for the period from
April 1, 2003 to June 30, 2003. The fixed price of the swap is 79.25 cents per gallon and the agreement
is estimated to represent 15% of our fuel purchases for that period. In April 2003, we entered
into a third swap agreement with a notional volume of 1,260,000 gallons per month for the period from
July 1, 2003 to December 31, 2003. The fixed price of the swap is 71.53 cents per gallon and the agreement
is estimated to represent 15% of our fuel purchases for that period. Our results of operations for the
quarter ended June 30, 2003 include an unrealized derivative gain of $752,000 which is included in
nonoperating income (expense) and a realized loss of approximately $213,000 in cash settlements
paid to the counter-party recorded as an increase in fuel expense. We were not a party to any
derivative contracts during the quarter ended June 30, 2002.
In March 2003, we entered into an interest rate swap agreement with a notional amount of
$27,000,000 to hedge a portion of our LIBOR based borrowings. Under the interest rate swap agreement,
we are paying a fixed rate of 2.45% and receive a variable rate based on the three month LIBOR. At June
30, 2003, our interest rate swap agreement had an estimated unrealized loss of $290,000 which was
recorded as accumulated other comprehensive loss and is included in the balance sheet. We did not
have any interest rate swap agreements outstanding during the quarter ended June 30, 2002.
Effective January 1, 2003, we entered into an engine maintenance agreement with GE Engine
Services, Inc. ("GE") covering the scheduled and unscheduled repair of our aircraft engines used
on our Airbus aircraft. The agreement is for a 12-year period from the effective date for our owned
aircraft or December 31, 2014, whichever comes first, and for each leased aircraft, the term
coincides with the initial lease term of 12 years. This agreement precludes us from using another third
party for such services during the term. This agreement requires monthly payments at a specified
rate multiplied by the number of flight hours flown on the aircraft during that month. The amounts
due based on flight hours are not included in table above.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are defined as those that are both important to the portrayal
of our financial condition and results, and require management to exercise significant judgments.
Our most critical accounting policies are described briefly below. For additional information about
these and our other significant accounting policies, see Note 1 of the Notes to the Financial
Statements.
Revenue Recognition
Passenger, cargo, and other revenues are recognized when the transportation is provided
or after the tickets expire, one year after date of issuance, and are net of excise taxes,
passenger facility charges and security fees. Revenues that have been deferred are included
in the accompanying balance sheet as air traffic liability.
Impairment of Long-Lived Assets
We record impairment losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted future cash flows estimated to be generated by those
assets are less than the carrying amount of the assets. If an impairment occurs, the loss is
measured by comparing the fair value of the asset to its carrying amount.
Aircraft Maintenance
We operate under an FAA-approved continuous inspection and maintenance program. We account
for maintenance activities on the direct expense method. Under this method, major overhaul
maintenance costs are recognized as expense as maintenance services are performed, as flight
hours are flown for nonrefundable maintenance payments required by lease agreements, and as
the obligation is incurred for payments made under service agreements. Routine maintenance and
repairs are charged to operations as incurred. Prior to fiscal 2003 we accrued for major overhaul
costs on a per-flight-hour basis in advance of performing the maintenance services.
Effective January 1, 2003, we and GE executed a 12-year engine services agreement (the
"Services Agreement") covering the scheduled and unscheduled repair of Airbus engines.
Under the terms of the Services Agreement, we agreed to pay GE a fixed rate per-engine-hour,
payable monthly, and GE assumed the responsibility to overhaul our engines on Airbus aircraft as
required during the term of the Services Agreement, subject to certain exclusions. We believe
the fixed rate per-engine hour approximates the periodic cost we would have incurred to
service those engines. Accordingly, these payments are expensed as the obligation is incurred.
Fuel Derivative Instruments
We have entered into derivative instruments which are intended to reduce our exposure to
changes in fuel prices. We account for the derivative instruments entered into as trading instruments
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities"
and record the fair value of the derivatives as an asset or liability as of each balance sheet
date. We record any settlements received or paid as an adjustment to the cost of fuel or interest
expense.
Interest Rate Hedging Program
During the quarter ending June 30, 2003, we designated certain interest rate swaps as
qualifying cash flow hedges. Under these hedging arrangements, we are hedging the interest
payments associated with a portion of our LIBOR-based borrowings. Under the swap agreements,
we pay a fixed rate of interest on the notional amount of the contracts of $27 million,
and we receive a variable rate if interest based on the three month LIBOR rate, which is reset
quarterly. Interest expense for the quarter ended June 30, 2003, includes $79,000 of settlement
amounts payable to the counter party for the period. Changes in the fair value of interest rate
swaps designated as hedging instruments are reported in accumulated other comprehensive
income. These amounts are subsequently reclassified into interest expense as a yield adjustment
in the same period in which the related interest payments on the LIBOR-based borrowings affects
earnings. Approximately $290,000 of losses in accumulated other comprehensive income at June
30, 2003, are expected to be reclassified into interest expense as a yield adjustment of the hedged
interest payments over the next 12 months.
Customer Loyalty Programs
In February 2001, we established EarlyReturns, a frequent flyer program to encourage
travel on our airline and customer loyalty. We account for the EarlyReturns program under the
incremental cost method whereby travel awards are valued at the incremental cost of carrying one
passenger based on expected redemptions. Those incremental costs are based on expectations of
expenses to be incurred on a per passenger basis and include food and beverages, fuel, liability
insurance, and ticketing costs. The incremental costs do not include a contribution to overhead,
aircraft cost or profit. We do not record a liability for mileage earned by participants who have
not reached the level to become eligible for a free travel award. We believe this is appropriate
because the large majority of these participants are not expected to earn a free flight award.
We do not record a liability for the expected redemption of miles for non-travel awards since the
cost of these awards to us is negligible.
As of June 30, 2003 and 2002, we estimated that approximately 19,367 and 6,887 round-trip
flight awards, respectively, were eligible for redemption by EarlyReturns members who have mileage
credits exceeding the 15,000-mile free round-trip domestic ticket award threshold. Of these
earned awards, we expect that approximately 84% would be redeemed. The difference between
the round-trip awards outstanding and the awards expected to be redeemed is the estimate of awards
which will (1) never be redeemed, or (2) be redeemed for something other than a free trip. As of
June 30, 2003 and March 31, 2003, we had recorded a liability of approximately $375,000 and
$283,181, respectively, for these rewards.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Aircraft Fuel
Our earnings are affected by changes in the price and availability of aircraft fuel.
Market risk is estimated as a hypothetical 10 percent change in the average cost per gallon of
fuel for the quarter ended March 31, 2003. Based on fiscal year 2003 actual fuel usage, such a
change would have the effect of increasing or decreasing our aircraft fuel expense by approximately
$8,590,000 in fiscal year 2003. Comparatively, based on projected fiscal year 2004 fuel usage,
such a change would have the effect of increasing or decreasing our aircraft fuel expense by
approximately $9,746,000 in fiscal year 2004 excluding the effects of our fuel hedging arrangements.
The increase in exposure to fuel price fluctuations in fiscal year 2004 is due to the increase of
our average aircraft fleet size during the year ended March 31, 2004, projected increases to
our fleet during the year ended March 31, 2004 and related gallons purchased.
As of June 30, 2003, we had hedged approximately 12.3% of our projected fiscal 2004 fuel
requirements. In November 2002, we initiated a fuel hedging program comprised of swap and collar
agreements. Under a swap agreement, we receive the difference between a fixed swap price and a
price based on an agreed upon published spot price for jet fuel. If the index price is higher
than the fixed price, we receive the difference between the fixed price and the spot price. If
the index price is lower, we pay the difference. A collar agreement has a cap price, a primary
floor price, and a secondary floor price. When the U.S. Gulf Coast Pipeline Jet index price is
above the cap, we receive the difference between the index and the cap. When the index price is
below the primary floor but above the secondary floor, we pay the difference between the index
and the primary floor. However, when the price is below the secondary floor, we are only obligated
to pay the difference between the primary and secondary floor prices.
In November 2002, we entered into a swap agreement with a notional volume of 770,000 gallons
per month of jet fuel for the period from December 1, 2002 to May 31, 2003. The fixed price
under this agreement is 72.25 cents per gallon. The volumes were estimated to represent 10%
of our fuel purchases for that period. We entered into a three-way collar in November 2002,
with a notional volume of 385,000 gallons per month for the period December 1, 2002 to November
30, 2003. The cap prices for this agreement is 82 cents per gallon, and the primary and secondary
floor prices are 72 and 64.5 cents per gallon, respectively. The volume of fuel covered by this
contract is estimated to represent 5% of our fuel purchases for that period. In March 2003,
we entered into a second swap agreement with a notional volume of 1,260,000 gallons per month
for the period from April 1, 2003 to June 30, 2003. The fixed price of the swap is 79.25 cents
per gallon and the agreement is estimated to represent 15% of our fuel purchases for that period.
In April 2003, we entered into a third swap agreement with a notional volume of 1,260,000 gallons
per month for the period from July 1, 2003 to December 31, 2003. The fixed price of the swap is
71.53 cents per gallon and the agreement is estimated to represent 15% of our fuel purchases for
that period. The results of operations for the quarter ended June 30, 2003 include an unrealized
derivative gain of $752,000 which is included in nonoperating income (expense) and a realized loss
of approximately $213,000 in cash settlements paid to a counter-party recorded as an increase in
fuel expense. We were not a party to any derivative contracts during the quarter ended June 30,
2002.
Interest
We are susceptible to market risk associated with changes in variable interest rates on long-
term debt obligations we incurred to finance the purchases of our Airbus aircraft and our government
guaranteed loan. Interest expense on seven of our owned Airbus A319 aircraft is subject to interest
rate adjustments every three to six months based upon changes in the applicable LIBOR rate. The
interest rate on borrowings under our government guaranteed loan is also subject to adjustment based
on changes in the applicable LIBOR rates. A change in the base LIBOR rate of 100 basis points
(1.0 percent) would have the effect of increasing or decreasing our annual interest expense by
$2,355,000 assuming the loans outstanding that are subject to interest rate adjustments at June
30, 2003 totaling $235,487,000 are outstanding for the entire period. As of June 30, 2003, we
had hedged approximately 11.5% of our variable interest rate loans.
In March 2003, we entered into an interest rate swap agreement with a notional amount
of $27,000,000 to hedge a portion of our LIBOR based borrowings. Under the interest rate
swap agreement, we are paying a fixed rate of 2.45% and receive a variable rate based on the three
month LIBOR over the term of the swap which expires in March 2007. As of June 30, 2003, the fair
value of the swap agreement is a loss of $289,000..
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective. Disclosure controls and procedures are controls and procedures that are
designed to ensure that information required to be disclosed in our reports filed or submitted under
the Exchange Act is recorded, processed, summarized and completely and accurately reported within the
time periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other factors that
could significantly affect internal controls subsequent to the date we carried out this evaluation.
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
31.1 Section 302 certification of President and Chief Executive Officer,
Jeffery S. Potter. (1)
31.2 Section 302 certification of Chief Financial Officer, Paul H. Tate. (1)
32 Section 906 certification of President and Chief Executive Officer,
Jeffery S. Potter, and Chief Financial Officer, Paul H. Tate (1)
(1) Filed herewith.
(b) Reports on Form 8-K
During the quarter ended June 30, 2003, the Company filed the following reports on
Form 8-K.
.
Date of Reports Item Numbers Financial Statements
Required to be Filed
May 22, 2003 12 and 7 None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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: July 30, 2003 By: /s/ Paul H. Tate
Paul H. Tate, Senior Vice President and
Chief Financial Officer
Date: July 30, 2003 By: /s/ Elissa A. Potucek
Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer