Frontier Airlines, Inc Annual Report
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
[ ] 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)
Registrant's telephone number including area code: (720) 374-4200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
Title of Class
Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of common stock held by non-affiliates of the Company computed by reference to the last
quoted price at which such stock sold on such date as reported by the Nasdaq National Market as of May 24, 2002 was
$494,576,286.
The number of shares of the Company's common stock outstanding as of May 24, 2002 is 29,544,581.
Documents incorporated by reference - Information required by Part III is incorporated by reference to the Company's
2002 Proxy Statement.
TABLE OF CONTENTS
Page
----
PART I
Item 1: Business..............................................................................3
Item 2: Properties ..........................................................................16
Item 3: Legal Proceedings....................................................................16
Item 4: Submission of Matters to a Vote of Security Holders..................................16
PART II
Item 5: Market for Common Equity and Related Stockholder Matters.............................17
Item 6: Selected Financial Data..............................................................19
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................21
Item 7A: Quantitative and Qualitative Disclosures About Market Risk...........................37
Item 8: Financial Statements.................................................................37
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.37
PART III
Item 10: Directors and Executive Officers of the Registrant..................................37
Item 11: Executive Compensation..............................................................37
Item 12: Security Ownership of Certain Beneficial Owners and Management......................38
Item 13: Certain Relationships and Related Transactions......................................38
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................38
- 55 -
PART I
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; general economic factors and behavior of the
fare-paying public and its potential impact on our liquidity; 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; issues relating to our transition to an Airbus aircraft fleet; uncertainties regarding aviation
fuel price; uncertainties regarding future terrorist attacks on the United States or military actions that may be
taken; 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 RPM or expense per ASM can significantly affect operating
results.
Share, per share and common stock information contained in this report has been retroactively adjusted or "restated"
to reflect a 50% common stock dividend to shareholders of record on February 19, 2001, which we paid on March 5,
2001.
Item 1: Business
General
We are a scheduled passenger airline based in Denver, Colorado. As of May 24, 2002, we, in conjunction with
Frontier JetExpress operated by Mesa Air Group (“Mesa”), operate routes linking our Denver hub to 31 cities in 20
states spanning the nation from 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 to 27 leased jets and four
purchased Airbus aircraft, including seven Boeing 737-200s, 17 larger Boeing 737-300s, and seven Airbus A319s.
Beginning in May 2001, we began a fleet replacement plan by which we will replace our Boeing aircraft with new
purchased and leased Airbus jet aircraft, a transition we expect to complete by approximately the second quarter of
calendar year 2006. During fiscal year 2002, we advanced the return of one leased Boeing 737-300 aircraft to its
owner from April 2002 to September 2001, and two leased Boeing 737-200 aircraft from September and November 2004 to
November 2002 and January 2003, respectively. We plan to accept delivery of an additional nine Airbus A319s during
our fiscal year ending March 31, 2003. Including the anticipated return of five Boeing aircraft, we plan to operate
a fleet of 16 Boeing 737-300s, three Boeing 737-200s and 16 Airbus A319s, or a total of 35 aircraft, by the end of
our fiscal year ending March 31, 2003.
We currently use up to eleven gates at our hub, Denver International Airport ("DIA"), where we operate
approximately 140 daily system flight departures and arrivals. Prior to the September 11, 2001 terrorist attacks,
we operated approximately 126 daily system flight departures and arrivals. Following the terrorist attacks, we
reduced our service to approximately 103 daily system flight departures and arrivals. On November 15, 2001, we
added an additional eight daily system flight departures and arrivals to our schedule, and we reinstated service to
Ronald Reagan Washington National Airport on December 12, 2001 with one daily round-trip. As of March 31, 2002, we
restored our service to our pre-September 11, 2001 levels as well as added additional flights with the additional
capacity added since September 11, 2001. We intend to continue to monitor passenger demand and other competitive
factors and adjust the number of flights we operate accordingly.
During the fiscal year ended March 31, 2002 we added Houston, on May 16, 2001, Reno/Lake Tahoe, Nevada and
Austin, Texas on October 1, 2001, New Orleans, Louisiana on February 1, 2002, Sacramento, California and Fort
Lauderdale, Florida on February 26, 2002. During fiscal year 2002, we also added additional flight frequencies in
Albuquerque, New Mexico and Kansas City, Missouri. We began service between Denver and Indianapolis, Indiana on May
23, 2002, and intend to begin service between Denver and Boise, Idaho and Tampa, Florida on June 24, 2002.
In September 2001, we entered into a codeshare agreement with Mesa Air Group. Under the terms of the
agreement, we will market and sell flights operated by Mesa as Frontier JetExpress. This codeshare began February
17, 2002 with service between Denver and San Jose, California, and with supplemental flights to our current service
between Denver and Houston, Texas. Effective April 7, 2002, the codeshare was expanded to include service to St.
Louis, Missouri and Ontario, California. On May 1, 2002, Frontier JetExpress began supplemental service between
Denver and San Diego, California and Minneapolis, Minnesota. This codeshare is expected to expand to include the
operation by Mesa of at least five 50-passenger Bombardier CRJ-200 regional jets, providing service to new
destinations as well as additional frequencies to our current route system.
Effective July 9, 2001, we began a codeshare agreement with Great Lakes Aviation, Ltd. (“Great Lakes”) by
which Great Lakes provides daily service to seven regional markets from our Denver hub. The codeshare agreement
initially included Casper, Cody, Gillette, and Cheyenne, Wyoming; Amarillo, Texas; Santa Fe, New Mexico; and Hayden,
Colorado. Effective November 15, 2001, we expanded the codeshare agreement to include nine additional Great Lakes
cities including Laramie, Riverton, Rock Springs, and Worland, Wyoming; Cortez and Telluride, Colorado; Scottsbluff,
Nebraska; and Farmington, New Mexico and we commenced a Great Lakes codeshare to Sheridan, Wyoming, on October 31,
2001. Effective December 14, 2001, an additional 20 cities were added including Page and Phoenix, Arizona; Alamosa
and Pueblo, Colorado; Dodge City, Garden City, Hays, and Liberal, Kansas; Dickinson and Williston, North Dakota;
Alliance, Chadron, Grand Island, Kearney, McCook, Norfolk, and North Platte, Nebraska; Pierre, South Dakota; and
Moab and Vernal, Utah. Service between Denver and Hayden, Colorado was removed from the codeshare agreement
effective December 13, 2001.
Our President and Chief Operating Officer, Jeff Potter, assumed the additional title and responsibilities of
Chief Executive Officer on April 1, 2002, replacing Chairman and former Chief Executive Officer Sam Addoms who
retired as CEO but remains as Chairman of our Board of Directors. During the past 12 months we have added several
new executive officers to our management team, including our Vice President and Chief Financial Officer (October
2001); our Vice President-Maintenance and Engineering (January 2002); and our Vice President and General Counsel
(April 2002). Each of these individuals has significant prior airline or aviation industry experience.
Our corporate headquarters are located at 7001 Tower Road, Denver, Colorado 80249. Our administrative office
telephone number is 720-374-4200; our reservations telephone number is 800-432-1359; and our worldwide Web site
address is www.frontierairlines.com.
September 11, 2001 Terrorist Attacks
On September 11, 2001, terrorists hijacked and used four commercial aircraft in terrorist attacks on the
United States. As a result of these terrorist attacks, the Federal Aviation Administration immediately suspended
all commercial airline flights on the morning of September 11. We resumed flight activity on September 14, 2001
with approximately a 20% reduction in our scheduled service. As of March 31, 2002, we have fully restored service
to our pre-September 11, 2001 levels as well as increased capacity by approximately 11.3% compared to our
pre-September 11, 2001 capacity.
Air Transportation Safety and Stabilization Act
As a result of the September 11, 2001 terrorist attacks on the United States, on September 22, 2001 President
Bush signed into law the Air Transportation Safety and System Stabilization Act (the “Act”). The Act includes for
all U.S. airlines and air cargo carriers the following key provisions: (i) $5 billion in cash compensation, of
which $4.5 billion is available to commercial passenger airlines and is allocated based on the lesser of each
airline's share of available seat miles during August 2001 or the direct and incremental losses (including lost
revenues) incurred by the airline from September 11, 2001 through December 31, 001; (ii) subject to certain
conditions, the availability of up to $10 billion in federal government guarantees of certain loans made to air
carriers for which credit is not reasonably available as determined by a newly established Air Transportation
Stabilization Board; (iii) the authority of the Secretary of Transportation to reimburse air carriers (which
authority expires 180 days after the enactment of the Act) for increases in the cost of war risk insurance over the
premium in effect for the period September 4, 2001 to September 10, 2001; (iv) at the discretion of the Secretary of
Transportation, a $100 million limit on the liability of any air carrier to third parties with respect to acts of
terrorism committed on or to such air carrier during the 180 day period following enactment of the Act; and (v) the
extension of the due date for the payment by air carriers of certain payroll and excise taxes until November 15,
2001 and January 15, 2002, respectively.
Business Strategy and Markets
Our business strategy is to provide air service at affordable fares to high volume markets from our Denver
hub. Our strategy is based on the following factors:
o Stimulate demand by offering a combination of low fares, quality service and frequent flyer credits in our
frequent flyer program, EarlyReturns.
o Expand our Denver hub operation and increase connecting traffic by adding additional high volume markets to
our current route system, as well as developing existing code sharing agreements with two commuter carriers
and potentially developing new alliances with other carriers.
o Continue filling gaps in flight frequencies to current markets from our Denver hub.
In September 2001, Fortune magazine ranked us 41st on its 100 Fastest Growing Companies list and in April
2002, Entrepreneur Magazine ranked us one of two "Best Low-Fare Airlines."
Route System Strategy
Our route system strategy encompasses connecting our Denver hub to top business and leisure destinations.
We currently serve 19 of the top 25 destinations from Denver, as defined by the U.S. Department of Transportation's
Origin and Destination Market Survey. In addition, as we bring additional aircraft into our fleet and add new
markets to our route system, connection opportunities increase. Connection opportunities for our passengers
connecting through DIA increased from an average of 7.5 flights as of March 31, 2001 to 8.9 flights as of March 31,
2002, which includes connecting passengers from our commuter affiliate, Frontier JetExpress.
Marketing and Sales
Our sales efforts are targeted to price-sensitive passengers in both the leisure and corporate travel
markets. In the leisure market, we offer discounted fares marketed through the Internet, newspaper, radio and
television advertising along with special promotions. We market these activities in Denver and in cities throughout
our route system.
In order to increase connecting traffic, we began two code share agreements, one with Great Lakes in July
2001 and the other with Mesa Air Group, operating as Frontier JetExpress, in February 2002. We have also negotiated
interline agreements with approximately 130 domestic and international airlines serving cities on our route system.
Generally, these agreements include joint ticketing and baggage services and other conveniences designed to expedite
the connecting process.
To balance the seasonal demand changes that occur in the leisure market, we have introduced programs over
the past several years that are designed to capture a larger share of the corporate market, which tends to be less
seasonal than the leisure market. These programs include negotiated fares for large companies that sign contracts
committing to a specified volume of travel, future travel credits for small and medium size businesses contracting
with us, and special discounts for members of various trade and nonprofit associations. As of May 24, 2002, we had
signed contracts with over 8,400 companies.
We also pursue sales opportunities with meeting and convention arrangers and government travel offices. The
primary tools we use to attract this business include personal sales calls, direct mail and telemarketing. In
addition, we offer air/ground vacation packages to many destinations on our route system under contracts with
various tour operators.
Effective February 1, 2001, we commenced EarlyReturns, our own frequent flyer program. As of March 31, 2002,
there are approximately 276,000 EarlyReturns' members. We believe that our frequent flyer program offers some of the
most generous benefits in the industry, including a free round trip after accumulating only 15,000 miles.
Additionally, members who earn 25,000 or more annual credited EarlyReturns flight miles attain Summit Level status,
which includes a 25% mileage bonus on each paid Frontier flight, priority check-in and boarding, complimentary
on-board alcoholic beverages, extra allowance on checked baggage and priority baggage handling, guaranteed
reservations on any Frontier flight when purchasing an unrestricted coach class ticket at least 72 hours prior to
departure, and access to an exclusive Summit customer service toll-free phone number. Members earn one mile for
every mile flown on Frontier plus additional mileage with program partners, which presently include Continental
Airlines, Midwest Express Airlines, Virgin Atlantic Airways, Alamo, Hertz, National and Payless Car Rentals, Kimpton
Group Hotels and Citicorp Diners Club Inc. Effective September 2002, our frequent flyer reciprocal agreement with
Continental Airlines will end. We do not anticipate that the discontinuation of this agreement will have a material
impact on our operations or financial performance. To apply for the EarlyReturns program, customers may visit our
Web site at www.frontierairlines.com, obtain an EarlyReturns enrollment form at any of our airport counters or call
our EarlyReturns Service Center toll-free hotline at 866-26-EARLY, or our reservations at 800-4321-FLY.
Our relationship with travel agencies is important to us and other airlines. In March 2002, several of the
major airlines eliminated travel agency “base” commissions but will continue to pay individually negotiated
incentive commissions to select agents. Effective June 1, 2002, we matched our competitors and have also eliminated
travel agency base commissions. We have implemented marketing strategies designed to maintain and encourage
relationships with travel agencies throughout our route system. We communicate with travel agents through personal
visits by Company executives and sales managers, sales literature mailings, trade shows, telemarketing and
advertising in various travel agent trade publications.
We participate in the four major computer reservation systems used by travel agents to make airline
reservations: Amadeus, Galileo, Worldspan and Sabre. We maintain reservations centers in Denver, Colorado and Las
Cruces, New Mexico, operated by our employees. We opened the Las Cruces call center in August 2000, replacing a
Miami, Florida contractor that had been providing reservation services for us.
Our agreement with Electronic Data Systems enhances our ability to provide Internet bookings through the
EDS SHARES web booking engine. In April 1999, we began offering “Spirit of the Web” fares via our Web site, which
permits customers to make “close in” bookings beginning on Wednesdays for the following weekend. This is intended to
fill seats that might otherwise remain unused. As a percentage of total flown revenue, the percentage of flown
revenue generated from our own Web site (www.frontierairlines.com) increased from 16% during March 2001 to 23%
during March 2002.
Since early 1997, we have made greater use of electronic or “paperless” ticketing, a lower cost alternative
to ticketing passengers on relatively expensive ticket stock, and during fiscal year 2002, we increased the amount
of e-tickets as a percentage of total revenue to approximately 82%, up from 74% from the prior year. E-ticketing
capabilities for our passengers in all four computer reservation systems used by travel agents were enabled during
fiscal year 2000.
Product Pricing
We generally offer our seats at discount fares on flights booked within 21 days of travel, and consider our
service an affordable alternative to the higher fare, larger carriers. Seat inventories on each flight are managed
through a yield management system. We generally provide discounts with five levels of advance purchase
requirements. In contrast to most carriers, our fares usually do not require travelers to include a Saturday
overnight stay in order to take advantage of these discount fares. We also do not charge a premium for one-way fares
and, generally, our fares do not require a round-trip purchase.
Competition
The Airline Deregulation Act of 1978 produced a highly competitive airline industry, freed of certain
government regulations that for 40 years prior to the Deregulation Act had dictated where domestic airlines could
fly and how much they could charge for their services. Since then, we and other smaller carriers have entered
markets long dominated by larger airlines with substantially greater resources, such as United Airlines, American
Airlines, Northwest Airlines and Delta Air Lines.
We compete principally with United Airlines, the dominant carrier at DIA. During the month of March 2002,
United and its commuter affiliates had a total market share at DIA of approximately 62.7%. This gives United a
significant competitive advantage compared to us and other carriers serving DIA. We believe our current market
share, including our codeshare affiliates, at DIA for the month of March 2002 approximated 11.2%. We compete with
United primarily on the basis of fares, fare flexibility and the quality of our customer service.
At the present time, four domestic airports, including New York's LaGuardia Airport and Washington, D.C.'s
National Airport, are regulated by means of “slot” allocations, which represent government authorization to take off
or land at a particular airport within a specified time period. FAA regulations require the use of each slot at
least 80% of the time and provide for forfeiture of slots in certain circumstances. We were originally awarded six
high density exemption slots at LaGuardia, and at the present time, we utilize four of those slots to operate two
daily round-trip flights between Denver and LaGuardia. In addition to slot restrictions, Washington National is
limited by a perimeter rule, which limits flights to and from Washington National to 1,250 miles. In April 2000, the
Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, or AIR 21 was enacted. AIR 21 authorizes
the Department of Transportation (“DOT”) to grant up to 12 slot exemptions beyond the 1,250-mile Washington National
perimeter, provided certain specifications are met. These include that the new service will provide air
transportation with domestic network benefits in areas beyond the perimeter; increase competition by new entrant air
carriers or in multiple markets; not reduce travel options for communities served by small hub airports and medium
hub airports within the perimeter; and not result in meaningfully increased travel delays. We are presently
authorized to operate one daily round-trip flight between Denver and Washington National. We are seeking authority
to operate a second round-trip flight in this market but are unable to predict whether such authority will be
granted.
Aircraft
As of May 24, 2002, we operate 24 Boeing 737 and seven Airbus A319 in all-coach seating configurations. The
age of these aircraft, their passenger capacities and their lease expirations are shown in the following table:
Approximate
Number of
Aircraft No. of Year of Passenger Lease
Model Aircraft Manufacture Seats Expiration
------ -------- ----------- ----- ----------
B-737-200A 7 1978-1983 119 2001-2005
B-737-300 17 1985-1998 136 2002-2006
A319 4 2001-2002 132 owned
A319 3 2001-2002 132 2013-2014
--------------------------------------------------------------------------------------------------------------------
In March 2000, we entered into an agreement, as subsequently amended, to purchase up to 31 new Airbus
aircraft. We have agreed to firm purchases of 17 of these aircraft, and have options to purchase up to an
additional 14 aircraft. As a complement to this purchase order, in April and May 2000 we signed two agreements to
lease 16 new Airbus aircraft for delivery in our fiscal years 2002 through 2005. During the year ended March 31,
2002, we took delivery of the first three purchased aircraft and first three leased aircraft. Based upon these firm
orders, we expect to be operating up to 37 purchased and leased Airbus aircraft, assuming that we will exercise five
additional Airbus options, by approximately the second quarter of calendar year 2006. 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. 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. The A319 and A318 aircraft are
configured with 132 and 114 passenger seats, respectively, with a 33-inch seat pitch. We believe that operating
new Airbus aircraft will result in significant operating cost savings and an improved product for our customers.
Maintenance and Repairs
All of our aircraft maintenance and repairs are accomplished in accordance with our maintenance program
approved by the FAA. We maintain spare or replacement parts primarily in Denver, Colorado. Spare parts vendors
supply us with certain of these parts, and we purchase or lease others from other airline or vendor sources.
Since mid-1996, we have trained, staffed and supervised our own maintenance work force at Denver, Colorado.
We sublease a portion of Continental Airlines' hangar at DIA where we currently perform our own maintenance through
the “D” check level. Other major maintenance, such as major engine repairs, is performed by outside FAA approved
contractors. We also maintain line maintenance facilities at El Paso, Texas and Phoenix, Arizona.
Under our aircraft lease agreements, we pay all expenses relating to the maintenance nd operation of our
aircraft, and we are required to pay monthly maintenance reserve deposits to the lessors based on usage. Maintenance
reserve deposits are applied against the cost of scheduled major maintenance. To the extent not used for major
maintenance during the lease terms, maintenance reserve deposits remain with the aircraft lessors upon redelivery of
the aircraft.
Our monthly completion factors for the years ending March 31, 2002, 2001, and 2000 ranged from 97.3% to
99.8%, from 98.6 to 99.8%, and from 96.7 to 99.7%, respectively. The completion factor is the percentage of our
scheduled flights that were operated by us (i.e., not canceled). Canceled flights were principally as a result of
mechanical problems, and, to a lesser extent, weather. Maintenance management has recently implemented processes
and procedures that will assist in ensuring that our aircraft will continue to be sufficiently reliable over longer
periods of time. These include the implementation of a multi-departmental product team designed to provide the
leadership and direction necessary to maintain and improve fleet costs and performance. The product team consists
of four core departments: engineering, quality control, reliability and production. In addition, base maintenance
has established flowcharts to more efficiently utilize "C" check manpower and parts resources to ensure maintenance
schedules are maintained in a cost effective manner. We also expect that our new Airbus aircraft will improve
aircraft reliability.
In calendar years ended December 31, 1999, 2000 and 2001, our maintenance and engineering department received
the Federal Aviation Administration's highest award, the Diamond Certificate of Excellence, in recognition of 100
percent of our maintenance and engineering employees completing advanced aircraft maintenance training programs. The
Diamond Award recognizes advanced training for aircraft maintenance professionals throughout the airline industry.
We are the first part 121 domestic air carrier to achieve 100 percent participation in this training program by our
maintenance employees.
Fuel
During the years ending March 31, 2002, 2001, and 2000, jet fuel accounted for 14.3%, 18.1% and 15.3%,
respectively, of our operating expenses. We have arrangements with major fuel suppliers for substantial portions of
our fuel requirements, and we believe that these arrangements assure an adequate supply of fuel for current and
anticipated future operations. However, we have not entered into any agreements that fix the price of fuel over any
period of time. Jet fuel costs are subject to wide fluctuations as a result of sudden disruptions in supply beyond
our control. Therefore, we cannot predict the future availability and cost of jet fuel with any degree of
certainty. Fuel prices decreased significantly in fiscal 2002. Our average fuel price per gallon including taxes
and into-plane fees was 87(cent)for the year ended March 31, 2002, with the monthly average price per gallon during the
same period ranging from a low of 72(cent)to a high of $1.01. As of May 20, 2002, the price per gallon was 86(cent). Our
average fuel price per gallon including taxes and into-plane fees was $1.07 for the year ended March 31, 2001, with
the monthly average price per gallon during the same period ranging from a low of 91.3(cent)to a high of $1.24.
Increases in fuel prices or a shortage of supply could have a material adverse effect on our operations and
financial results. Our ability to pass on increased fuel costs to passengers through price increases or fuel
surcharges may be limited, particularly given our affordable fare strategy.
Insurance
We carry insurance limits of $800 million per aircraft per occurrence in property damage and passenger and
third-party liability insurance, and insurance for aircraft loss or damage with deductible amounts as required by
our aircraft lease agreements, and customary coverage for other business insurance. While we believe such insurance
is adequate, there can be no assurance that such coverage will adequately protect us against all losses that we
might sustain. Our aircraft hull and liability coverage scheduled renewal date is June 7, 2002.
Our aviation war risk underwriters issued (seven days notice of cancellation to us) immediately following the
events of September 11th. On September 24, 2001, these underwriters reinstated war risk passenger liability
coverage but limited third party bodily injury and property damage to $50 million per occurrence. A special
surcharge of $1.25 per passenger carried was established as the premium for this coverage. At the same time, the
FAA provided us supplemental third party war risk coverage from the $50 million limit to an estimated $1.6 billion
for us. The premium for this supplemental coverage is $7.50 per flight departure and is now set to expire on June
19, 2002, unless renewed by Congress. Congress has been periodically renewing this coverage since its inception on
September 26, 2001. Absent a similar renewal on June 19, 2002, we expect that the government premiums could be
substantially increased and coverage reduced to a higher deductible amount.
Employees
As of May 24, 2002, we had 2,866 employees, including 2,269 full-time and 597 part-time personnel. Our
employees included 353 pilots, 489 flight attendants, 581 customer service agents, 346 ramp service agents, 291
reservations agents, 358 mechanics and related personnel, and 448 general management and administrative personnel.
We consider our relations with our employees to be good.
We have established a compensation philosophy that we will pay competitive wages compared to other airlines
of similar size and other employers with whom we compete for our labor supply. Employees have the opportunity to
earn above our established market rates through the payment of performance bonuses.
Three of our employee groups have voted for union representation: our pilots voted in November 1998 to be
represented by an independent union, the Frontier Airline Pilots Association, our dispatchers voted in September
1999 to be represented by the Transport Workers Union, and our mechanics voted in July 2001 to be represented by the
International Brotherhood of Teamsters. The first bargaining agreement for the pilots, which has a 5-year term, was
ratified and became effective in May 2000. The first bargaining agreement for the dispatchers, which has a 3-year
term, was ratified and became effective in September 2000. We are in the process of negotiating the bargaining
agreement with the mechanics. At this time we are unable to predict when the negotiations will be completed. In
addition since 1997 we have had union organizing attempts that were defeated by our flight attendants, ramp service
agents, and stock clerks. We have received official notification from the National Mediation Board of a
representation application for flight attendants by the Association of Flight Attendants. An election has been
authorized and the results will be announced in June 2002.
Effective May 2000, we enhanced our 401(k) Retirement Savings Plan by announcing an increased matching
contribution by the Company. Participants may receive a 50% Company match for contributions up to 10% of salary.
This match is discretionary and approved on an annual basis by our Board of Directors. The Board of Directors has
approved the continuation of the match through the plan year ended December 31, 2002. We anticipate that the match
and related vesting schedule of 20% per year may serve to reduce our employee turnover rates.
All new employees are subject to pre-employment drug testing. Those employees who perform safety sensitive
functions are also subject to random drug and alcohol testing, and testing in the event of an accident.
Training, both initial and recurring, is required for many employees. We train our pilots, flight
attendants, ground service personnel, reservations personnel and mechanics. FAA regulations require pilots to be
licensed as commercial pilots, with specific ratings for aircraft to be flown, to be medically certified or
physically fit, and have recent flying experience. Mechanics, quality control inspectors and flight dispatchers
must be licensed and qualified for specific aircraft. Flight attendants must have initial and periodic competency,
fitness training and certification. The FAA approves and monitors our training programs. Management personnel
directly involved in the supervision of flight operations, training, maintenance and aircraft inspection must meet
experience standards prescribed by FAA regulations.
Government Regulation
General. All interstate air carriers are subject to regulation by the DOT the Federal Administration
Administration (“FAA”) and other state and federal government agencies. In general, the amount of regulation
over domestic air carriers in terms of market entry and exit, pricing and inter-carrier agreements has been greatly
reduced subsequent to enactment of the Deregulation Act.
U.S. Department of Transportation. The DOT's jurisdiction extends primarily to the economic aspects of air
transportation, such as certification and fitness, insurance, advertising, computer reservation systems, deceptive
and unfair competitive practices, and consumer protection matters such as on-time performance, denied boarding and
baggage liability. It is also authorized to require reports from air carriers and to investigate and institute
proceedings to enforce its economic regulations and may, in certain circumstances, assess civil penalties, revoke
operating authority and seek criminal sanctions. We hold a Certificate of Public Convenience and Necessity issued
by the DOT that allows us to engage in air transportation. Pursuant to law and DOT regulation, each United States
air carrier must qualify as a United States citizen, which requires that its President and at least two-thirds of
its Board of Directors and other managing officers be comprised of United States citizens; that not more than 25% of
its voting stock may be owned by foreign nationals, and that the carrier not be otherwise subject to foreign
control.
Transportation Security Administration. On November 19, 2001, in response to the terrorist acts of September
11, 2001, the President of the United States signed into law the Aviation and Transportation Security Act (“ATSA”).
The ATSA created the Transportation Security Administration (“TSA”), an agency within the DOT, to oversee, among
other things, aviation and airport security. The ATSA provided for the federalization of airport passenger,
baggage, cargo, mail and employee and vendor screening processes. The ATSA also enhanced background checks,
provided federal air marshals aboard flights, improved flight deck security, and enhanced security for airport
perimeter access. The ATSA also requires that all checked baggage be screened by explosive detection systems by
December 31, 2002.
U.S. Federal Aviation Administration. The FAA's regulatory authority relates primarily to flight operations
and air safety, including aircraft certification and operations, crew licensing and training, maintenance standards,
and aircraft standards. The FAA also oversees aircraft noise regulation, ground facilities, dispatch,
communications, weather observation, and flight and duty time. The FAA has the authority to suspend temporarily or
revoke permanently the authority of an airline or its licensed personnel for failure to comply with FAA regulations
and to assess civil and criminal penalties for such failures. We hold an operating certificate issued by the FAA
pursuant to Part 121 of the Federal Aviation Regulations. We must have and we maintain FAA certificates of
airworthiness for all of our aircraft. Our flight personnel, flight and emergency procedures, aircraft and
maintenance facilities and station operations are subject to periodic inspections and tests by the FAA.
At the present time, four airports, including LaGuardia and Washington National, are regulated by means of
“slot” allocations, which represent government authorization to take off or land at a particular airport within a
specified time period. FAA regulations require the use of each slot at least 80% of the time and provide for
forfeiture of slots in certain circumstances. We currently hold slots to serve the Denver-LaGuardia and
Denver-Washington National market and provide two and one daily round trip flights in those markets, respectively.
Environmental Matters. The Aviation Safety and Noise Abatement Act of 1979, the Airport Noise and Capacity
Act of 1990 and Clean Air Act of 1963 oversee and regulate airlines with respect to aircraft engine noise and
exhaust emissions. We are required to comply with all applicable FAA noise control regulations and with current
exhaust emissions standards. Our fleet is in compliance with the FAA's Stage 3 noise level requirements. In
addition, various elements of our operation and maintenance of our aircraft are subject to monitoring and control by
federal and state agencies overseeing the use and disposal of hazardous materials and storm water discharge. We
believe we are currently in substantial compliance with all material requirements of such agencies.
Railway Labor Act/National Mediation Board. Three of our employee groups have voted for union
representation: our pilots voted in November 1998 to be represented by an independent union, the Frontier Airline
Pilots Association, our dispatchers voted in September 1999 to be represented by the Transport Workers Union, and
our mechanics voted in July 2001 to be represented by the International Brotherhood of Teamsters. The first
bargaining agreement for the pilots, which has a 5-year term, was ratified and became effective in May 2000. The
first bargaining agreement for the dispatchers, which has a 3-year term, was ratified and became effective in
September 2000. We are in the process of negotiating the first bargaining agreement with the mechanics. Our labor
relations with respect to the these unions are now covered under Title II of the Railway Labor Act and are subject
to the jurisdiction of the National Mediation Board.
Miscellaneous. We are also subject to regulation or oversight by other federal and state agencies.
Antitrust laws are enforced by the U.S. Department of Justice and the Federal Trade Commission. All air carriers
are subject to certain provisions of the Communications Act of 1934 because of their extensive use of radio and
other communication facilities, and are required to obtain an aeronautical radio license from the Federal
Communications Commission. The Immigration and Naturalization Service, the U.S. Customs Service and the Animal and
Plant Health Inspection Service of the U.S. Department of Agriculture each have jurisdiction over certain aspects of
our aircraft, passengers, cargo and operations.
Risk Factors
In addition to the other information contained in this Form 10-K, the following risk factors should be
considered carefully in evaluating our business and us.
We may be subject to terrorist attacks or other acts of war.
On September 11, 2001, four commercial aircraft were hijacked by terrorists and crashed into The World Trade
Center in New York City, the Pentagon in Northern Virginia and a field in Pennsylvania. These terrorists' attacks
resulted in an overwhelming loss of life and extensive property damage. Immediately after the attacks, the FAA
closed U.S. airspace, prohibiting all flights to, from and within the United States of America. Airports reopened
on September 13, 2001, except for Washington D.C. Ronald Reagan International Airport, which partially reopened on
October 4, 2001.
The terrorist attacks, subsequent closing of the U.S. airspace, and the fear created among consumers had
significant negative economic impacts on the airline industry. Primary effects were substantial loss of revenue and
flight disruption costs, increased security and insurance costs, increased concerns about the potential for future
terrorist attacks, airport shutdowns and flight cancellations and delays due to additional screening of passengers
and baggage, security breaches and perceived safety threats, and significantly reduced passenger traffic and yields
due to the subsequent drop in demand for air travel.
In recent months, industry-wide demand for air travel has increased, but has not yet returned to levels in
place prior to the September 11 terrorist attacks. Given the magnitude and unprecedented nature of the September 11
attacks, it is uncertain what long-term impact these events will have on the airline industry in general and on us
in particular. Factors that could affect the our operating results and financial condition in the future include
continued weakness in demand for air travel, increased costs due to new security measures and the potential for new
or additional government mandates for security related measures, increased insurance premiums, uncertainty about the
continued availability of war risk coverage or other insurances, and the eventual reinstatement of flights that many
competitors eliminated after September 11.
In addition, although the entire industry is substantially enhancing security equipment and procedures, it is
impossible to guarantee that additional terrorist attacks or other acts of war will not occur. Given the weakened
state of the airline industry, should additional terrorist attacks or acts of war occur, particularly in the near
future, it can be expected that the impact of those attacks on the industry may be similar in nature to but
substantially greater than those resulting from the September 11 terrorist attacks.
Our insurance costs have increased substantially as a result of the September 11th terrorist attacks, and further
increases in insurance costs would harm our business.
Following the September 11 terrorist attacks, aviation insurers dramatically increased airline insurance
premiums and significantly reduced the maximum amount of insurance coverage available to airlines for liability to
persons other than passengers for claims resulting from acts of terrorism, war or similar events to $50 million per
event and in the aggregate. We previously carried $1.5 billion in coverage per event in war risk coverage. In
light of this development, under the Stabilization Act, the government has provided domestic airlines with excess
war risk coverage above $50 million up to an estimated $1.6 billion per event for us.
Aviation insurers could increase their premiums even further in the event of additional terrorist attacks,
hijackings, airline crashes or other events adversely affecting the airline industry. Furthermore, the excess war
risk coverage provided by the government is currently scheduled to be in force until June 19, 2002. While the
government may extend the deadline for when it will stop providing excess war risk coverage, we cannot assure you
that any extension will occur, or 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. Significant increases
in insurance premiums would harm our financial condition and results of operations.
We may not be able to obtain or secure new aircraft financing.
We have agreed to purchase a number of new Airbus A319 and A318 aircraft. We have secured a financing
commitment for the first four purchased aircraft, of which three were delivered to us during the fiscal year ended
March 31, 2002 and the other in May 2002. To complete the purchase of the remaining aircraft, we must secure
aircraft financing, which we may not be able to obtain on terms acceptable to us, if at all. The amount of
financing required will depend on the number of aircraft purchase options we exercise, the required down payment on
mortgaged financed aircraft and the extent of leasing compared to purchasing the aircraft. We are exploring various
financing alternatives, including, but not limited to, domestic and foreign bank financing, a public offering of
equity or debt securities, debt financing such as enhanced equipment trust certificates, leveraged lease
arrangements or government guaranteed financing. There can be no guaranty that additional financing will be
available when required or on acceptable terms. The inability to secure the financing could have a material adverse
effect on us and result in delays in or our inability to take delivery of Airbus aircraft that we have agreed to
purchase, further impairing the Company's strategies for long-term growth.
The airline industry is seasonal and cyclical, resulting in unpredictable liquidity and earnings.
Because the airline industry is seasonal and cyclical, our liquidity and earnings will fluctuate and be
unpredictable. Our operations primarily depend on passenger travel demand and seasonal variations. Our weakest
travel periods are generally during the quarters ending in June and December. The airline industry is also a highly
cyclical business with substantial volatility. Airlines frequently experience short-term cash requirements. These
requirements are caused by seasonal fluctuations in traffic, which often reduce cash during off-peak periods, and
various other factors, including price competition from other airlines, national and international events, fuel
prices, and general economic conditions including inflation. A majority of our customers use our services on a
discretionary basis. Accordingly, our operating and financial results are likely to be negatively impacted by any
downturn in national or regional economic conditions in the United States, and particularly in Colorado. Airlines
require substantial liquidity to continue operating under most conditions. The airline industry also has low
operating profit margins and revenues that vary to a substantially greater degree than do the related costs. Working
capital deficits are not uncommon in the airline industry because airlines typically have no product inventories and
ticket sales to passengers who have not yet flown are reflected as current liabilities. Therefore, a significant
shortfall from expected revenue levels could have a material adverse effect on our operations.
We, like many in the industry, are seeing a negative impact to passenger traffic caused by the slowing
economy as well as the events of September 11. The impact has been more prevalent with our business traffic, which
is higher yield traffic that books closer to the date of departure, than with our leisure customers. Even though
the slowing economy has impacted us, we believe that the larger, more established carriers are being impacted to a
greater extent as the discretionary business travelers who typically fly these carriers are looking for affordable
alternatives similar to the service we provide. The larger carriers may reduce their "close-in" fare structure to
more aggressively compete for this traffic. Aggressive pricing tactics by our major competitors has had and could
also have an impact in the future on the leisure component.
We are in a high fixed cost business, and any unexpected decrease in revenues could harm us.
The airline industry is characterized by low profit margins and high fixed costs primarily for personnel,
fuel, aircraft ownership costs and other rents. The expenses of an aircraft flight do not vary significantly with
the number of passengers carried and, as a result, a relatively small change in the number of passengers or in
pricing could have a disproportionate effect on the airline's operating and financial results. Accordingly, a
shortfall from expected revenue levels can have a material adverse effect on our profitability and liquidity.
We have a significant amount of fixed obligations and we will incur significantly more fixed obligations, which
could increase the risk of failing to meet payment obligations.
As of March 31, 2002, maturities of our long-term debt were $3,226,000 in 2003, $3,426,000 in 2004,
$3,656,000 in 2005, $3,913,000 in 2006, $4,169,000 in 2007 and an aggregate of $51,668,000 for the years
thereafter. In addition to long-term debt, we have a significant amount of other fixed obligations under operating
leases related to our aircraft, airport terminal space, other airport facilities and office space. As of March 31,
2002, future minimum lease payments under noncancelable operating leases were approximately $78,609,000 in 2003,
$74,550,000 in 2004, $69,669,000 in 2005, $55,783,000 in 2006, $69,798,000 in 2007 and an aggregate of $357,895,000
for the years thereafter. As of March 31, 2002, we had commitments of approximately $420,000,000 to purchase 14
additional aircraft over the next four years, including estimated amounts for contractual price escalations and
spare parts to support these aircraft. We will incur additional debt and other fixed obligations as we take
delivery of new aircraft and other equipment and continue to expand into new markets.
Increases in fuel costs affect our operating costs and competitiveness.
We cannot predict our future cost and availability of fuel, which affects our ability to compete. Fuel is
a major component of our operating expenses. Both the cost and availability of fuel are influenced by many economic
and political factors and events occurring in oil producing countries throughout the world, and fuel costs fluctuate
widely. Fuel accounted for 14.3% of our total operating expenses for the year ended March 31, 2002. The
unavailability of adequate fuel supplies could have a material adverse effect on our operations and profitability.
In addition, larger airlines may have a competitive advantage because they pay lower prices for fuel. We intend
generally to follow industry trends by raising fares in response to significant fuel price increases. However, our
ability to pass on increased fuel costs through fare increases may be limited by economic and competitive conditions.
We are subject to strict federal regulations, and compliance with federal regulations increases our costs and
decreases our revenues.
Airlines are subject to extensive regulatory and legal requirements that involve significant compliance
costs. In the last several years, Congress has passed laws, and the DOT and FAA have issued regulations relating to
the operation of airlines that have required significant expenditures. For example, the President signed into law
the Aviation and Transportation Security Act in November of 2001. This law federalizes substantially all aspects of
civil aviation security and requires, among other things, the implementation of certain security measures by
airlines and airports, including a requirement that all passenger baggage be screened for explosives by December 31,
2002. Funding for airline and airport security under the law is primarily provided by a new $2.50 per enplanement
ticket tax effective February 1, 2002, with authority granted to the TSA to impose additional fees on air carriers
if necessary. In addition, the acquisition, installation and operation of the required baggage screening systems by
airports will result in capital expenses and costs by those airports that will likely be passed on to the airlines
through increased use and landing fees. It is impossible to determine at this time exactly what the cost impact
will be of the increased security measures imposed by the ATSA.
In addition, although we have obtained the necessary authority from the DOT and the FAA to conduct flight
operations and are currently obtaining such authority from the FAA with respect to our Airbus aircraft, we must
maintain this authority by our continued compliance with applicable statutes, rules, and regulations pertaining to
the airline industry, including any new rules and regulations that may be adopted in the future. We believe that
the FAA strictly scrutinizes smaller airlines like ours, which makes us susceptible to regulatory demands that can
negatively impact our operations. We may not be able to continue to comply with all present and future rules and
regulations. In addition, we cannot predict the costs of compliance with these regulations and the effect of
compliance on our profitability, although these costs may be material. We also expect substantial FAA scrutiny as
we transition from our Boeing fleet to an all Airbus fleet. In 1996 a relatively new domestic airline sustained an
accident in which one of its aircraft was destroyed and all persons on board were fatally injured. Shortly
thereafter, that airline agreed at the FAA's request to cease all of its flight operations. Although the FAA, after
an intensive and lengthy investigation, allowed that airline to resume its operations, should we experience a
similar accident, it is probable that there would be a material adverse effect on our business and results of
operations. On February 17, 2002, the ATSA imposed a base security infrastruture fee on commercial operators in an
amount equal to the calendar year ended 2000 airport security expenses.
We experience high costs at DIA, which may impact our results of operations.
We operate our hub of flight operations from DIA where we experience high costs. DIA opened in March 1995,
and Stapleton International Airport was closed. Financed through revenue bonds, DIA depends on landing fees, gate
rentals, income from airlines, the traveling public, and other fees to generate income to service its debt and to
support its operations. Our cost of operations at DIA will vary as traffic increases or diminishes at that
airport. We believe that our operating costs at DIA substantially exceed those that other airlines incur at most
hub airports in other cities, which decreases our ability to compete with other airlines with lower costs at their
hub airports.
We have a limited number of routes, which limits our market share and ability to compete.
Because of our relatively small fleet size and limited number of routes, we are at a competitive
disadvantage compared to other airlines, such as United Airlines, that can spread their operating costs across more
equipment and routes and retain connecting traffic (and revenue) within their much more extensive route networks.
We face intense competition and market dominance by United Airlines.
The airline industry is highly competitive, primarily due to the effects of the Deregulation Act, which has
substantially eliminated government authority to regulate domestic routes and fares and has increased the ability of
airlines to compete with respect to flight frequencies and fares. We compete with United Airlines in our hub in
Denver, and we anticipate that we will compete principally with United Airlines in our future market entries.
United Airlines and its commuter affiliates are the dominant carriers out of DIA, accounting for approximately 62.7%
of all passenger boardings for the month of March 2002. Fare wars, "capacity dumping" in which a competitor places
additional aircraft on selected routes, and other activities could adversely affect us. The future activities of
United Airlines and other carriers may have a material adverse effect on our revenues and results of operations.
Most of our current and potential competitors have significantly greater financial resources, larger route networks,
and superior market identity.
We could lose airport and gate access thereby decreasing our competitiveness.
We could encounter barriers to airport slot or airport gate access that would deny or limit our access to
the airports that we currently use or intend to use in the future. A slot is an authorization to schedule a takeoff
or landing at the designated airport within a specific time window. The FAA must be advised of all slot transfers
and can disallow any such transfer. In the United States, the FAA currently regulates slot allocations at O'Hare
International Airport in Chicago, JFK and LaGuardia Airport in New York City, and Ronald Reagan National Airport in
Washington D.C. We use LaGuardia Airport and Ronald Reagan National Airport in our current operations. The FAA's
slot regulations require the use of each slot at least 80% of the time, measured on a monthly basis. Failure to
comply with these regulations may result in a recall of the slot by the FAA. In addition, the slot regulations
permit the FAA to withdraw the slots at any time without compensation to meet the DOT's operational needs. Our
ability to increase slots at the regulated airports is affected by the number of slots available for takeoffs and
landings.
In addition, the number of gates available to us at some airports may be limited to the restricted capacity
or by disruptions caused by major renovation projects. Available gates may not provide for the best overall service
to our customers, and may prevent us from scheduling our flights during peak or opportune times. Any failure to
obtain gate access at the airports that we serve could adversely affect our operations. These barriers may in turn
materially adversely affect our business and competitiveness.
Our transition to an Airbus fleet creates risks.
We currently operate 24 Boeing aircraft and seven Airbus aircraft. Our long-term strategy is to transition
our fleet so that we are operating only Airbus aircraft by the second calendar quarter of 2006. One of the key
elements of this strategy is to produce cost savings because crew training is standardized for aircraft of a common
type, maintenance issues are simplified, spare parts inventory is reduced, and scheduling is more efficient.
However, issues will be raised during our transition period with respect to providing crews with sufficient flight
time that may be difficult to address, especially as the number of Boeing aircraft we operate are reduced to small
numbers. We may be faced with retiring these Boeing aircraft in advance of the end of the lease agreements in
place of these aircraft, thus resulting in significant early-termination costs.
In addition, once we are operating only Airbus aircraft, we will be dependent on a single manufacturer for
future aircraft acquisitions or deliveries, spare parts or warranty service. Should Airbus be unable to perform its
obligations under existing purchase agreements, or be unable to provide future aircraft or services, whether by
fire, strike or other event that affects its ability to fulfill contractual obligations or manufacture aircraft or
spare parts, we would have to find another supplier for our aircraft. Currently, Boeing is the only other
manufacturer from whom we could purchase or lease alternate aircraft. If we were forced to acquire Boeing aircraft,
we would need to address fleet transition issues, including substantial costs associated with retraining our
employees, acquiring new spare parts, and replacing our manuals. In addition, the fleet efficiency benefits
described above may no longer be available.
Finally, once we are operating only Airbus aircraft we will be particularly vulnerable to any problems that
might be associated with these aircraft. Our business would be significantly disrupted if a FAA airworthiness
directive or service bulletin were issued, resulting in the grounding of all Airbus aircraft of the type we operate
while the defect is being corrected. Our business could also be harmed if the public avoids flying Airbus aircraft
due to an adverse perception about the aircraft's safety or dependability, whether real or perceived, in the event
of an accident or other incident involving an Airbus aircraft of the type we fly.
Our maintenance expenses may be higher than we anticipate.
We may incur higher than anticipated maintenance expenses. We bear all routine and major maintenance on
our owned aircraft. Additionally, under our leased aircraft lease agreements, we are required to bear all routine
and major maintenance expenses. Maintenance expenses comprise a significant portion of our operating expenses. In
addition, we are required periodically to take aircraft out of service for heavy maintenance checks, which can
adversely increase costs and reduce revenue. We also may be required to comply with regulations and airworthiness
directives the FAA issues, the cost of which our aircraft lessors may only partially assume depending upon the
magnitude of the expense. Although we believe that our purchased and leased aircraft are currently in compliance
with all FAA issued airworthiness directives, there is a high probability that additional airworthiness directives
will be required in the future necessitating additional expense.
Our landing fees may increase because of local noise abatement procedures.
Compliance with local noise abatement procedures may lead to increased landing fees. As a result of
litigation and pressure from airport area residents, airport operators have taken local actions over the years to
reduce aircraft noise. These actions have included regulations requiring aircraft to meet prescribed decibel limits
by designated dates, curfews during night time hours, restrictions on frequency of aircraft operations, and various
operational procedures for noise abatement. The Airport Noise and Capacity Act of 1990 recognized the right of
airport operators with special noise problems to implement local noise abatement procedures as long as the
procedures do not interfere unreasonably with the interstate and foreign commerce of the national air transportation
system.
An agreement between the City and County of Denver and another county adjacent to Denver specifies maximum
aircraft noise levels at designated monitoring points in the vicinity of DIA with significant payments payable by
Denver to the other county for each substantiated noise violation under the agreement. DIA has incurred such
payment obligations and likely will incur such obligations in the future, which it will pass on to us and other air
carriers serving DIA by increasing landing fees. Additionally, noise regulations could be enacted in the future that
would increase our expenses and have a material adverse effect on our operations.
We have a limited number of aircraft, and any unexpected loss of any aircraft could disrupt and harm our operations.
Because we have a limited number of aircraft, if any of our aircraft unexpectedly are taken out of service,
our operations may be disrupted. We can schedule all of our aircraft for regular passenger service and only
maintain limited spare aircraft capability should one or more aircraft be removed from scheduled service for
unplanned maintenance repairs or for other reasons. The unplanned loss of use of one or more of our aircraft for a
significant period of time could have a material adverse effect on our operations and operating results. A
replacement aircraft may not be available or we may not be able to lease or purchase additional aircraft on
satisfactory terms or when needed. The market for leased or purchased aircraft fluctuates based on worldwide
economic factors that we cannot control.
Our labor costs may increase.
We believe we operate with lower personnel costs than many larger, established airlines, principally due to
lower base salaries and greater flexibility in the utilization of personnel, however, these costs may increase. We
may not be able to continue to realize these advantages over other air carriers for an extended period of time.
Three of our employee groups have voted for union representation: our pilots voted in November 1998 to be
represented by an independent union, the Frontier Airline Pilots Association, our dispatchers voted in September
1999 to be represented by the Transport Workers Union, and our mechanics voted in July 2001 to be represented by the
International Brotherhood of Teamsters. The first bargaining agreement for the pilots, which has a 5-year term, was
ratified and became effective in May 2000. The first bargaining agreement for the dispatchers, which has a 3-year
term, was ratified and became effective in September 2000. We are in the process of negotiating the first
bargaining agreement with the Mechanics. At this time we are unable to predict when the negotiations will be
completed. In addition, since 1997 we have had union organizing attempts that were defeated by our flight
attendants, ramp service agents, and stock clerks. We recently received a letter signed by certain of our flight
attendants indicating that they are pursuing union representation. We have received official notification from the
National Mediation Board of a representation application for flight attendants by the Association of Flight
Attendants. An election has been authorized and the results will be announced in June 2002. The collective
bargaining agreement we have entered into with our pilots increased our labor and benefit costs effective May 2000,
and additional unionization of our employees could increase our overall costs.
We have not paid cash dividends and do not expect to pay any in the foreseeable future.
We have never declared or paid cash dividends on our common stock. We currently intend to retain any
future earnings to fund operations and to continue development of our business and do not expect to pay any cash
dividends on our common stock in the foreseeable future.
Item 2: Properties
Aircraft
--------
As of May 24, 2002, we operate 24 Boeing 737 and seven Airbus A319 in all-coach seating configurations.
The age of these aircraft, their passenger capacities and their lease expirations are shown in the following table:
Approximate
Number of
Aircraft No. of Year Passenger Lease
Model Aircraft Manufacture Seats Expiration
------ -------- ----------- --------- ----------
B-737-200A 7 1978-1983 119 2001-2005
B-737-300 17 1985-1998 136 2002-2006
A319 4 2001-2002 132 owned
A319 3 2001-2002 132 2013-2014
--------------------------------------------------------------------------------------------------------------------
Facilities
----------
In January 2001, we moved our general and administrative offices to a new headquarters facility near DIA,
where we lease approximately 70,000 square feet of space for a lease term of 12 years at an average annual rental of
approximately $965,000 plus operating and maintenance expenses.
The Denver reservations facility relocated in July 2001 to a 16,000 square foot facility, also in Denver,
which we have leased for a 10-year lease term at an average annual rental of approximately $140,000 plus operating
and maintenance expenses. In August 2000, we established a second reservations center facility in Las Cruces, New
Mexico. This facility is approximately 12,000 square feet and is leased for a term of 122 months at an average
annual rental of approximately $129,000 plus operating and maintenance expenses.
We have entered into an airport lease and facilities agreement expiring in 2010 with the City and County of
Denver at DIA for ticket counter space, nine gates and associated operations at a current annual rental rate of
approximately $5,717,000 for these facilities. We also sublease a portion of Continental Airlines' hangar at DIA
until January 1, 2004 for an annual rental of approximately $1,234,000.
Each of our airport locations requires leased space associated with gate operations, ticketing and baggage
operations. We either lease the ticket counters, gates and airport office facilities at each of the airports we
serve from the appropriate airport authority or sublease them from other airlines. Total annual rent expense for
these facilities, excluding DIA is approximately $6,245,000 based on rents paid for the month of March 2002.
Additionally, we lease maintenance facilities in El Paso, Texas and Phoenix, Arizona at a current annual rental of
approximately $201,000 for these facilities
Item 3: Legal Proceedings
From time to time, we are engaged in routine litigation incidental to our business. We believe there are no
legal proceedings pending in which we are a party or of which any of our property is the subject that are not
adequately covered by insurance maintained by us, or which, if adversely decided, would have a material adverse
affect upon our business or financial condition.
Item 4: Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, we did not submit any matters to a vote
of our security holders through the solicitation of proxies or otherwise.
PART II
Item 5: Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock
The following table shows the range of high and low bid prices per share for our common stock for the periods
indicated and as reported by Nasdaq through May 24, 2002. Market quotations listed here represent prices between
dealers and do not reflect retail mark-ups, markdowns or commissions. As of May 24, 2002, there were 881 holders of
record of our common stock.
Price Range of
Common Stock
--------------
Quarter Ended High Low
------------- ---- ---
June 30, 2000 $ 10.34 $ 7.49
September 30, 2000 12.96 9.71
December 31, 2000 20.63 12.92
March 31, 2001 25.50 9.94
June 30, 2001 16.71 10.31
September 30, 2001 15.78 6.77
December 31, 2001 17.40 8.00
March 31, 2002 23.75 17.02
June 30, 2001 (through May 24, 2001) 17.95 14.82
Recent Sales of Securities
During the period April 1, 2001 through May 24, 2002, holders of warrants to purchase our common stock
exercised their warrants and we issued common stock as described below:
Warrant
Number of Exercise
Warrant Holder Shares Issued Price Dates of Exercise
-------------- ------------- ----- -----------------
Private placement warrant holder 525,000 $2.50 December 13, 2001
Dividend Policy
We have not declared or paid cash dividends on our common stock. We currently intend to retain any future
earnings to fund operations and the continued development of our business, and, thus, do not expect to pay any cash
dividends on our common stock in the foreseeable future. Future cash dividends, if any, will be determined by our
Board of Directors and will be based upon our earnings, capital requirements, financial condition and other factors
deemed relevant by the Board of Directors. On March 5, 2001, we paid a fifty percent stock dividend to shareholders
of record of common stock on February 19, 2001.
Rights Dividend Distribution
In February 1997, our Board of Directors declared a dividend distribution of one right (a “Right”) for each
outstanding share of our common stock to shareholders of record at the close of business on March 15, 1997. Except
as described below, each Right, when exercisable, entitles the registered holder to purchase from us one share of
common stock at a purchase price of $65.00 per share (the "Purchase Price"), subject to adjustment. The Rights
expire at the close of business on February 20, 2007, unless we redeem or exchange them earlier as described below.
The description and terms of the Rights are set forth in a Rights Agreement, as amended (as so amended, the "Rights
Agreement"). As a result of the fifty percent stock dividend we paid on March 5, 2001, there are currently 0.67
Rights associated with each outstanding share of common stock.
The Rights are exercisable upon the earlier of (i) 10 days following a public announcement that a person or
group of affiliated or associated persons other than us, our subsidiaries or any person receiving newly-issued
shares of common stock directly from us or indirectly via an underwriter in connection with a public offering by us
(an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of common stock (the “Stock Acquisition Date”), or (ii) 10 business days following the
commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or
more of such outstanding shares of common stock.
If any person becomes an Acquiring Person other than pursuant to a Qualifying Offer (as defined below), each
holder of a Right has the right to receive, upon exercise, common stock (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times the exercise price of the Right.
Notwithstanding any of the foregoing, all Rights that are beneficially owned by any Acquiring Person will be null
and void. However, Rights are not exercisable in any event until such time as the Rights are no longer redeemable
by us as set forth below.
A “Qualifying Offer” means a tender offer or exchange offer for, or merger proposal involving, all
outstanding shares of common stock at a price and on terms determined by at least a majority of the Board of
Directors who are not our officers or employees and who are not related to the Person making such offer, to be fair
to and in the best interests of the Company and our shareholders.
If after the Stock Acquisition Date we are acquired in a merger or other business combination transaction in
which the common stock is changed or exchanged or in which we are not the surviving corporation (other than a merger
that follows a Qualifying Offer) or 50% or more of the Company's assets or earning power is sold or transferred,
each holder of a Right shall have the right to receive, upon exercise, common stock of the acquiring company having
a value equal to two times the exercise price of the Right.
The Purchase Price payable, and the number of shares of common stock or other securities or property
issuable, upon exercise of the Right, and the number of Rights associated with each share of common stock, are all
subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the common stock, (ii) if holders of the common stock are granted
certain rights or warrants to subscribe for common stock or convertible securities at less than the current market
price of the common stock, or (iii) upon the distribution to holders of the common stock of evidences of
indebtedness or assets or of subscription rights or warrants.
At any time until ten days following the Stock Acquisition Date, we may redeem the Rights in whole at a price
of $.01 per Right. Upon the action of the Board of Directors ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the $.01 redemption price.
While the distribution, if any, of the Rights will not be taxable to shareholders or to us, shareholders may,
depending upon the circumstances, recognize taxable income if the Rights become exercisable for common stock (or
other consideration) of the Company or for common stock of the acquiring company.
Item 6: Selected Financial Data
The following selected financial and operating data as of and for each of the years ended March 31, 2002,
2001, 2000, 1999, and 1998 are derived from our audited financial statements. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the
financial statements and the related notes thereto included elsewhere in this report.
Year Ended March 31,
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(Amounts in thousands except per share amounts)
Statement of Operations Data:
Total operating revenues $ 445,075 $ 472,876 $ 329,820 $ 220,608 $ 147,142
Total operating expenses 428,689 392,155 290,511 195,928 165,697
Operating income (loss) 16,386 80,721 39,309 24,680 (18,554)
Income (loss) before income tax expense
(benefit) and cumulative effective change
in accounting 24,832 88,332 43,415 25,086 (17,746)
Income tax expense (benefit) 8,282 33,465 16,954 (5,480) -
Income (loss) before cumulative effect of
change in accounting 16,550 54,868 26,460 30,566 (17,746)
Cumulative effect of change of method of
change in accounting - - 549 - -
Net income (loss) 16,550 54,868 27,010 30,566 (17,746)
Income (loss) per share before cumulative
effect of a change in accounting:
Basic 0.58 2.02 1.02 1.43 (1.30)
Diluted 0.56 1.90 0.93 1.32 (1.30)
Net income (loss) per share:
Basic 0.58 2.02 1.04 1.43 (1.30)
Diluted 0.56 1.90 0.95 1.32 (1.30)
Balance Sheet Data:
Cash and cash equivalents $ 87,555 $ 109,251 $ 67,851 $ 47,289 $ 3,641
Current assets 192,048 199,794 140,361 94,209 33,999
Total assets 413,685 295,317 187,546 119,620 50,598
Current liabilities 152,064 136,159 98,475 68,721 50,324
Long-term debt 66,898 204 329 435 3,566
Total liabilities 244,552 150,538 106,501 75,230 56,272
Stockholders' equity (deficit) 169,133 144,779 81,045 44,391 (5,673)
Working capital (deficit) 39,984 63,635 41,886 25,488 (16,325)
Year Ended March 31,
2002 2001 2000 1999 1998
-----------------------------------------------------------------------
Selected Operating Data:
Passenger revenue (000s) (2) $ 435,946 $ 462,609 $ 320,850 $ 214,311 $ 142,018
Revenue passengers carried (000s) 3,069 3,017 2,284 1,664 1,356
Revenue passenger miles (RPMs) (000s) (3) 2,756,965 2,773,833 2,104,460 1,506,597 1,119,378
Available seat miles (ASMs) (000s) (4) 4,592,298 4,260,461 3,559,595 2,537,503 1,996,185
Passenger load factor (5) 60.0% 65.1% 59.1% 59.4% 56.1%
Break-even load factor (1) (6) 57.6% 52.7% 51.1% 52.4% 63.1%
Block hours (7) 92,418 83,742 71,276 52,789 42,767
Departures 41,736 38,556 33,284 25,778 22,257
Average seats per departure 132 132 129 125 124
Average stage length 834 837 829 787 723
Average length of haul 898 919 921 905 826
Average daily block hour utilization (8) 9.1 9.4 9.9 9.6 9.5
Yield per RPM (cents) (9) 15.78 16.66 15.23 14.19 12.68
Total yield per RPM (cents) (10) 16.14 17.05 15.67 14.64 13.14
Yield per ASM (cents) (11) 9.47 10.85 9.00 8.42 7.11
Total yield per ASM (cents) (12) 9.69 11.10 9.27 8.69 7.37
Expense per ASM (cents) (1) 9.33 9.20 8.16 7.72 8.30
Expense per ASM excluding fuel (cents) (1) 8.00 7.54 6.91 6.82 7.13
Passenger revenue per block hour $ 4,717 $ 5,524 $ 4,502 $ 4,060 $ 3,321
Average fare (13) $ 132 $ 146 $ 134 $ 123 $ 100
Average Aircraft in service 27.8 24.5 19.7 15.0 12.3
Aircraft in service at end of year 30.0 25.0 23.0 17.0 14.0
Average age of aircraft at end of year 10.6 11.4 10.5 14.7 16.2
EBITDAR (000s) (14) $ 100,403 $ 147,179 $ 90,583 $ 58,848 $ 7,437
EBITDAR as a % of revenue 22.6% 31.1% 27.5% 26.7% 5.1%
(1) The write-down of the carrying values of the Boeing 737-200 aircraft parts totaling $1,512,000, the
stabilization act compensation of $12,703,000, and the unusual item for the early lease termination of
$4,914,000 , during the year ended March 31, 2002, have been excluded from the calculation of the break-even
load factor, expense per ASM and expense per ASM excluding fuel.
(2) "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.
(3) "Revenue passenger miles," or RPMs, are determined by multiplying the number of fare-paying passengers carried
by the distance flown.
(4) "Available seat miles," or ASMs, are determined by multiplying the number of seats available for passengers by
the number of miles flown.
(5) "Passenger load factor" is determined by dividing revenue passenger miles by available seat miles.
(6) "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.
(7) "Block hours" represent the time between aircraft gate departure and aircraft gate arrival.
(8) "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.
(9) "Yield per RPM" is determined by dividing passenger revenues (excluding charter revenue) by revenue passenger
miles.
(10) "Total yield per RPM" is determined by dividing total revenues by revenue passenger miles.
(11) "Yield per ASM" is determined by dividing passenger revenues (excluding charter revenue) by available seat
miles.
(12) "Total yield per ASM" is determined by dividing passenger revenues by available seat miles.
(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.
(14) "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. Our calculation of EBITDAR may not be comparable to similarly titled
measures reported by other companies.
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
Selected Operating Statistics
The following table provides our operating revenues and expenses expressed as cents per total available seat
miles ("ASM") and as a percentage of total operating revenues, as rounded, for the years ended March 31, 2002, 2001,
and 2000.
2002 2001 2000
---------------------------------------------------------------------------------
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- -------
Revenues:
Passenger 9.49 97.9% 10.86 97.8% 9.02 97.3%
Cargo 0.14 1.5% 0.18 1.6% 0.19 2.1%
Other 0.05 0.6% 0.06 0.6% 0.06 0.6%
---------------------------------------------------------------------------------
Total revenues 9.68 100.0% 11.10 100.0% 9.27 100.0%
Operating expenses:
Flight operations 4.16 42.9% 4.21 37.9% 3.53 38.1%
Aircraft and traffic servicing 1.53 15.8% 1.42 12.8% 1.38 14.8%
Maintenance 1.53 15.8% 1.54 13.9% 1.41 15.2%
Promotion and sales 1.29 13.4% 1.31 11.8% 1.29 14.0%
General and administrative 0.57 5.9% 0.59 5.3% 0.46 5.0%
Depreciation and amortization 0.25 2.6% 0.13 1.2% 0.10 1.0%
----------------------------------------------------------------------------------
Total operating expenses 9.33 96.4% 9.20 82.9% 8.16 88.1%
===================================================================================
Results of Operations - Year Ended March 31, 2002 Compared to Year Ended March 31, 2001
General
We are a scheduled airline based in Denver, Colorado. We were organized in February 1994 and we began flight
operations in July 1994 with two leased Boeing 737-200 aircraft. We have since expanded our fleet to 27 leased
aircraft and four purchased Airbus A319 aircraft, comprised of seven Boeing 737-200s, 17 Boeing 737-300s, and seven
Airbus A319s
Beginning in May 2001, we began a fleet replacement plan by which we will replace our Boeing aircraft with
new purchased and leased Airbus jet aircraft, a transition we expect to complete by approximately the second quarter
of calendar year 2006, assuming early lease returns of five of our Boeing aircraft. We advanced the return of one
leased Boeing 737-300 aircraft to its owner from April 2002 to September 2001 and two leased Boeing 737-200 aircraft
from September and November 2004 to November 2002 and January 2003.
During the fiscal year ended March 31, 2002 we added Houston, on May 16, 2001, Reno/Lake Tahoe, Nevada and
Austin, Texas, on October 1, 2001, New Orleans, Louisiana on February 1, 2002, Sacramento, California, and Fort
Lauderdale, Florida on February 26, 2002.
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.
Impact of the September 11, 2001 Terrorist Attacks and Our Response
Among the effects experienced by us from the September 11, 2001 terrorist attacks have been significant flight
disruption costs caused by the FAA's temporary grounding of the U.S. airline industry's fleet, significantly
increased security, insurance and other costs, significantly higher ticket refunds and significantly reduced load
factors. These and other associated factors affected our results of operations particularly during the last four
months of 2001.
Immediately following the terrorist attacks on September 11, 2001, we took several steps to reduce our
operating expenses. We reduced our capacity by approximately 20%. We also reduced our costs by offering voluntary
leaves of absences and early retirements, and by furloughs, totaling approximately 405 employees; by reducing
salaries for our officers by 20 to 40%, reducing the salaries of 650 other employees by three to 15%; by eliminating
food service provided on our flights; by deferring nonessential capital spending and significantly reducing all
nonessential operating expenses. We also have generally experienced lower fuel prices since the end of September
2001. These cost savings were offset by increased security costs and higher insurance premiums. We have not
altered the Airbus delivery schedule and our intent is to continue with the fleet transition plan in place prior to
September 11, 2001.
As of March 31, 2002, we have fully restored service to our pre-September 11, 2001 levels as well as
increased capacity by approximately 11.3%. As of May 24, 2002, we had recalled approximately 390 employees as a
result of the increases in capacity, that were phased in beginning November 15, 2001, additional personnel
requirements for enhanced security measures, and maintenance personnel to provide heavy maintenance checks on the
additional aircraft that will fly the increased schedule. In mid December 2001, we restored essentially all of our
pre September 11, 2001 food service. During the three months ended December 31, 2001, we reinstated salaries for
all employees except pilots, director level employees and officers. Pilots, officers and director level employees'
salaries were reinstated to their pre-September 11, 2001 levels effective January 1, 2002.
After the events of September 11, 2001, many domestic airlines began working with the FAA to increase the
security of aircraft flight decks. A variety of security enhancements were introduced, ranging from Level 1 through
Level 4. Level 4 has the most comprehensive enhancements. We also began exploring additional security measures
and, working with our aircraft manufacturers and the FAA, developed enhanced flight deck door security measures that
are consistent with Level 2. All of our Boeing aircraft are currently Level 2 compliant. Our seven Airbus aircraft
are at least Level 2 compliant and, pending FAA approvals, will be Level 4 compliant by approximately April 2003.
The federal government has established funds from which participating airlines are reimbursed to some extent, not
yet determined, for the additional flight security enhancements. We intend to participate in that reimbursement
program.
After September 11, 2001, and with the subsequent decline in the flying public's confidence in air travel
safety and security, we implemented several marketing programs designed to assist in restoring consumer confidence
in air travel. These initiatives have helped us experience a slow but steady increase in load factors and booking
levels. Some of these initiatives were as follows:
o Marketing programs that used direct mail, Internet fare sales, travel agent promotions and enhanced frequent
flyer program benefits;
o A community relations outreach program called Seats for Sharing that offered complimentary seats to eligible
non-profit organizations, including schools and religious organizations;
o Communication programs that included letters to various school administrators and employee-led visits to
local schools, as well as increased unpaid media efforts designed to educate and inform the public on increased
security;
o An employee campaign that increased employee reduced rate "buddy" passes, designed to enable employees to
encourage their friends and family members to fly again.
As a result of the September 11 terrorist attacks, expansion of our operations, transition costs associated
with our fleet replacement plan during the year ended March 31, 2002, the slowing economy, and hail storms that
damaged five of our aircraft earlier in the year, we do not believe our results of operations for the year ended
March 31, 2002 are indicative of future operating results or comparable to the year ended March 31, 2001.
Results of Operations
We had net income of $16,550,000 or 56(cent)per diluted share for the year ended March 31, 2002 as compared
to net income of $54,868,000 or $1.90 per diluted share for the year ended March 31, 2001, a decrease of $38,318,000
or 69.9%. On September 11, 2001, the FAA temporarily suspended all commercial airline flights as a result of
the terrorist attacks on the United States. As a result of this suspension, we cancelled 407 scheduled flights until
we resumed operations on September 14, 2001. After we resumed operations, we cancelled 303 additional scheduled
flights through September 30, 2001 as a result of diminished consumer demand. During the year ended March 31, 2002,
our daily average aircraft block hour utilization decreased to 9.1 from 9.4 during the prior comparable period ended
March 31, 2001, as we reduced approximately 18.2% of departures originally scheduled during that period. Due to
high fixed costs, we continued to incur a significant portion of our normal operating expenses during the period
from September 11, 2001 through December 31, 2001 and incurred operating losses.
As a result, we recognized $12,703,000 of the federal grant we received under the Act, which compensates for
direct and incremental losses incurred by air carriers from September 11, 2001 through the end of calendar year
2001. Our fiscal year net income included an after-tax gain of $7,749,000 from the Federal grant program; a $922,000
write-down, net of taxes, for the carrying value of spare parts that support our Boeing 737-200A aircraft and an
unusual charge of $2,998,000, net of taxes, for the early return of two Boeing 737-200 aircraft. Without these
unusual items, we would have reported net income of $12,721,000, or $0.43 per diluted common share.
During the year ended March 31, 2002, we took delivery of our first six Airbus aircraft. Because this was a
new aircraft type for us, we were required by the FAA to demonstrate that our crews were proficient in flying Airbus
aircraft and that we were capable of properly maintaining the aircraft and related maintenance records before we
placed these aircraft in scheduled passenger service. This process took longer than we originally had anticipated
and, as a result, we were required to cancel scheduled flights that the first aircraft was scheduled to perform. We
believe that this delay in receiving necessary FAA approval, adversely affected our passenger revenues and our cost
per ASM during the year ended March 31, 2002.
Our costs per ASM for the year ended March 31, 2002 was 9.33(cent)and for the year ended March 31, 2001 was
9.20(cent), or an increase of .13(cent) or 1.4%. Costs per ASM excluding fuel for the years ended March 31, 2002 and
2001 were 8.00(cent)and 7.54(cent), respectively, or an increase of .46(cent)or 6.1%. Our cost per ASM increased
during the year ended March 31, 2002 over the prior comparable year principally because of the decreased aircraft
utilization and shorter stage lengths during that period. These expenses were impacted by the terrorist attacks and
the hail damage to five of our aircraft, or approximately 20% of our fleet, during the year ended March 31, 2002.
During the year ended March 31, 2002, we wrote down the carrying value of spare parts that support the Boeing 737-200
aircraft by $1,512,000 as a result of diminished demand for that aircraft type, resulting in an increase of .03(cent)
per ASM for the period. We incurred short-term lease expenses for substitute aircraft to minimize the number of flight
cancellations while the hail damage to our aircraft was being repaired, additional maintenance expenses for the repair
of the hail damage, and interrupted trip expenses as a result of the number of flight cancellations related to the
aircraft out of service for repair. During April 2001, the Denver area also experienced an unusual blizzard, which
caused flight cancellations as well as expenses associated with deicing our aircraft. We estimate that the total
adverse impact on our cost per ASM associated with these unusual weather conditions was .04(cent), or approximately
$1,893,000, for the year ended March 31, 2002. During the year ended March 31, 2002, we incurred approximately
$4,511,000 in transition expenses associated with the induction of the Airbus aircraft, which had an adverse effect
on our CASM of approximately .10(cent)per ASM. These include crew salaries; travel, training and induction team
expenses; and depreciation expense. An increase in pilots' salaries effective in May 2001 also contributed to the
increase in cost per ASM during the year ended March 31, 2002. Additionally, due to the flight cancellations as a
result of the September 11 terrorist attacks and these weather conditions, our ASMs were less than we had planned,
which caused our fixed costs to be spread over fewer ASMs and, we believe, distorted our cost per ASM for the 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 year ended March
31, 2002, our break-even load factor was 57.6% compared to our achieved passenger load factor of 60.0%. For the
year ended March 31, 2001, our break-even load factor was 52.7% compared to the passenger load factor achieved of
65.1%. Our break-even load factor increased for the year ended March 31, 2002 from the prior comparable period
largely as a result of a decrease in our average fare to $132 during the year ended March 31, 2002 from $146 during
the year ended March 31, 2001, compounded by an increase in our expense per ASM to 9.33(cent)for the year ended
March 31, 2002 from 9.20(cent)for the year ended March 31, 2001.
Revenues
Fare pricing policies have 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.
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.
Effective February 17, 2002, the DOT began to provide security services through the newly established
Transportation Security Agency and assumed many of the contracts and overseeing those security vendors that we and
other carriers use to provide airport security services. Additionally, the DOT will reimburse us, as well as all
other air carriers, for certain security services provided by our own personnel. In order to be able to provide and
fund these security services, the DOT has imposed a $2.50 security service fee per passenger segment flown, not to
exceed $5.00 for one-way travel or $10.00 for a round trip, on tickets purchased on and after February 1, 2002. We
are unable to predict the effect that these additional fees may have on future fare or passenger traffic levels.
Our average fare for the year ended March 31, 2002 was $132 and for the year ended March 31, 2001 was $146.
We believe that the decrease in the average fare during the year ended March 31, 2002 from the prior comparable year
was principally a result of the slowing economy. During the year ended March 31, 2001, we experienced an increase
in the number of passengers that a major competitor directed to us because of delays and cancellations that airline
experienced. We estimate that the additional passenger traffic received from that airline had the effect of
increasing our load factor and average fare for the year ended March 31, 2001 by approximately .6 load factor points
and .9%, respectively.
Passenger Revenues. Passenger revenues totaled $435,946,000 for the year ended March 31, 2002 compared to
$462,609,000 for the year ended March 31, 2001, or a decrease of 5.8%, on increased capacity of 331,837,000 ASMs or
7.8%. The number of revenue passengers carried was 3,069,000 for the year ended March 31, 2002 compared to 3,017,000
for the year ended March 31, 2001 or an increase of 1.7%. We had an average of 27.8 aircraft in our fleet during
the year ended March 31, 2002 compared to an average of 24.5 aircraft during the year ended March 31, 2001, an
increase of 13.5%. RPMs for the year ended March 31, 2002 were 2,756,965,000 compared to 2,773,833,000 for the year
ended March 31, 2001, a decrease of .6%. We believe that our cancelled flights due to the terrorist attacks and
weather had an adverse effect on our revenue during the period.
Cargo revenues, consisting of revenues from freight and mail service, totaled $6,624,000 and $7,517,000 for
the years ended March 31, 2002 and 2001, respectively, representing 1.5% and 1.6% of total operating revenues,
respectively, a decrease of 11.9%. We believe that our cargo revenues have been impacted by the slowing economy as
well as the flight cancellations as a result of the terrorist attacks, and the resulting limitations placed on cargo
service as a result of the terrorist attacks. 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 $2,505,000 and $2,751,000 or .6% of total operating revenues for each of the years ended March 31, 2002 and
2001, 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
$428,689,000 and $392,155,000, respectively, for the years ended March 31, 2002 and 2001, and represented 96.4% and
82.9% of total revenue, respectively. Operating expenses increased as a percentage of revenue during the year ended
March 31, 2002 as a result of the 5.8% decrease in passenger revenues, associated with the slowing economy and the
September 11 terrorist attacks. For a discussion of steps we have taken to reduce our expenses as a result of the
September 11, 2001 terrorist attacks, see " Liquidity and Capital Resources" below.
Flight Operations. Flight operations expenses of $191,041,000 and $179,453,000 were 42.9% and 37.9% of total
revenue for the years ended March 31, 2002 and 2001, 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. Included in flight operations expenses during the year ended March 31, 2002 are
approximately $2,315,000 for Airbus training and related travel expenses.
Aircraft fuel expenses include both the direct cost of fuel including taxes as well as the cost of delivering
fuel into the aircraft. Aircraft fuel costs of $61,226,000 for 70,530,000 gallons used and $71,083,000 for
66,724,000 gallons used resulted in an average fuel cost of 87(cent)and $1.07 per gallon and represented 32.1% and
39.6% of total flight operations expenses for the years ended March 31, 2002 and 2001, respectively. Fuel prices are
subject to change weekly, as we do not purchase supplies in advance for inventory. Fuel consumption for the year
ended March 31, 2002 and 2001 averaged 763 and 797 gallons per block hour, respectively. Fuel consumption decreased
from the prior comparable periods because of a decrease in our load factors, the more fuel- efficient Airbus
aircraft added to our fleet and a newly developed fuel conservation program implemented in August 2001. Fuel
consumption also decreased during the year ended March 31, 2002 from the prior comparable period also as a result of
decreased use of the Boeing 737-200 aircraft, which have a higher fuel burn rate than the Boeing 737-300 and Airbus
A319 aircraft. We do not hedge our fuel expense exposure.
Aircraft lease expenses totaled $64,990,000 (14.6% of total revenue) and $61,194,000 (13% of total revenue)
for the years ended March 31, 2002 and 2001, respectively, or an increase of 6.2%. The increase is largely due to
an increase in the average number of aircraft to 27.8 from 24.5, or 13.5%, during the year ended March 31, 2002
compared to the same period in 2001. During the year ended March 31, 2002, to minimize the number of flight
cancellations while our aircraft were being repaired following hail damage, we incurred short-term lease expenses of
$630,000 for aircraft to partially replace capacity of the damaged aircraft. During the year ended March 31, 2002,
we also added our first three owned Airbus aircraft to our fleet. These aircraft do not have associated lease
expense.
Aircraft insurance expenses totaled $5,324,000 (1.2% of total revenue) for the year ended March 31, 2002.
Aircraft insurance expenses for the year ended March 31, 2001 were $3,241,000 (.7% of total revenue). Aircraft
insurance expenses were .19(cent)and .12(cent)per RPM for the years ended March 31, 2002 and 2001, respectively.
Aircraft insurance expenses during the year ended March 31, 2002 have not been fully impacted by the result of the
terrorist attacks on September 11, 2001. Our aviation war risk underwriters issued immediately following the events of
September 11, seven days notice of cancellation to us. On September 24, 2001, these underwriters reinstated war
risk passenger liability coverage but limited third party bodily injury and property damage to $50 million per
occurrence. A special surcharge of $1.25 per passenger carried was established as the premium for this coverage.
At the same time, the FAA provided us supplemental third party war risk coverage from the $50 million limit to $1.6
billion. The premium for this supplemental coverage is $7.50 per flight departure and is now set to expire on June
19, 2002, unless renewed by Congress.
Pilot and flight attendant salaries before payroll taxes and benefits totaled $32,042,000 and $22,475,000 or
7.4% and 4.9% of passenger revenue for each of the years ended March 31, 2002 and 2001, 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. In May 2001, we agreed to reconsider the current rates of pay under our collective bargaining agreement with
our pilots in part because several pilot unions at other air carriers received wage increases, which caused our
pilot salaries to be substantially below those paid by certain of our competitors. We submitted a revised pilot pay
proposal to the Frontier Airline Pilots Association, and its members accepted this proposal and was made effective
May 2001. Pilot and flight attendant compensation also increased as a result of a 13.5% increase in the average
number of aircraft in service, an increase of 10.4% in block hours, a general wage increase in flight attendant
salaries, and additional crews required replacing those attending training on the Airbus equipment. During the
three months ended December 31, 2001, FAPA agreed to an 11% decrease in salaries for all pilots in lieu of furloughs
as a result of the September 11, 2001 terrorist attacks. The pilot salary levels were reinstated effective January
1, 2002.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $70,202,000 and $60,408,000 (an
increase of 16.3%) for the years ended March 31, 2002 and 2001, respectively, and represented 15.8% and 12.8% 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 reaccommodate
passengers as well as hotel, meal and other incidental expenses. Aircraft and traffic servicing expenses increase
with the addition of new cities and departures to our route system. During the year ended March 31, 2002, we served
30 cities compared to 23 during the year ended March 31, 2001, or an increase of 30.4%. During the year ended March
31, 2002, our departures increased to 41,736 from 38,556 or 8.2%. Aircraft and traffic servicing expenses were
$1,682 per departure for the year ended March 31, 2002 as compared to $1,567 per departure for the year ended March
31, 2001, or an increase of $115 per departure. Aircraft and traffic servicing expenses increased as a result of
expenses associated with deicing in April 2001 as a result of an unusual spring blizzard, a general wage rate
increase and an increase in interrupted trip expenses as a result of the number of flight cancellations related to
the aircraft out of service for repair of hail damage. Additionally, our security expenses increased substantially
during the year ended March 31, 2002, or approximately 119.7% greater than those incurred during the year ended
March 31, 2001, as a result of the September 11, 2001 terrorist attacks. Additionally, due to the number of flight
cancellations as a result of weather conditions, as well as the September 11 terrorist attacks, the number of
departures were less than we had planned, which caused our fixed costs to be spread over fewer departures thereby
increasingour expenses per departure for the year ended March 31, 2002.
Effective February 17, 2002, the DOT began providing security services through the newly established
Transportation Security Agency or assumed many of the contracts and overseeing those security vendors that we and
other carriers use to provide airport security services. Additionally, the DOT will reimburse us, as well as all
other air carriers, for certain security services provided by our own personnel. In order to be able to provide and
fund these security services, the DOT has imposed a $2.50 security service fee per passenger segment flown, not to
exceed $5.00 for one-way travel or $10.00 for a round trip, on tickets purchased on and after February 1, 2002. In
anticipation that these fees will not be adequate to cover the costs of the TSA, a security infrastructure fee has
been assessed to all air carriers in an amount equal to the security fees paid by each carrier during the calendar
year ended December 31, 2000. The security infrastructure fee is expected to be far less than the security costs
that have been assumed by TSA. As a result of these actions, we expect our expenses associated with security
services to be significantly reduced after February 17, 2002. During the years ended March 31, 2002 and 2001, total
security related expenses approximated $3,871,000 and $1,762,000, respectively.
Maintenance. Maintenance expenses for the years ended March 31, 2002 and 2001 of $70,227,000 and
$65,529,000, respectively, were 15.8% and 13.9% of total revenue, an increase of 7.2%. These include all labor, parts
and supplies expenses related to the maintenance of the aircraft. Routine maintenance is charged to maintenance
expense as incurred while major engine overhauls and heavy maintenance checks expense are accrued monthly.
Maintenance costs per block hour for the years ended March 31, 2002 and 2001 were $760 and $783 per block hour,
respectively. Maintenance cost per block hour decreased during the year ended March 31, 2002 from the prior
comparable year as a result of decreased utilization of our Boeing 737-200 aircraft which are older and more costly
to maintain than our other aircraft. Additionally, we added 6 new Airbus aircraft that are less costly to maintain
than our older Boeing aircraft. These maintenance savings were offset or distorted by several factors. During the
year ended March 31, 2002, we incurred approximately $881,000 for Airbus training or $10 per block hour. Also,
during the year ended March 31, 2002, we decreased the number of our departures as a result of decreased consumer
demand for air travel and reduced the utilization of our Boeing 737-200 aircraft, which are more costly to
maintain. We also incurred increased costs in personnel, training and information technology expenses for
implementation of new maintenance and engineering software and in preparation for the Airbus transition.
Additionally, due to the flight cancellations as a result of the September 11 terrorist attacks and the adverse
spring weather conditions, our block hours were less than we had planned, which caused our fixed costs to be spread
over fewer block hours and, we believe, distorted our cost per block hour for the year ended March 31, 2002.
Promotion and Sales. Promotion and sales expenses totaled $59,459,000 and $55,881,000 and were 13.4% and
11.8% of total revenue for the years ended March 31, 2002 and 2001, respectively. These include advertising
expenses, telecommunications expenses, wages and benefits for reservationists and reservations supervision,
marketing management and sales personnel, credit card fees, travel agency commissions and computer reservations
costs.
During the year ended March 31, 2002, promotion and sales expenses per passenger increased to $19.37 from
$18.52 for the year ended March 31, 2001. Promotion and sales increased per passenger over the prior comparable
year largely as a result of increased advertising for additional fare sales offered during the year as well as
advertising in the new cities we entered this year. 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% for the year ended March 31, 2002, compared to 3.5% for the year
ended March 31, 2001 as a result of the cap we put on commissions effective September 2001. 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. In July 2000, we opened an
additional reservations facility in Las Cruces, New Mexico and simultaneously terminated an outsourcing agreement,
which reduced our cost of reservations.
General and Administrative. General and administrative expenses for the years ended March 31, 2002 and 2001
totaled $26,174,000 and $25,429,000, and were 5.9% and 5.3% of total revenue, respectively. During the years, ended
March 31, 2002 and 2001, we accrued for employee performance bonuses totaling $2,521,000 and $7,009,000,
respectively, which were .6% and 1.5% of total revenue, a decrease of 64%. 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 2,360 in March 2001 to approximately 2,700 in March 2002, an increase of 14.4%. Also, the cost of
health insurance premiums increased to $4,239,000 during the year ended March 31, 2002 from $2,166,000 during the
prior comparable period, an increase of 95.7%. Because of the increase in personnel, our health insurance benefits
expenses and accrued vacation expense increased accordingly. During the year ended March 31, 2002, we also incurred
start-up costs associated with the implementation of our in-house revenue accounting department which began
processing effective with April 2002 sales and revenue.
Depreciation and Amortization. Depreciation and amortization expenses of $11,587,000 and $5,455,000, an
increase of 112.4%, were approximately 2.6% and 1.2% of total revenue for the years ended March 31, 2002 and 2001,
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 as a result of
depreciation expense associated with our first three purchased aircraft, an increase in our spare parts inventory
including spare engines and parts for the Airbus fleet, 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 $8,447,000 for the year ended March 31, 2002
compared to $7,611,000 for the year ended March 31, 2001. Interest income decreased to $4,388,000 from $7,897,000
during the year ended March 31, 2002 from the prior year due to a decrease in cash balances as a result of cash used
for pre-delivery payments for future purchases of aircraft, spare parts inventories largely for the new Airbus fleet
and a decrease in interest rates. Interest expense increased to $3,383,000 for the year ended March 31, 2002 from
$94,000 as a result of interest expense associated with the financing of the first three purchased Airbus aircraft
received in May, August and September 2001.
During the year ended March 31, 2002, we negotiated early lease terminations on two of our Boeing 737-200
aircraft resulting in a pre-tax charge of $4,914,000 representing the advance payment amounts we agreed upon.
During the year ended March 31, 2002, we recognized $12,703,000 of the federal grant as a result of the Act
to offset direct and incremental losses we experienced as a result of the terrorist attacks on September 11, 2001.
We received a total of $17,538,000 as of December 31, 2001; the remaining $4,835,000 represents amounts received in
excess of estimated allowable direct and incremental losses incurred from September 11, 2001 to December 31, 2001
and is included as a deferred liability on our balance sheet.
Income Tax Expense. We accrued income taxes of $8,282,000 and $33,465,000 at 38.7% of taxable income for
each of the years ended March 31, 2002 and 2001, respectively. During the year ended March 31, 2002, we recorded a
credit to income tax expense totaling $1,327,000. During the year ended March 31, 2001, we accrued income tax
expense at the rate of 38.7% which was greater than the actual effective tax rate of 37.6% determined upon
completion and filing of the income tax returns in December 2001. During the year ended March 31, 2002, we also
recorded a $441,000 reduction to income tax expense as a result of a review and revision of state tax apportionment
factors used in filing our amended state tax returns for 2000.
Results of Operations - Year Ended March 31, 2001 Compared to Year Ended March 31, 2000
We had net income of $54,868,000 or $1.90 per diluted share for the year ended March 31, 2001 as compared to
net income of $27,009,000 or 95(cent)per diluted share for the year ended March 31, 2000. During the year ended March
31, 2001, as compared to the prior comparable period, we experienced higher average fares and load factors 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 believe
that our passenger traffic and related revenues during the year ended March 31, 2000 were adversely affected by late
deliveries of aircraft and consumer concerns over the Year 2000 issue.
Our costs per ASM for the years ended March 31, 2001 and 2000 were 9.20(cent)and 8.16(cent), respectively,
or an increase of 1.04(cent)or 12.7%. Costs per ASM excluding fuel for the years ended March 31, 2001 and 2000
were 7.54(cent)and6.91(cent), respectively, or an increase of .63(cent)or 9.1%. Our cost per ASM increased during
the year ended March 31, 2001 principally because of increases in the cost of fuel which accounted for .42(cent)per
ASM, aircraft rentals for newer and larger aircraft of .09(cent)per ASM, maintenance expense of .13(cent), and general
and administrative expenses primarily due to accrued bonuses for all employees resulting from increased profitability
and a higher level of employee benefits of .13(cent)per ASM. 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
year ended March 31, 2001. During the year ended March 31, 2001, two of our aircraft underwent unusually extensive
maintenance checks. This was the first time we were required to perform an annual maintenance check on these aircraft
since they entered our fleet. During the year ended March 31, 2001, we also performed "D"checks on two of our aircraft
for which reserves paid to the lessor were not adequate to fully recover the expenses.
For the year ended March 31, 2001, our break-even load factor was 52.7% compared to our achieved passenger
load factor of 65.1%. For the year ended March 31, 2000, our break-even load factor was 51.1% compared to the
passenger load factor achieved of 59.1%. Our break-even load factor increased over the prior comparable period
largely as a result of an increase in our cost per ASM to 9.20(cent)for the year ended March 31, 2001 from 8.16(cent)
for the year ended March 31, 2000, offset by an increase in our average fare to $146 during the year ended March 31,
2001 from $134 during the year ended March 31, 2000, and an increase in our total yield per RPM from 15.67(cent)for
the year ended March 31, 2000 to 17.05(cent)for the year ended March 31, 2001.
Revenues
Our average fares for the years ended March 31, 2001 and 2000 were $146 and $134, respectively. We believe
that the increase in the average fare during the year ended March 31, 2001 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 each of our
average fare and load factor by approximately .9% and .6%, respectively, for the year ended March 31, 2001.
Passenger Revenues. Passenger revenues totaled $462,609,000 for the year ended March 31, 2001 compared to
$320,850,000 for the year ended March 31, 2000, or an increase of 44.2%, which exceeded the 19.7% increase in ASMs
of 700,866,000. The number of revenue passengers carried was 3,017,000 for the year ended March 31, 2001 compared to
2,284,000 for the year ended March 31, 2000 or an increase of 32.1%. We had an average of 24.5 aircraft in our
fleet during the year ended March 31, 2001 compared to an average of 19.7 aircraft during the year ended March 31,
2000, an increase 24.4%. RPMs for the year ended March 31, 2001 were 2,773,833,000 compared to 2,104,460,000 for
the year ended March 31, 2000, an increase of 31.8%. We believe that our passenger traffic and related revenues
during the year ended March 31, 2000 were adversely affected by late deliveries of aircraft and consumer concerns
over the Year 2000 issue.
Cargo revenues, consisting of revenues from freight and mail service, totaled $7,517,000 and $6,856,000 for
the years ended March 31, 2001 and 2000, respectively, representing 1.6% and 2.1% of total operating revenues,
respectively, an increase of 9.6%. During July 2000 we performed an audit of 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 year ended March 31,
2001. Had the adjustment been recorded during the year ended March 31, 2000 instead of the year ended March 31,
2001, cargo revenue would have been $7,940,000 and $6,433,000 for the years ended March 31, 2001 and 2000,
respectively, an increase of 23.4%.
Other revenues, comprised principally of interline handling fees, liquor sales and excess baggage fees,
totaled $2,751,000 and $2,114,000 or .6% of total operating revenues for each of the years ended March 31, 2001 and
2000, respectively.
Operating Expenses
Total operating expenses were $392,155,000 and $290,511,000, respectively, for the years ended March 31, 2001
and 2000, and represented 82.9% and 88.1% of total revenue, respectively. Operating expenses decreased as a
percentage of revenue during the year ended March 31, 2001 as a result of the 44.2% increase in passenger revenues
attributable to a 32.1% increase in passengers and a 9.0% increase in the average fare offset by a 33.9% increase in
the average cost per gallon of fuel, a general wage rate increase which became effective in January 2000, 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 $179,453,000 and $125,536,000 were 37.9% and 38.1% of total
revenue for the years ended March 31, 2001 and 2000, 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 costs of $71,083,000 for 66,724,000 gallons used and $44,402,000 for 55,568,000 gallons used
resulted in an average fuel cost of $1.07 and 79.9(cent)per gallon and represented 39.6% and 35.4% of total flight
operations expenses for the years ended March 31, 2001 and 2000, respectively. The average fuel cost per gallon
increased for the year ended March 31, 2001 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 years ended March 31, 2001 and 2000 averaged 797 and 780 gallons per block hour,
respectively. Fuel consumption increased over the prior comparable period because of an increase in our load factor
from 59.1% to 65.1%. Additionally, we returned five aircraft to the lessor during the year ended March 31, 2000 and
replaced them with four aircraft that are larger and have a greater fuel burn rate.
Aircraft lease expenses totaled $61,194,000 (13% of total revenue) and $47,945,000 (14.5% of total revenue)
for the years ended March 31, 2001 and 2000, respectively, or an increase of 27.6%. The increase is principally due
to an increase in the average number of aircraft to 24.5 from 19.7, or 24.4%, during the year ended March 31, 2001
compared to the same period in 2000.
Aircraft insurance expenses totaled $3,241,000 (.7% of total revenue) for the year ended March 31, 2001. Aircraft
insurance expenses for the year ended March 31, 2000 were $2,689,000 (.8% of total revenue). Aircraft insurance
expenses were .12(cent)and .13(cent)per RPM for the years ended March 31, 2001 and 2000, respectively. Aircraft
insurance expenses decreased per RPM as a result of competitive pricing in the aircraft insurance industry and our
favorable experience rating since we began flight operations in July 1994.
Pilot and flight attendant salaries before payroll taxes and benefits totaled $22,475,000 and $15,392,000 or
4.9% and 4.8% of passenger revenue for each of the years ended March 31, 2001 and 2000, or an increase of 46%.
Pilot and flight attendant compensation increased principally as a result of a 24.4% increase in the average number
of aircraft in service, general wage rate increases, and a 17.5% increase in block hours. 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.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $60,408,000 and $48,955,000 (an
increase of 23.4%) for the years ended March 31, 2001 and 2000, respectively, and represented 12.8% and 14.8% of
total revenue. During the year ended March 31, 2001, we served 23 cities compared to 21 during the year ended March
31, 2000, or an increase of 9.5%. During the year ended March 31, 2001, our departures increased to 38,556 from
33,284 or 15.8%. Aircraft and traffic servicing expenses were $1,567 per departure for the year ended March 31,
2001 as compared to $1,471 per departure for the year ended March 31, 2000, or an increase of $96 per departure.
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 per passenger charges as a result of the
greater number of passengers we carried. These increases were offset by a decrease in interrupted trip expenses as
a result of an improvement in our completion factor from 98.6% for the year ended March 31, 2000 to 99.2% for the
year ended March 31, 2001.
Maintenance. Maintenance expenses for the years ended March 31, 2001 and 2000 of $65,529,000 and
$50,239,000, respectively, were 13.9% and 15.2% of total revenue. These include all labor, parts and supplies
expenses related to the maintenance of the aircraft. Routine maintenance is charged to maintenance expense as
incurred while major engine overhauls and heavy maintenance check expenses are accrued monthly. Maintenance costs
per block hour for the years ended March 31, 2001 and 2000 were $783 and $705 per block hour, respectively.
Maintenance cost per block hour increased as a result of increased facilities rentals to satisfy 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
9.9 for the year ended March 31, 2000 to 9.4 for the year ended March 31, 2001. During the year ended March 31,
2001, two of our aircraft experienced unusually extensive maintenance checks. During the year ended March 31, 2001,
we also performed "D" checks on two of our aircraft for which maintenance reserves paid to the lessor for
reimbursement of these events did not cover the associated expense. These were the first occasions we were required
to perform annual maintenance checks on these aircraft since they entered our fleet. Additionally, during the year
ended March 31, 2001, we accrued an additional $1,276,000 ($15 per block hour) for engine reserves based on revised
cost estimates and a revised schedule of engine overhauls. We also incurred increased costs in personnel, training
and information technology expenses for implementation of new maintenance and engineering software and in
preparation for the Airbus aircraft transition. In January 2001, a lease for spare aircraft parts expired, and we
purchased these parts for $2,500,000. During the year ended March 31, 2001, we incurred $1,241,000 of lease expenses
associated with this lease, included in maintenance expenses, or $15 per block hour.
Promotion and Sales. Promotion and sales expenses totaled $55,881,000 and $46,014,000 and were 11.8% and
14.0% of total revenue for the years ended March 31, 2001 and 2000, respectively. Promotion and sales expenses
decreased as a percentage of revenue for the nine months ended December 31, 2000 over the prior comparable period
largely as a result of the increase in revenue and a decrease in travel agency commissions.
During the year ended March 31, 2001, promotion and sales expenses per passenger decreased to $18.52 from
$20.15 for the year ended March 31, 2000. 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 3.5% for the year ended March 31, 2001, compared to 4.4% for the year ended March 31, 2000. The decrease in
travel agency commissions was offset by increased commission expense associated with the increase in our average
fares as we do not cap commissions. 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. In July 2000, we opened an additional reservations facility in
Las Cruces, New Mexico and simultaneously terminated an outsourcing agreement, which reduced our cost of
reservations. These cost savings were offset by an increase in credit card fees associated with the increase in our
average fare from $134 for the year ended March 31, 2000 to $146 for year ended March 31, 2001.
General and Administrative. General and administrative expenses for the years ended March 31, 2001 and 2000
totaled $25,429,000 and $16,327,000, and were 5.3% and 5.0% of total revenue, respectively. During the years, ended
March 31, 2001 and 2000, we accrued for employee performance bonuses totaling $7,009,000 and $2,605,000,
respectively, which were 1.5% and .8% of total revenue, an increase of 169.1%. Employee performance bonuses
increased over the prior comparable period as a result of our increased profitability and an enhancement to the
bonus program. We experienced increases in our human resources, training and information technology expenses as a
result of an increase in employees from approximately 2,067 in March 2000 to 2,362 in March 2001, an increase of
14.3%. We also experienced personnel increases for 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 year ended March 31, 2001, 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 $5,455,000 and $3,440,000, an
increase of 58.6%, were approximately 1.2% and 1.0% of total revenue for the years ended March 31, 2001 and 2000,
respectively. These expenses include depreciation of office equipment, station ground equipment, and other fixed
assets. Depreciation and amortization expenses increased over the prior year as a result of an increase in our
spare parts inventory including a spare engine, leasehold improvements associated with 14 aircraft (eight additional
and six replacement) added to our fleet during the past 21 months, ground handling equipment, and computers to
support new employees as well as replacement computers for those with dated technology.
Nonoperating Income (Expense). Net nonoperating income totaled $7,611,000 for the year ended March 31, 2001
compared to $4,105,000 for the year ended March 31, 2000. Interest income increased from $4,335,000 to $7,897,000
during the year ended March 31, 2001 from the prior period due to an increase in cash balances as a result of an
increase in cash provided by operating activities and proceeds from stock option and warrant exercises.
Income Tax Expense (Benefit). We accrued income taxes of $33,465,000 and $16,954,000 at 39% of taxable
income during the years ended March 31, 2001 and 2000, respectively
Cumulative Effect of Change in Method of Accounting for Overhaul Costs. During the year ended March 31,
2000, we changed our method of accounting for routine maintenance checks from the accrual to the direct expense
method, which resulted in a credit of $549,000 net of income taxes of $351,000.
Liquidity and Capital Resources
Our liquidity depends to a large extent on the number of passengers who fly with us and the fares we charge.
Also, we depend on financing to acquire many of our aircraft, including 14 aircraft scheduled for delivery by 2005.
We incurred $72,000,000 in debt during the year ended March 31, 2002 to finance three Airbus aircraft. We seek to
control our operating costs, but our airline, like other airlines, has many fixed costs.
We had cash and cash equivalents and short-term investments of $89,555,000 and $111,251,000 at March 31, 2002
and 2001, respectively. At March 31, 2002, total current assets were $192,048,000 as compared to $152,064,000 of
total current liabilities, resulting in working capital of $39,984,000. At March 31, 2001, total current assets
were $199,794,000 as compared to $136,159,000 of total current liabilities, resulting in working capital of
$63,635,000. The decrease in our cash and working capital from March 31, 2001 is largely a result of cash used by
investing activities, principally as a result of a net increase in pre-delivery payments totaling $16,148,000, the
purchase of our first three Airbus aircraft and spare parts for the new Airbus fleet.
Cash provided by operating activities for the year ended March 31, 2002 was $40,294,000. This is
attributable to our net income for the period, increase in deferred tax expense, and increases in air traffic
liability, other accrued expenses, accrued maintenance expenses, and deferred rent, offset by increases in
restricted investments, security, maintenance and other deposits, and inventories, and decreases in accounts
payable. Also, included in cash provided by operations is $4,835,000 of amounts received in excess of allowable
direct and incremental losses reimbursable under the Act incurred from September 11, 2001 to December 31, 2001.
This amount also is included as a liability on our balance sheet as of March 31, 2002. Cash provided by operating
activities for the year ended March 31, 2001 was $72,526,000. This is attributable to our net income for the
period, decreases in receivables and increases in accrued expenses, income taxes payable and accrued maintenance
expense, offset by increases in restricted investments, security, maintenance and other deposits, and inventories
and decreases in accounts payable and air traffic liability.
Cash used by investing activities for the year ended March 31, 2002 was $134,529,000. Net aircraft lease and
purchase deposits increased by $17,483,000. During the year ended March 31, 2002, we exercised purchase options for
three Airbus A319 aircraft, and advanced their delivery dates from the third and fourth calendar quarters of 2004 to
May and June 2002, which required deposits of $9,603,000. Additionally, we amended the purchase agreement to add
two additional firm Airbus A319 aircraft, for delivery in December 2002, which required additional deposits in March
2002 of $3,602,000. We also used $118,183,000 for the purchase of our first three Airbus aircraft and to purchase
rotable aircraft components to support the Airbus fleet, as well as a spare engine for the Boeing fleet, leasehold
improvements for our new reservations center, computer software for the new maintenance and accounting systems and
other general equipment purchases. Cash used by investing activities for the year ended March 31, 2001 was
$34,339,000. 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 year ended
March 31, 2001, we made cash security deposits and aircraft pre-delivery payments totaling $22,811,000 and increased
restricted investments by $3,331,000 associated with two leased Boeing 737-300 aircraft delivered during the year
ended March 31, 2001, the 16 Airbus aircraft we have agreed to lease with delivery dates beginning in June 2001, and
the 12 Airbus aircraft we have agreed to purchase with delivery dates which began in May 2001. During the year
ended March 31, 2001, we used $21,957,000 for capital expenditures for rotable aircraft components including initial
provisioning for aircraft components and certain buyer furnished equipment for the Airbus aircraft deliveries in
2001; maintenance equipment and tools; aircraft leasehold costs and improvements; computer equipment and software
for enhancements to our internet booking site and our reservation system, a replacement maintenance system; and
leasehold improvements to our new reservations center in Las Cruces, New Mexico, and our new headquarters in Denver,
Colorado.
Cash provided by financing activities for the years ended March 31, 2002 and 2001, were $72,538,000 and
$3,213,000, respectively. During the year ended March 31, 2002, we borrowed $72,000,000 to finance the purchase of
our first three Airbus aircraft, of which $1,942,000 was repaid during the year ended March 31, 2002. During the
years ended March 31, 2002 and 2001, we received $3,184,000 and $3,326,000, respectively, from the exercise of
common stock options and warrants. In April 1998, we issued a warrant to purchase 1,075,393 shares of our common
stock at a purchase price of $2.50 per share. During the years ended March 31, 2002 and 2001, the warrant holder
purchased 525,000 and 550,393 shares, respectively, of our common stock under this warrant resulting in net proceeds
to us of $1,312,000 and $1,376,000, respectively.
Contractual Obligations
The following table summarizes our contractual obligations as of March 31, 2002:
Less than 1-3 4-5 After
1 year years years 5 years Total
-----------------------------------------------------------------------------------------------
Long-term debt (1) $ 3,226,000 $ 7,082,000 $ 8,081,000 $ 51,669,000 $ 70,058,000
Capital lease obligations 153,000 68,000 - - 221,000
Operating leases (2) (4) 78,609,000 144,219,000 125,581,000 357,895,000 706,304,000
Unconditional purchase obligations (3) 196,000,000 210,200,000 - - 406,200,000
-----------------------------------------------------------------------------------------------
Total contractual cash obligations $287,087,000 375,971,000 147,552,000 433,133,000 1,243,743,000
===============================================================================================
(1) In May 2001, 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. Each aircraft loan has a term of 120 months and
is payable in equal monthly installments, including interest, payable in arrears. The aircraft secures the
loans. The credit agreement contains certain events of default, including events of default for failure to
make payments when due or to comply with covenants in the agreement. As of March 31, 2002, we had $70,058,000
of debt outstanding for purchase of these three Airbus aircraft. Each loan provides for monthly principal and
interest payments ranging from $207,579 to $218,109, bears interest with rates ranging from 6.05% to 6.71%,
averaging 6.43% for the three aircraft loans, with maturities in May, August, and September 2011, at which time
a balloon payment totaling $10,200,000 is due with respect each aircraft loan.
(2) As of March 31, 2002, we lease three Airbus 319 type aircraft and 24 Boeing 737 type aircraft under operating
leases with expiration dates ranging from 2002 to 2014. Under these leases, we are required to make cash
security deposits or issue letters of credit representing approximately two months of lease payments per
aircraft. At March 31, 2002, we had made cash security deposits and had arranged for issuance of letters of
credit totaling $5,293,000 and $9,487,000, respectively. Accordingly, our restricted cash balance includes
$9,487,000 that collateralizes the outstanding letters of credit. Additionally, we make deposits to cover the
cost of major scheduled maintenance overhauls of these aircraft. These deposits are based on the number of
flight hours flown and/or flight departures and are not included as an obligation in the above schedule. At
March 31, 2002, we had remaining unused maintenance deposits of $51,055,000 classified as an asset on our
balance sheet.
As a complement to our Airbus purchase agreement, in April and May 2000 we signed two agreements to lease 16
new Airbus aircraft, for a term of 12 years, three of which had been delivered to us as of March 31, 2002. As
of March 31, 2002, we had made cash security deposits on the remaining 13 aircraft we agreed to lease and had
arranged for issuance of letters of credit totaling $400,000 and $2,471,000, respectively, to secure these
leases
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 2002 to 2014. In addition we also
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 above schedule.
We expect, in the near future, to embark on a program to expand our gates, ticket counter and back office
facilities at DIA. The actual cost of completing such a plan has yet to be determined.
(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 31 new Airbus aircraft. Included in the purchase commitment amount are amounts for
spare aircraft components to support the aircraft. We are not under any contractual obligations with respect
to spare parts. We have agreed to firm purchases of 17 of these aircraft, and have options to purchase up to
an additional 14 aircraft. During the year ended March 31, 2002, we took delivery of the first three purchased
aircraft. 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 March 31, 2002, we had
made pre-delivery payments on future deliveries totaling $44,659,000 to secure these aircraft and option
aircraft. We expect to be operating up to 37 purchased and leased Airbus aircraft, by the first quarter of
calendar 2005.
As discussed previously, we have secured a financing commitment for the first three purchased Airbus A319
aircraft. We have recently signed a term sheet with a European bank to provide debt financing for two of our
seven A319 aircraft scheduled for delivery from Airbus in fiscal year 2003, one of which was financed in May
2002. The terms permit us to borrow up to $51,100,000 over a period of 120 months at either a fixed or
floating interest rate with a $7,600,000 balloon payment due at maturity. We are also in discussions with
several other European banks for the debt financing of the remaining fiscal year 2003 A319 aircraft
deliveries. The additional amount of financing required will depend on the number of aircraft purchase options
we exercise and our cash position prior to delivery of the aircraft. While we believe that such financing will
be available to us, there can be no assurance, particularly in view of the September 11 terrorist attacks, that
financing will be available when required, or on acceptable terms. The inability to secure such 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.
Commercial Commitments
As we enter new markets, increase the amount of space leased, or add leased aircraft, we are often required
to provide the lessor with a letter of credit, bond, or cash security deposits. These generally approximate up to
three months of rent and fees. As of March 31, 2002, we had outstanding letters of credit, bonds, and cash
security deposits totaling $12,636,000, $2,351,000, and $5,937,000, 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, 2002, and another credit agreement with a second financial institution for up to $20,000,000, which expires
November 30, 2002. 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 March 31, 2002, we have drawn $12,636,000 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 Airlines Reporting Corporation 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
March 31, 2002, 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 May 10, 2002, the coverage would be increased to
$1,834,000 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 attempting to maximize the efficiency of our fleet replacement plan; we continue to endeavor to return
certain leased B737 aircraft to their owners on dates before the currently scheduled lease expiration dates for
these aircraft. We returned one Boeing aircraft during the year ended March 31, 2002. If we early return these
aircraft from service and are unable to sublease these aircraft to third parties, we may incur additional expense,
or pay the lessor all or a portion of the remaining lease payments, that could result in a charge against earnings
in the period in which the agreement is entered into. We have entered into an agreement to early return two 737-200
aircraft to the lessor, for which we have recorded an unusual charge or approximately $3,000,000, net of income
taxes, against earnings in our year ended March 31, 2002.
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.
Maintenance
Routine maintenance and repairs are charged to operations as incurred.
Under the terms of its aircraft lease agreements, the Company is required to make monthly maintenance
deposits and a liability for accrued maintenance is established based on usage. The deposits are applied against the
cost of major airframe maintenance checks, landing gear overhaul and engine overhauls. Deposit balances remaining at
lease termination remain with the lessor and any remaining liability for maintenance checks is reversed against the
deposit balance. Additionally, a provision is made for the estimated costs of scheduled major overhauls required to
be performed on leased aircraft and components under the provisions of the aircraft lease agreements if the required
monthly deposit amounts are not adequate to cover the entire cost of the scheduled maintenance. The Company also
accrues for major airframe maintenance checks, landing gear overhauls and engine overhauls on its owned aircraft.
Accrued maintenance expense expected to be incurred beyond one year is classified as long-term. The amounts accrued
for maintenance are based on estimates of the time required to complete the procedures and cost of parts used.
Additional maintenance accruals may be required of these estimates prove to be inadequate.
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.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" which requires the use of the purchase method and eliminates the option
of using the pooling-of-interests method of accounting for all business combinations. The provisions in this
statement apply to all business combinations initiated after June 30, 2001, and all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001, or later. This accounting
pronouncement presently has no impact on the Company as it does not have any business combinations planned.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142) which requires that all intangible assets acquired, other than those acquired in a
business combination, be initially recognized and measured based on the asset's fair value. Goodwill and certain
identifiable intangible assets are not to be amortized under SFAS 142, but instead are reviewed for impairment at
least annually in accordance with the provisions of this statement. We are required to adopt the provisions of SFAS
142 effective April 1, 2002. This accounting pronouncement will have no impact on us as we do not have any
intangible assets on our balance sheet.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143), which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies
to legal obligations associated with the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset. SFAS 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair
value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each
period through charges to operating expense. If the obligation is settled for other than the carrying amount of the
liability, it will recognize a gain or loss on settlement. We do not expect the impact of adopting SFAS 143 to be
significant.
In October 2001, the FASB issued Statement of Financial Standards No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144), which addressed financial accounting and reporting for the impairment
or disposal of long-lived assets. While SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, it retains many of the fundamental provisions of that
Statement. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of A Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. We do not expect the
impact of adopting SFAS 144 to be significant.
September 11, 2001 Terrorist Attacks and Fiscal Year 2003 First Quarter Outlook
The impact of the terrorist attacks of September 11, 2001 and their aftermath on us and the domestic economy,
and the sufficiency of our financial resources to absorb that impact will depend on a number of factors, including:
(i) the magnitude and duration of the adverse impact of the terrorist attacks on the economy in general, and the
airline industry in particular; (ii) our ability to reduce our operating costs and conserve our financial resources,
taking into account the increased costs we will incur as a consequence of the attacks, (iii) the higher costs
associated with new airline security directives and any other increased regulation of air carriers; (iv) the
significantly higher costs of aircraft insurance coverage including coverage for claims caused by acts of war,
terrorism, sabotage, hijacking and other similar perils, and the extent to which such insurance will continue to be
available; (v) our ability to raise additional financing; (vi) the price and availability of jet fuel, in light of
current industry conditions; (vii) the extent of the benefits received by us under the Act, taking into account any
challenges to and interpretations or amendments of the Act or regulations issued pursuant thereto; and (viii) the
timing and health of an economic recovery or the lack thereof.
Further terrorist attacks using commercial aircraft in flight could result in another grounding of our fleet,
and could result in additional reductions in load factor and yields, along with increased ticket refunds, security
and other costs. The worldwide aviation insurance market may not be able to sustain another terrorist attack of the
same magnitude as the events of September 11 without further material increases in premiums or cutback in
coverages. In addition, terrorist attacks not involving commercial aircraft, or the general increase in hostilities
relating to reprisals against terrorist organizations or otherwise, could result in decreased load factors and
yields for airlines, including us, and increased costs.
Our load factor for April 2002 was 61.6% compared to 67.9% in April 2001. As of May 15, 2002, advance
booking levels were up 5.2 and 7.5 points in May and June, respectively, compared to the same date and for the same
periods last year. Yields appear to be headed for another year over year significant decline in our first fiscal
quarter ending June 30, 2002, as our competitors continue to discount their fares or we match those lower fare
levels.
Due principally to the lack of predictability of future industry traffic and yields, we continue to be unable
to fully estimate the impact on us of the events of September 11 and their consequences, and the sufficiency of our
financial resources to absorb that impact.
We are assessing our liquidity position in light of our aircraft purchase commitments and other capital
needs, the economy, the events of September 11, and other uncertainties surrounding the airline industry. We
believe it may be appropriate to enhance our liquidity, and are actively considering several financing
alternatives. In that regard, we filed a shelf registration with the SEC in April 2002 that would allow us to sell
equity or debt securities from time to time as market conditions permit, or a public offering of equity or debt
securities. In addition, we may pursue domestic or foreign bank financing, public debt financing such as enhanced
equipment trust certificates, leveraged lease arrangements or government guaranteed financing. We have recently
signed a term sheet with a European bank to provide debt financing for two of our seven A319 aircraft scheduled for
delivery from Airbus in fiscal year 2003. We are also in discussions with several other European banks for the debt
financing of the remaining five A319 aircraft.
Item 7A: 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 an 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,
2002. Based on fiscal year 2002 actual fuel usage, such an increase would have resulted in an increase to aircraft
fuel expense of approximately $6,482,000 in fiscal year 2002. Comparatively, based on projected fiscal year 2003
fuel usage, such an increase would result in an increase to aircraft fuel expense of approximately $8,574,000 in
fiscal year 2003. The increase in exposure to fuel price fluctuations in fiscal year 2003 is due to the increase of
our average aircraft fleet size during the year ended March 31, 2002, projected increases to our fleet during the
year ended March 31, 2003 and related gallons purchased.
Our average cost per gallon of fuel for the period ended March 31, 2002 decreased 18.7% over the average cost
for the year ended March 31, 2001.
We will be susceptible to market risk associated with changes in interest rates on expected future long-term
debt obligations to fund the purchases of our Airbus aircraft.
Item 8: Financial Statements
Our financial statements are filed as a part of this report immediately following the signature page.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10: Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated herein by reference to the data under the heading
"Election of Directors" in the Proxy Statement to be used in connection with the solicitation of proxies for our
annual meeting of shareholders to be held on September 6, 2002. We will file the definitive Proxy Statement with the
Commission on or before July 31, 2002.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the data under the heading
"Executive Compensation" in the Proxy Statement to be used in connection with the solicitation of proxies for our
annual meeting of shareholders to be held on September 6, 2002. We will file the definitive Proxy Statement with the
Commission on or before July 31, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated herein by reference to the data under the heading
"Voting Securities and Principal Holders Thereof" in the Proxy Statement to be used in connection with the
solicitation of proxies for our annual meeting of shareholders to be held on September 6, 2002. We will file the
definitive Proxy Statement with the Commission on or before July 31, 2002.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference to the data under the heading
"Related Transactions" in the Proxy Statement to be used in connection with the solicitation of proxies for our
annual meeting of shareholders to be held on September 6, 2002. We will file the definitive Proxy Statement with
the Commission on or before July 31, 2002.
PART IV
Item 14(a): Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Exhibit
Numbers Description of Exhibits
------- -----------------------
3.1 Restated Articles of Incorporation of the Company. (12)
3.2 Amended and restated Bylaws of the Company (September 9, 1999). (14)
4.1 Specimen common stock certificate of the Company. (1)
4.2 The Amended and Restated Articles of Incorporation and Amended Bylaws of the Company are included
as Exhibits 3.1 and 3.2.
4.3 Form of Warrant. (1)
4.4 Rights Agreement, dated as of February 20, 1997, between Frontier Airlines, Inc. and American
Securities Transfer & Trust, Inc, including the form of Rights Certificate and the Summary of
Rights attached thereto as Exhibits A and B, respectively, incorporated by reference to Frontier
Airlines, Inc. Registration Statement on Form 8-A dated March 11, 1997. (6)
4.4(a) Amendment to Rights Agreement dated June 30, 1997. (5)
4.4(b) Amendment to Rights Agreement dated December 5, 1997. (13)
4.4(c) Third Amendment to Rights Agreement dated September 9, 1999. (7)
4.4(d) Fourth Amendment to Rights Agreement dated May 30, 2001. (19)
10.1 Office Lease. (1)
10.2 Office Lease Supplements and Amendments. (5)
10.2(a) Addendum to Office Lease (10)
10.2(b) Office Lease Supplements and Amendments (13)
10.2(c) Lease Amendment dated as of January 12, 2000 between Highline Group, LLC, landlord, and Frontier,
Airlines, Inc., tenant. Portions of this exhibit have been excluded from the publicly available
document and an order granting confidential treatment of the excluded material has been received.
(16)
10.2(d) Lease Amendment dated as of April 1, 2000 between Highline Group, LLC, landlord, and Frontier
Airlines, Inc., tenant. Portions of this exhibit have been excluded from the publicly available
document and an order granting confidential treatment of the excluded material has been received.
(16)
10.3 1994 Stock Option Plan. (1)
10.4 Amendment No. 1 to 1994 Stock Option Plan. (2)
10.4(a) Amendment No. 2 to 1994 Stock Option Plan (5)
10.5 Registration Rights Agreement. (1)
10.6 Sales Agreement. (1)
10.7 Airport Use and Facilities Agreement, Denver International Airport (2)
10.8 Aircraft Lease Agreement dated as of July 26, 1994. (2)
10.8(a) Assignment and Assumption Agreements dated as of March 28, 1997 and March 20, 1997 between
USAirways, Inc. and First Security Bank, National Association ("Trustee") and Frontier Airlines,
Inc. (5)
10.8(b) Amendment No. 1, dated June 5, 1997, to Lease Agreement dated as of July 26, 1994 between Frontier
Airlines, Inc. and First Security Bank, National Association. (5)
10.9 Code Sharing Agreement. (5)
10.10 Aircraft Lease Agreement dated as of October 20, 1995 (MSN 23177). (3)
10.10(a) Aircraft Lease Extension and Amendment Agreement dated as of October 1, 1999. Portions of this
Exhibit have been excluded from the publicly available document and an order granting
confidential treatment of the excluded material has been received. (15)
10.11 Aircraft Lease Agreement dated as of October 20, 1995 (MSN 23257). (3)
10.11(a) Aircraft Lease Extension and Amendment Agreement dated as of October 1, 1999. (15)
10.11(b) Aircraft Lease Extension and Amendment Agreement (MSN 23257) dated as of September 29, 2000,
between General Electric Capital Corporation and Frontier Airlines, Inc. (17)
10.12 Aircraft Lease Agreement dated as of May 1, 1996. (3)
10.12(a) Aircraft Lease Extension and Amendment Agreement (MSN 22733) dated as of September 29, 2000,
between Polaris Holding Company and Frontier Airlines, Inc. (17)
10.13 Aircraft Lease Agreement dated as of June 3, 1996. (3)
10.13(a) Amendment No. 1 to Aircraft Lease Agreement dated as of June 3, 1996.(10)
10.13(b) Aircraft Lease Extension and Amendment Agreement (MSN 22734) dated as of September 29, 2000,
between Polaris Holding Company and Frontier Airlines, Inc. (17)
10.14 Aircraft Lease Agreement dated as of June 12, 1996. Portions of this Exhibit have been excluded
from the publicly available document and an order granting confidential treatment of the excluded
material has been received. (3)
10.15 Operating Lease Agreement dated November 1, 1996 between the Company and First Security Bank,
National Association. Portions of this Exhibit have been excluded from the publicly available
document and an order granting confidential treatment of the excluded material has been received.
(4)
10.16 Aircraft Lease Agreement (MSN 28760) dated as of December 12, 1996 between the Company and
Boullion Aircraft Holding Company, Inc. Portions of this Exhibit have been excluded from the
publicly available document and an order granting confidential treatment of the excluded material
has been received. (4)
10.16(a) Amendment No. 1 to Aircraft Lease Agreement (MSN 28760) dated May 20, 1997. Portions of this
Exhibit have been excluded from the publicly available document and an order granting confidential
treatment of the excluded material has been received. (5)
10.17 Aircraft Lease Agreement (MSN 28662) dated as of December 12, 1996 between the Company and
Boullion Aircraft Holding Company, Inc. Portions of this Exhibit have been excluded from the
publicly available document and an order granting confidential treatment of the excluded material
has been received. (4)
10.17(a) Amendment No. 1 to Aircraft Lease Agreement (MSN 28662) dated May 20, 1997. Portions of this
Exhibit have been excluded from the publicly available document and an order granting confidential
treatment of the excluded material has been received. (5)
10.18 Aircraft Lease Agreement (MSN 28563) dated as of March 25, 1997 between the Company and General
Electric Capital Corporation. Portions of this Exhibit have been excluded from the publicly
available document and an order granting confidential treatment of the excluded material has been
received. (5)
10.19 Space and Use Agreement with Continental Airlines, as amended. Portions of this Exhibit have been
excluded from the publicly available document and an order granting confidential treatment of the
excluded material has been received. (5)
10.19(a) Space and Use Agreement with Continental Airlines. Portions of this exhibit have been excluded
from the publicly available document and an application for an order granting confidential
treatment of the excluded material has been made. (16)
10.20 Letter of Understanding with Continental Airlines dated August 16, 1996. Portions of this Exhibit
have been excluded from the publicly available document and an order granting confidential
treatment of the excluded material has been received. (5)
10.21 Service Agreement between Frontier Airlines, Inc. and Greenwich Air Services, Inc. dated May 19,
1997. Portions of this Exhibit have been excluded from the publicly available document and an
order granting confidential treatment of the excluded material has been received. (5)
10.22 Agreement between Frontier Airlines, Inc. and Dallas Aerospace, Inc. dated April 17, 1997.
Portions of this Exhibit have been excluded from the publicly available document and an order
granting confidential treatment of the excluded material has been received. (5)
10.23 General Services Agreement between Frontier Airlines, Inc. and Tramco, Inc. dated as of August 6,
1996. (5)
10.24 General Terms Engine Lease Agreement between Frontier Airlines, Inc. and Terandon Leasing
Corporation dated as of August 15, 1996, as assigned to U.S. Bancorp Leasing and Financial on
February 19, 1997. Portions of this Exhibit have been excluded from the publicly available
document and an order granting confidential treatment of the excluded material has been received.
(5)
10.25 Lease Agreement between Frontier Airlines, Inc. and Aircraft Instrument and Radio Company, Inc.
dated December 11, 1995. Portions of this Exhibit have been excluded from the publicly available
document and an order granting confidential treatment of the excluded material has been received.
(5)
10.26 Agreement and Plan of Merger between Western Pacific Airlines, Inc. and Frontier Airlines, Inc.
dated June 30, 1997. (5)
10.26(a) Agreement dated as of September 29, 1997 between Western Pacific Airlines, Inc. and Frontier
Airlines, Inc. (7)
10.27 Security Agreement with Wexford Management LLC dated December 2, 1997. (8)
10.28 Amended and Restated Warrant Agreement with Wexford Management LLC dated as of February 27, 1998.
(12)
10.29 Amended and Restated Registration Rights Agreement with Wexford Management LLC dated as
of February 27, 1998. (12)
10.30 Securities Purchase Agreement with B III Capital Partners, L.P. dated as of April 24, 1998. (9)
10.31 Registration Rights Agreement with B III Capital Partners, L.P. dated as of April 24, 1998. (12)
10.32 Warrant Agreement with The Seabury Group, LLC dated as of May 26, 1998. (12)
10.33 Registration Rights Agreement with The Seabury Group, LLC dated as of May 26, 1998. (12)
10.34 Aircraft Lease Agreement (MSN 21613) dated as of August 10, 1998 between the Company and
Interlease Aviation Investors, L.L.C. (10)
10.35 Aircraft Lease Agreement (MSN 28738) dated as of November 23, 1998 among first Security Bank,
National Association, Lessor, Heller Financial Leasing, Inc., Owner participant, and the Company,
Lessee. (11).
10.36 Aircraft Sublease Agreement (MSN 28734) dated as of December 14, 1998 between Indigo pacific AB,
Sublessor, and the Company, Sublessee. (11)
10.37 Aircraft Lease Agreement (MSN 23004) dated as of February 26, 1999 between First Security Bank, N.A.,
Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded from the
publicly available document and an order granting confidential treatment of the excluded material has
been received. (13)
10.37(a) Amendment No. 2 dated as of February 14, 2002 between Wells Fargo Bank Northwest, N.A. (formerly
First Security Bank National Association), as Lessor and Frontier Airlines, Inc., as Lessee and
Triton Aviation Finance to the Aircraft Lease Agreement (MSN 23004) dated as of February 26,
1999. Portions of this exhibit have been excluded from the publicly available document and an
application for confidential treatment of the excluded Material has been made. (22)
10.38 Aircraft Lease Agreement (MSN 23007) dated as of February 26, 1999 between First Security Bank, N.A.
Lessor and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded from the
publicly available document and an order granting confidential treatment of the excluded material has
been received. (13)
10.38(a) Amendment No. 2 dated as of February 14, 2002 between Wells Fargo Bank Northwest, N.A. (formerly
First Security Bank National Association), as Lessor and Frontier Airlines, Inc., as Lessee and
Triton Aviation Finance to the Aircraft Lease Agreement (MSN 23004) dated as of February 26,
1999. Portions of this exhibit have been excluded from the publicly available document and an
application for confidential treatment of the excluded Material has been made. (22)
10.39 Aircraft Lease Agreement (MSN 26440) dated as of March 15, 1999 between Indigo Aviation AB (publ),
Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded from the
publicly available document and an order granting confidential treatment of the excluded material
has been received. (13)
10.40 Aircraft Lease Agreement (MSN 24569) dated as of April 16, 1999 between C.I.T. Leasing
Corporation, Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been
excluded from the publicly available document and an order granting confidential treatment of the
excluded material has been received. (13)
10.41 Aircraft Lease Agreement (MSN 24856) dated as of June 2, 1999 between Indigo Aviation AB (publ),
Lessor and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded from the
publicly available document and an order granting confidential treatment of the excluded material
has been received. (13)
10.42 Severance Agreement dated March 10, 1999 between the Company and Samuel D. Addoms. (13)
10.43 Space and Use Agreement between Continental Airlines, Inc. and the Company. (13)
10.44 Aircraft Sublease Agreement (MSN 23039) dated as of July 21, 1999 between Kommanditbolaget
Flygplanet XIV, Sublessor, and Frontier Airlines, Inc., Sublessee. Portions of this exhibit have
been excluded from the publicly available document and an order granting confidential treatment of
the excluded material has been received. (14)
10.45 Aircraft Sublease Agreement (MSN 23040) dated as of July 21, 1999 between Kommanditbolaget
Flygplanet XII, Sublessor, and Frontier Airlines, Inc., Sublessee. Portions of this exhibit have
been excluded from the publicly available document and an order granting confidential treatment of
the excluded material has been received. (14)
10.46 Aircraft Sublease Agreement (MSN 26442) dated as of October 11, 1999 between Indigo Aviation AB
(publ), Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded
from the publicly available document and an order granting confidential treatment of the excluded
material has been received. (15)
10.47 Aircraft Lease Agreement (MSN 25256) dated as of January 7, 2000 between Aviation Financial
Services, Inc. Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been
excluded from the publicly available document and an order granting confidential treatment of the
excluded material has been received. (16)
10.48 Aircraft Lease Agreement (MSN 25159) dated as of January 7, 2000 between Aviation Financial
Services, Inc. Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been
excluded from the publicly available document and an order granting confidential treatment of the
excluded material has been received. (16)
10.49 Aircraft Lease Agreement (MSN 25264) dated as of January 7, 2000 between Aviation Financial
Services, Inc. Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been
excluded from the publicly available document and an order granting confidential treatment of the
excluded material has been received. (16)
10.50 Aircraft Lease Agreement (MSN 25263) dated as of January 7, 2000 between Aviation Financial
Services, Inc. Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been
excluded from the publicly available document and an order granting confidential treatment of the
excluded material has been received. (16)
10.51 Airbus A318/A319 Purchase Agreement dated as of March 10, 2000 between AVSA, S.A.R.L., Seller, and
Frontier Airlines, Inc., Buyer. Portions of this exhibit have been excluded from the publicly available
document and an order granting confidential treatment of the excluded material has been received. (16)
10.51(a) Amendment No. 1 to Airbus A318/319 Purchase Agreement dated as of March 10, 2000 between AVSA,
S.A.R.L., Seller, and Frontier Airlines, Inc., Buyer. Portions of this exhibit have been excluded
from the publicly available document and an order granting confidential treatment of the excluded
material has been received. (17)
10.51(b) Amendment No. 1 to Airbus A318/319 Purchase Agreement dated as of March 10, 2000 between AVSA,
S.A.R.L., Seller, and Frontier Airlines, Inc., Buyer. Portions of this exhibit have been excluded
from the publicly available document and an order granting confidential treatment of the excluded
material has been received. (18)
10.51(c) Amendment No. 3 to Airbus A318/319 Purchase Agreement dated as of March 10, 2000 between AVSA,
S.A.R.L., Seller, and Frontier Airlines, Inc., Buyer. Portions of this exhibit have been excluded
from the publicly available document and an application for an order granting confidential
treatment of the excluded material has been made. (20)
10.51(d) Amendment No. 3 to Airbus A318/319 Purchase Agreement dated as of March 10, 2000 between AVSA,
S.A.R.L., Seller, and Frontier Airlines, Inc., Buyer. Portions of this exhibit have been excluded
from the publicly available document and an application for an order granting confidential
treatment of the excluded material has been made. (22)
10.51(e) Amendment No. 3 to Airbus A318/319 Purchase Agreement dated as of March 10, 2000 between AVSA,
S.A.R.L., Seller, and Frontier Airlines, Inc., Buyer. Portions of this exhibit have been excluded
from the publicly available document and an application for an order granting confidential
treatment of the excluded material has been made. (23)
10.51(f) Amendment No. 3 to Airbus A318/319 Purchase Agreement dated as of March 10, 2000 between AVSA,
S.A.R.L., Seller, and Frontier Airlines, Inc., Buyer. Portions of this exhibit have been excluded
from the publicly available document and an application for an order granting confidential
treatment of the excluded material has been made. (23)
10.52 Aircraft Lease Common Terms Agreement dated as of April 20, 2000 between General Electric Capital
Corporation and Frontier Airlines, Inc. Portions of this exhibit have been excluded from the
publicly available document and an order granting confidential treatment of the excluded material
has been received. (16)
10.53 Aircraft Lease Agreement dated as of April 20, 2000 between Aviation Financial Services, Inc.,
Lessor, and Frontier Airlines, Inc., Lessee, in respect of 15 Airbus A319 Aircraft. Portions of
this exhibit have been excluded from the publicly available document and an order granting
confidential treatment of the excluded material has been received. (16)
10.54 Aircraft Lease Agreement dated as of May 25, 2000 between Frontier Airlines, Inc., Lessee, and
International Lease Finance Corporation, Lessor, in respect to one Airbus A318 aircraft. Portions
of this exhibit have been excluded from the publicly available document and an order granting
confidential treatment of the excluded material has been received. (16)
10.55 Lease dated as of May 5, 2000 for Frontier Center One, LLC, as landlord, and Frontier Airlines,
Inc., as tenant. Portions of this exhibit have been excluded from the publicly available document
and an order granting confidential treatment of the excluded material has been received. (16)
10.56 Operating Agreement of Frontier Center One, LLC, dated as of May 10, 2000 between Shea Frontier
Center, LLC, and 7001 Tower, LLC, and Frontier Airlines, Inc. Portions of this exhibit have been
excluded from the publicly available document and an order granting confidential treatment of the
excluded material has been received. (16)
10.57 Standard Industrial Lease dated April 27, 2000, between Mesilla Valley Business Park, LLC,
landlord, and Frontier Airlines, Inc., tenant. Portions of this exhibit have been excluded from
the publicly available document and an order granting confidential treatment of the excluded
material has been received. (16)
10.58 Aircraft Lease Agreement dated as of May 25, 2000 between Frontier Airlines, Inc., Lessee, and International
Lease Finance Corporation, Lessor, in respect to one Boeing 737 aircraft. Portions of this exhibit have been
excluded from the publicly available document and an order granting confidential treatment of the
excluded material has been received. (16)
10.59 Aircraft Lease Agreement dated as of August 14, 2000 between Frontier Airlines, Inc., Lessee, and International
Lease Finance Corporation, Lessor, in respect to one Boeing 737-300 aircraft (MSN 26301). Portions of
this exhibit have been excluded from the publicly available document and an order granting
confidential treatment of the excluded material has been received. (17)
10.60 General Terms Agreement No. 6-13616 between CFM International and Frontier Airlines, Inc. Portions of
this exhibit have been excluded from the publicly available document and an order granting confidential
treatment of the excluded material has been received. (17)
10.61 Lease Agreement dated as of December 15, 2000 between Gateway Office Four, LLC, Lessor, and Frontier Airlines,
Inc., Lessee. (18)
10.62 Code Share Agreement dated as of May 3, 2001 between Frontier Airlines, Inc. and Great Lakes Aviation, Ltd.
Portions of this exhibit have been excluded from the publicly available document and an order granting
confidential treatment of the excluded material has been received. (19)
10.62(a) Amendment No. 1 to the Codeshare Agreement dated as of May 3, 2001 between Frontier Airlines, Inc.
and Great Lakes Aviation, Ltd. Portions of the exhibit have been excluded from the publicly
available document and an application for confidential treatment of the excluded material has been
made (22)
10.63 Credit Agreement Dated as of May 9, 2001 between PK Finance and Frontier Airlines, Inc. Portions of this
exhibit have been excluded form the publicly available document and an order granting confidential treatment
of the excluded material has been received. (19)
10.64 Mortgage and Security Agreement dated as of May 9, 2001 between PK Finance and Frontier Airlines, Inc. (19)
10.65 Codeshare Agreement between Mesa Airlines, Inc. and Frontier Airlines, Inc. (21)
10.65(a) Amendment No. 1 to the Codeshare Agreement dated as of September 4, 2001 between Mesa Airlines,
Inc. and Frontier Airlines, Inc. Portions of this exhibit have been excluded from the publicly
available document and an application for confidential treatment of thee excluded material has
been made. (22)
10.66 Employee Stock Ownership Plan of Frontier Airlines, Inc. as amended and restated, effective
January 1, 1997 and executed February 5, 2002. (22)
10.66(a) Amendment of the Employee Stock Ownership Plan of Frontier Airlines, Inc. as amended and restated,
effective January 1, 1997 and executed February 5, 2002 for EGTRRA. (22)
10.67 Director Compensation Agreement between Frontier Airlines, Inc. and Samuel D. Addoms dated
effective April 1, 2002. (23)
23.1 Consent of KPMG LLP (23)
(1) Incorporated by reference from the Company's Registration Statement on Form SB-2, Commission File No.
33-77790-D, declared effective May 20, 1994.
(2) Incorporated by reference from the Company's Annual Report on Form 10-KSB, Commission File No. 0-4877,
filed on June 29, 1995.
(3) Incorporated by reference from the Company's Annual Report on Form 10-KSB, Commission File No. 0-4877,
filed on June 24, 1996.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB, Commission File No. 0-4877,
filed on February 13, 1997.
(5) Incorporated by reference from the Company's Annual Report on Form 10-KSB, Commission File No. 0-24126,
filed July 14, 1997.
(6) Incorporated by reference from the Company's Report on Form 8-K filed on March 12, 1997.
(7) Incorporated by reference from the Company's Report on Form 8-K filed on October 1, 1997.
(8) Incorporated by reference from the Company's Report on Form 8-K filed on December 12, 1997.
(9) Incorporated by reference from the Company's Report on Form 8-K filed on May 4, 1998.
(10) Incorporated by reference from the Company's Report on Form 10-Q, Commission File No. 0-24126, filed on
November 13, 1998.
(11) Incorporated by reference from the Company's Report on Form 10-Q, Commission File No. 0-24126, filed on
February 12, 1999.
(12) Incorporated by reference from the Company's Report on Form 10-K/A, Commission file No. 0-24126, filed on
July 9, 1998.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K, Commission File No., 0-24126,
filed on June 22, 1999.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q, Commission File No. 0-24126,
filed on August 10, 1999.
(15) Incorporated by reference from the Company's Quarterly Report on Form 10-Q, Commission File No. 0-24126,
filed on November 10, 1999.
(16) Incorporated by reference from the Company's Report on Form 10-K, Commission File No. 0-24126, filed on
June 26, 2000.
(17) Incorporated by reference from the Company's Quarterly Report on Form 10-Q, Commission File No. 0-24126
filed on November 2, 2000.
(18) Incorporated by reference from the Company's Quarterly Report on Form 10-Q, Commission File No. 0-24126,
filed on February 7, 2001.
(19) Incorporated by reference from the Company's Report on Form 10-KSB, Commission File No. 0-24126, filed on
June 8, 2001.
(20) Incorporated by reference from the Companys Quarterly Report on Form 10-Q, Commission File No. 0-24126
filed on August 3, 2001.
(21) Incorporated by reference from the Company's Quarterly Report on Form 10-Q, Commission File No. 0-24126
filed on November 14, 2001.
(22) Incorporated by reference from the Company's Quarterly Report on Form 10-Q, Commission File No.0-24126
filed on February 14, 2002.
(23) Filed herewith.
Item 14(b): Reports on Form 8-K.
During the quarter ended March 31, 2001, a report on Form 8-K was filed on January 22, 2001.
41
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: May 30, 2002 By: /s/ Paul H. Tate
-----------------------------------------------------------
Paul H. Tate, Vice President and
Chief Financial Officer
Date: May 30, 2002 By: /s/ Elissa A. Potucek
-----------------------------------------------------------
Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: May 30, 2002 By: /s/ Jeffery S. Potter
----------------------------------------------------------
Jeffery S. Potter, Director
Date: May 30, 2002 By: /s/ Samuel D. Addoms
---------------------------------------------------------
Samuel D. Addoms, Director
Date: May 30, 2002 By: /s/ William B. McNamara
---------------------------------------------------------
William B. McNamara, Director
Date: May 30, 2002 By: /s/ Paul Stephen Dempsey
---------------------------------------------------------
Paul Stephen Dempsey, Director
Date: May 30, 2002 By: /s/ B. LaRae Orullian
---------------------------------------------------------
B. LaRae Orullian, Director
Date: May 30, 2002 By: /s/ D. Dale Browning
--------------------------------------------------------------
D. Dale Browning, Director
Date: May 30, 2002 By: /s/ James B. Upchurch
--------------------------------------------------------------
James B. Upchurch, Director
Independent Auditors' Report
The Board of Directors and Stockholders
Frontier Airlines, Inc.:
We have audited the accompanying balance sheets of Frontier Airlines, Inc. as of March 31, 2002 and
2001, and the related statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended March 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Frontier Airlines, Inc. as of March 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the years in the three-year period ended March 31, 2002, in
conformity with accounting principles generally accepted in the United States of America.
As discussed in note 1 to the financial statements, the Company changed its method of accounting for
maintenance checks in 2000.
KPMG LLP
Denver, Colorado
May 15, 2002
FRONTIER AIRLINES, INC.
Balance Sheets
March 31, 2002 and 2001
2002 2001
------------------------ ------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 87,555,189 $ 109,251,426
Short-term investments 2,000,000 2,000,000
Restricted investments 11,574,000 9,100,000
Receivables, net of allowance for doubtful accounts of $155,000
and $368,000 at March 31, 2002 and 2001,respectively 35,391,857 32,380,943
Maintenance deposits 36,046,157 30,588,195
Prepaid expenses 11,013,602 10,849,080
Inventories 6,604,378 4,072,335
Deferred tax asset 1,788,078 1,506,218
Other current assets 74,952 45,621
------------------------ ------------------------
Total current assets 192,048,213 199,793,818
Security, maintenance and other deposits 65,591,608 45,680,373
Property and equipment, net 142,861,771 38,100,126
Restricted investments 12,660,210 11,683,660
Other assets 523,134 58,621
------------------------ ------------------------
$ 413,684,936 $ 295,316,598
======================== ========================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 20,152,888 $ 21,623,067
Air traffic liability 64,123,083 62,663,237
Other accrued expenses 22,060,082 18,236,479
Accrued maintenance expense 37,527,906 33,510,531
Refundable stabilization act compensation 4,835,381 -
Current portion of long-term debt 3,225,651 -
Current portion of obligations under capital leases 138,604 125,552
------------------------ ------------------------
Total current liabilities 152,063,595 136,158,866
Long-term debt 66,832,018 -
Accrued maintenance expense 15,796,330 12,175,225
Deferred tax liability 6,716,815 1,999,553
Deferred rent 3,077,326 -
Obligations under capital leases, excluding current portion 65,559 203,863
------------------------ ------------------------
Total liabilities 244,551,643 150,537,507
------------------------ ------------------------
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 and 40,000,000 shares at
March 31, 2002 and March 31, 2001, respectively;
29,421,331 and 28,194,602 issued and outstanding at
March 31, 2002 and March 31, 2001, respectively 29,422 28,195
Additional paid-in capital 85,867,486 77,606,918
Unearned ESOP shares (2,119,670) (1,662,087)
Retained earnings 85,356,055 68,806,065
------------------------ ------------------------
Total stockholders' equity 169,133,293 144,779,091
------------------------ ------------------------
Commitments and contingencies (notes 5 and 13)
$ 413,684,936 $ 295,316,598
======================== ========================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Income
Years Ended March 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Revenues:
Passenger $435,945,581 $462,608,847 $ 320,850,271
Cargo 6,623,665 7,516,867 6,855,882
Other 2,505,479 2,750,713 2,113,802
------------------------- ------------------------ -------------------------
Total revenues 445,074,725 472,876,427 329,819,955
------------------------- ------------------------ -------------------------
Operating expenses:
Flight operations 191,040,814 179,453,300 125,536,174
Aircraft and traffic servicing 70,201,825 60,408,236 48,954,728
Maintenance 70,227,020 65,529,428 50,238,538
Promotion and sales 59,458,779 55,880,717 46,013,812
General and administrative 26,173,864 25,428,753 16,327,410
Depreciation and amortization 11,586,703 5,454,673 3,440,069
------------------------- ------------------------ -------------------------
Total operating expenses 428,689,005 392,155,107 290,510,731
------------------------- ------------------------ -------------------------
Operating income 16,385,720 80,721,320 39,309,224
------------------------- ------------------------ -------------------------
Nonoperating income (expense):
Interest income 4,388,249 7,897,282 4,334,688
Interest expense (3,382,695) (94,393) (119,496)
Stabilization act compensation 12,703,007 - -
Aircraft lease termination (4,913,650) - -
Other, net (348,329) (191,771) (109,798)
------------------------- ------------------------ -------------------------
Total nonoperating income, net 8,446,582 7,611,118 4,105,394
------------------------- ------------------------ -------------------------
Income before income tax expense and
cumulative effect of change in method of
accounting for maintenance checks 24,832,302 88,332,438 43,414,618
Income tax expense 8,282,312 33,464,665 16,954,374
------------------------- ------------------------ -------------------------
Income before cumulative effect of change in
method of accounting for maintenance checks 16,549,990 54,867,773 26,460,244
Cumulative effect of change in method of
accounting for maintenance checks - - 549,009
------------------------- ------------------------ -------------------------
Net income $ 16,549,990 $ 54,867,773 $ 27,009,253
========================= ======================== =========================
(continued)
FRONTIER AIRLINES, INC.
Statements of Income, continued
Years Ended March 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Earnings per share:
Basic:
Income before cumulative effect of change in
method of accounting for maintenance checks $0.58 $2.02 $1.02
Cumulative effect of change in method of
accounting for maintenance checks - - 0.02
-------------------------- --------------------- -------------------------
Net income $0.58 $2.02 $1.04
========================== ===================== =========================
Diluted:
Income before cumulative effect of change in
method of accounting for maintenance checks $0.56 $1.90 $0.93
Cumulative effect of change in method of
accounting for maintenance checks - - 0.02
-------------------------- --------------------- -------------------------
Net income $0.56 $1.90 $0.95
========================== ===================== =========================
Weighted average shares of
common stock outstanding
Basic 28,603,861 27,152,099 25,994,100
========================== ===================== =========================
Diluted
29,515,150 28,842,783 28,285,032
========================== ===================== =========================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Stockholders' Equity
Years Ended March 31, 2002, 2001 and 2000
Retained
Common stock Additional Unearned earnings Total
Stated paid-in ESOP (accumulated stockholders'
Shares value capital shares deficit) equity
-----------------------------------------------------------------------------------------------------
Balances, March 31, 1999 24,211,758 $ 24,212 $ 58,046,773 $ (609,375) $(13,070,961) $ 44,390,649
Exercise of common stock
warrants 1,721,589 1,722 4,758,395 - - 4,760,117
Exercise of common stock
options 515,063 515 563,540 - - 564,055
Tax benefit from exercises of
common stock options and
warrants - - 3,425,055 - - 3,425,055
Contribution of common stock to
employees stock ownership plan 150,000 150 1,143,600 (1,143,750) - -
Amortization of employee stock
compensation - - - 895,412 - 895,412 -
Net income - - - - 27,009,253 27,009,253
----------------------------------------------------------------------------------------------------
Balances, March 31, 2000 26,598,410 $ 26,599 $ 67,937,363 $ (857,713) $ 13,938,292 $ 81,044,541
Exercise of common stock
warrants 583,030 583 1,450,570 - - 1,451,153
Exercise of common stock
options 879,025 879 1,884,366 - - 1,885,245
Tax benefit from exercises of
common stock options and
warrants - - 4,129,336 - - 4,129,336
Contribution of common stock to
employees stock ownership plan 135,000 135 2,216,115 (2,216,250) - -
Amortization of employee stock
compensation - - - 1,411,876 - 1,411,876
Adjustment for fractional shares
from stock dividend (863) (1) (10,832) - - (10,833)
Net Income - - - - 54,867,773 54,867,773
----------------------------------------------------------------------------------------------------
Balances, March 31, 2001 28,194,602 $ 28,195 $ 77,606,918 $ (1,662,087) $ 68,806,065 $144,779,091
Exercise of common stock
warrants 525,000 525 1,311,975 - - 1,312,500
Exercise of common stock
options 528,711 529 1,870,516 - - 1,871,045
Tax benefit from exercises of
common stock options and
warrants - - 2,252,023 - - 2,252,023
Contribution of common stock to
employees stock ownership plan 173,018 173 2,826,054 (2,826,227) - -
Amortization of employee stock
compensation - - - 2,368,644 - 2,368,644
Net income - - - 16,549,990 16,549,990
----------------------------------------------------------------------------------------------------
Balances, March 31, 2002 29,421,331 $ 29,422 $ 85,867,486 $ (2,119,670) $ 85,356,055 $169,133,293
====================================================================================================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Cash Flows
Years ended March 31, 2002, 2001, and 2000
--------------------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 16,549,990 $ 54,867,773 $ 27,009,253
Adjustments to reconcile net income to net cash
provided by operating activities:
Employee stock ownership plan compensation expense 2,368,644 1,411,876 895,412
Depreciation and amortization 11,670,818 5,618,200 3,725,697
Impairment recorded on fixed assets 1,511,642 - -
Loss on disposal of equipment 323,000 56,800 -
Deferred tax expense 4,435,402 1,146,015 5,459,468
Changes in operating assets and liabilities:
Restricted investments (4,588,250) (5,639,400) 402,000
Receivables (758,891) (6,060,773) (5,260,797)
Security, maintenance and other deposits (7,885,865) (16,207,351) (8,288,288)
Prepaid expenses (164,522) (3,462,229) (1,947,017)
Inventories (2,532,043) (1,837,152) (1,031,267)
Accounts payable (1,470,179) 7,215,154 396,675
Air traffic liability 1,459,846 18,144,400 15,631,145
Other accrued expenses 3,823,603 694,460 10,084,065
Accrued maintenance expense 7,638,480 16,578,273 8,130,957
Refundable stabilization act compensation 4,835,381 - -
Deferred rent 3,077,326 - -
------------------------- ------------------------ ------------------------
Net cash provided by operating
activities 40,294,382 72,526,046 55,207,303
------------------------- ------------------------ ------------------------
Cash flows from investing activities:
Increase (decrease) in short-term investments, net - 13,760,000 (15,760,000)
Increase in aircraft lease and purchase deposits, net (17,483,332) (22,810,967) (4,109,039)
Decrease (increase) in restricted investments 1,137,700 (3,330,500) (3,640,000)
Capital expenditures (118,182,990) (21,957,336) (16,360,553)
------------------------- ------------------------ ------------------------
Net cash used in investing activities (134,528,622) (34,338,803) (39,869,592)
------------------------- ------------------------ ------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants 3,183,545 3,325,566 5,324,172
Proceeds from long-term debt 72,000,000 - -
Payment of financing fees (577,959) - -
Principal payments on long-term debt (1,942,331) - -
Principal payments on obligations under capital leases (125,252) (112,316) (100,022)
------------------------- ------------------------ ------------------------
Net cash provided by financing activities 72,538,003 3,213,250 5,224,150
------------------------- ------------------------ ------------------------
Net (decrease) increase in cash and
cash equivalents (21,696,237) 41,400,493 20,561,861
Cash and cash equivalents, beginning of period 109,251,426 67,850,933 47,289,072
------------------------- ------------------------ ------------------------
Cash and cash equivalents, end of period $ 87,555,189 $109,251,426 $ 67,850,933
========================= ======================== ========================
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Financial Statements
March 31, 2002
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Frontier Airlines, Inc. ("Frontier" or the "Company") provides air transportation for passengers
and freight. Frontier was incorporated in the State of Colorado on February 8, 1994 and
commenced operations on July 5, 1994. Denver-based Frontier currently serves 28 cities coast to
coast with a fleet of 24 Boeing 737 and 6 Airbus A319 jets and employs approximately 2,800
aviation professionals.
Airline operations have high fixed costs relative to revenues and are highly sensitive to
various factors including the actions of competing airlines and general economic factors. Small
fluctuations in yield per revenue passenger mile or expense per available seat mile can
significantly affect operating results.
Preparation of Financial Statements
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.
Cash and Cash Equivalents
For financial statement purposes, the Company considers cash and short-term investments with an
original maturity of three months or less to be cash equivalents. These investments are stated
at cost, which approximates fair value.
Short-term Investments
Short-term investments consist of certificates of deposit with maturities between three months
and one year. These investments are classified as held-to-maturity and are carried at amortized
cost which approximates fair value. Held-to-maturity securities are those securities in which
the Company has the ability and intent to hold the security until maturity. Interest income is
recognized when earned.
FRONTIER AIRLINES, INC.
Notes to Financial Statements, continued
-------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Year for:
2002 2001 2000
---- ---- ----
Interest $ 3,081,370 $ 94,393 $ 119,496
Taxes $ 8,838,909 $ 21,926,000 $ 3,005,000
Restricted Investments
Restricted investments include certificates of deposit which secure certain letters of credit
issued primarily to companies which process credit card sale transactions, certain airport
authorities and aircraft lessors. Restricted investments are carried at cost, which management
believes approximates fair value. Maturities are for one year or less and the Company intends
to hold restricted investments until maturity.
Valuation and Qualifying Accounts
The allowance for doubtful accounts was approximately $155,000 and $368,000 at March 31, 2002
and 2001, respectively. Provisions for bad debts net of recoveries totaled $450,000,
$1,179,000, and $873,000 for the years ended March 31, 2002, 2001 and 2000, respectively.
Deductions from the allowance for doubtful accounts totaled $663,000, $982,000, and $902,000 for
the years ended March 31, 2002, 2001, and 2000, respectively.
Accrued maintenance expense was approximately $53,324,000 and $45,686,000 at March 31, 2002 and
2001, respectively. Provisions for accrued maintenance expenses totaled $22,168,000,
$24,970,000, and $22,811,000 for the years ended March 31, 2002, 2001 and 2000, respectively.
Deductions from accrued maintenance expense totaled $14,530,000, $8,391,000, and $14,681,000 for
the years ended March 31, 2002, 2001 and 2000, respectively.
Inventories
Inventories consist of expendable parts, supplies and aircraft fuel and are stated at the lower
of cost or market. Inventories are accounted for on a first-in, first-out basis and are charged
to expense as they are used.
At March 31, 2000, the Company had an aircraft parts agreement for its Boeing 737 aircraft with
an aircraft parts supplier that terminated in January 2001. The Company was required to pay a
monthly consignment fee to the lessor, based on the value of the consigned parts, and to
replenish any such parts when used with a like part. At March 31, 2000, the Company held
consigned parts and supplies in the amount of approximately $5,788,000 which are not included in
the Company's balance sheet.
Property and Equipment
Property and equipment are carried at cost. Major additions, betterments and renewals are
capitalized. Depreciation and amortization is provided for on a straight-line basis to
estimated residual values over estimated depreciable lives as follows:
Aircraft 25 years
Capitalized software 3 years
Flight equipment 5-10 years
Improvements to leased aircraft Life of improvements or term of lease,
whichever is less
Ground property, equipment, and
leasehold improvements 3-5 years or term of lease
Residual values for aircraft are at 25% of the aircraft cost, residual values for engines range
in amounts up to 48% of the engine's cost and residual values for major rotable parts are
generally 10% of the asset's cost, except when a guaranteed residual value or other agreements
exist to better estimate the residual value. Assets utilized under capital leases are amortized
over the lesser of the lease term or the estimated useful life of the asset using the
straight-line method. Amortization of capital leases is included in depreciation expense.
Manufacturers' Credits
The Company receives credits in connection with its purchase of aircraft, engines and other
rotable parts. These credits are deferred until the aircraft, engines and other rotable parts
are delivered and then applied on a pro-rata basis as a reduction to the cost of the related
equipment.
Maintenance
Routine maintenance and repairs are charged to operations as incurred.
Under the terms of its aircraft lease agreements, the Company is required to make monthly
maintenance deposits and a liability for accrued maintenance is established based on usage. The
deposits are applied against the cost of major airframe maintenance checks, landing gear
overhauls and engine overhauls. Deposit balances remaining at lease termination remain with the
lessor and any remaining liability for maintenance checks is reversed against the deposit
balance. Additionally, a provision is made for the estimated costs of scheduled major overhauls
required to be performed on leased aircraft and components under the provisions of the aircraft
lease agreements if the required monthly deposit amounts are not adequate to cover the entire
cost of the scheduled maintenance. The Company also accrues for major airframe maintenance
checks, landing gear overhauls and engine overhauls on its owned aircraft. Accrued maintenance
expense expected to be incurred beyond one year is classified as long-term.
Effective April 1, 1999, the Company changed its method of accounting for required periodic
maintenance checks from the accrue-in-advance method to the direct expensing method. The
Company believes that the newly adopted accounting principle is preferable in the circumstances
because there has not been an obligating event prior to the maintenance checks actually being
performed, and the new method is the predominant method used in the airline industry.
Fluctuations in these maintenance costs from period to period are not expected to be significant
given the maturity and current size of the Company's fleet. Previously, the Company
accrued-in-advance for periodic maintenance checks and overhauls, including the costs for
scheduled airframe, landing gear, and engine overhauls. The Company continues to utilize
the accrue-in-advance method for scheduled major airframe and maintenance checks, landing gear
overhauls and engine overhauls because the Company's aircraft lease agreements require the
Company to make non-refundable monthly deposits with the lessors for such costs.
The cumulative effect of the change, calculated as of April 1, 1999, was to increase net income
by $549,009 or $.02 per diluted share. The effect of the change was to decrease net income for
the year ended March 31, 2000 by $247,713 or $.01 per diluted share.
Advertising Costs
The Company expenses the costs of advertising as promotion and sales in the year incurred.
Advertising expense was $9,086,752, $6,076,501, and $4,437,149 for the years ended March 31,
2002, 2001, and 2000, respectively.
Development Costs
Development costs related to the preparation of operations for new routes are expensed as
incurred.
Revenue Recognition
Passenger, cargo, and other revenues are recognized when the transportation is provided or after
the tickets expire, and are net of excise taxes. Unearned revenues have been deferred and
included in the accompanying balance sheet as air traffic liability.
Passenger Traffic Commissions and Related Expenses
Passenger traffic commissions and related expenses are expensed when the transportation is
provided and the related revenue is recognized. Passenger traffic commissions and related
expenses not yet recognized are included as a prepaid expense.
Frequent Flyer Awards
In February 2001, the Company established EarlyReturns, a frequent flyer program to encourage
travel on its airline and customer loyalty.
The Company accounts 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. The Company does not record a liability for mileage earned by participants who have
not reached the level to become eligible for a free travel award. The Company believes this is
appropriate because the large majority of these participants are not expected to earn a free
flight award. The Company does not record a liability for the expected redemption of miles for
non-travel awards since the cost of these awards to the Company is negligible.
As of March 31, 2002 and 2001, the Company estimated that approximately 4,600 and 20 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, the Company expected 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 March 31, 2002 the Company had recorded a liability of approximately
$65,000 and none as of March 31, 2001 for these rewards.
Common Stock
On March 5, 2001, the Company distributed a fifty percent stock dividend to shareholders of
record on February 19, 2001. All share and per share data presented in the financial statements
and notes thereto have been restated to give effect to this stock dividend.
Earnings Per Common Share
Basic earnings per common share excludes the effect of potentially dilutive securities and is
computed by dividing income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per common share reflects the potential dilution of securities that
could share in earnings.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under that method,
deferred income taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and tax bases of existing assets and liabilities. A
valuation allowance for net deferred tax assets is provided unless realizability is judged by
management to be more likely than not. The effect on deferred taxes from a change in tax rates
is recognized in income in the period that includes the enactment date.
Fair Value of Financial Instruments
The Company estimates the fair value of its monetary assets and liabilities based upon existing
interest rates related to such assets and liabilities compared to current rates of interest for
instruments with a similar nature and degree of risk. The Company estimates that the carrying
value of all of its monetary assets and liabilities approximates fair value as of March 31, 2002
and 2001.
Stock Based 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). Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying Common Stock on the date of grant, no compensation
expense is recognized. The Company has included the pro forma disclosures required by SFAS 123
in Note 9.
Impairment of Long-Lived Assets
The Company records 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 assets' carrying amount. During the year ended March 31, 2002, the
Company wrote down the carrying value of spare parts that support the Boeing 737-200 aircraft by
$1,512,000 as a result of diminished demand for that aircraft type, the write down is included
in maintenance expenses. The amount of the write down was based on prevailing market values at
that time.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 141, "Business Combinations" which requires the use of the purchase
method and eliminates the option of using the pooling-of-interests method of accounting for all
business combinations. The provisions in this statement apply to all business combinations
initiated after June 30, 2001, and all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later. This accounting
pronouncement presently has no impact on the Company as it does not have any business
combinations planned.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142) which requires that all intangible assets acquired, other
than those acquired in a business combination, be initially recognized and measured based on the
asset's fair value. Goodwill and certain identifiable intangible assets are not to be amortized
under SFAS 142, but instead are reviewed for impairment at least annually in accordance with the
provisions of this statement. The Company is required to adopt the provisions of SFAS 142
effective April 1, 2002. This accounting pronouncement will have no impact on the Company as it
does not have any intangible assets on its balance sheet.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" (SFAS 143), which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction, development
and/or normal use of the asset. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is depreciated over the life
of the asset. The liability is accreted at the end of each period through charges to operating
expense. If the obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The Company does not expect the impact of
adopting SFAS 143 to be significant.
In October 2001, the FASB issued Statement of Financial Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of", it retains many of the fundamental provisions of that Statement. SFAS 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of A Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a
business. The Company does not expect the impact of adopting SFAS 144 to be significant.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
(2) Air Transportation Safety and System Stabilization Act
As a result of the September 11, 2001 terrorist attacks on the United States, on September 22,
2001 President Bush signed into law the Air Transportation Safety and System Stabilization Act
(the "Act"). The Act includes for all U.S. airlines and air cargo carriers the following key
provisions: (i) $5 billion in cash compensation, of which $4.5 billion is available to
commercial passenger airlines and is allocated based on the lesser of each airline's share of
available seat miles during August 2001 or the direct and incremental losses (including lost
revenues) incurred by the airline from September 11, 2001 through December 31, 2001; (ii)
subject to certain conditions, the availability of up to $10 billion in federal government
guarantees of certain loans made to air carriers for which credit is not reasonably available as
determined by a newly established Air Transportation Stabilization Board; (iii) the authority of
the Secretary of Transportation to reimburse air carriers (which authority expires 180 days
after the enactment of the Act) for increases in the cost of war risk insurance over the premium
in effect for the period September 4, 2001 to September 10, 2001; (iv) at the discretion of the
Secretary of Transportation, a $100 million limit on the liability of any air carrier to third
parties with respect to acts of terrorism committed on or to such air carrier during the 180 day
period following enactment of the Act; and (v) the extension of the due date for the payment by
air carriers of certain payroll and excise taxes until November 15, 2001 and January 15, 2002,
respectively.
The Company was eligible to receive up to approximately $20,200,000 from the $5 billion in cash
compensation, of which $17,538,388 was received as of March 2002. The Company recognized
$12,703,007 of the grant during the year ended March 31, 2002 which is included in nonoperating
income and expense. The remaining $4,835,381 represents amounts received in excess of estimated
allowable direct and incremental losses incurred from September 11, 2001 through December 31,
2001 and is included as a liability on the balance sheet as of March 31, 2002.
(3) Property and Equipment, Net
As of March 31, 2002 and 2001 property and equipment consisted of the following:
2002 2001
---- ----
Aircraft, spare aircraft parts, and improvements to
leased aircraft $ 142,590,544 $ 32,770,377
Ground property, equipment and leasehold improvements 20,989,272 12,704,749
Construction in progress 1,829,400 3,665,614
------------------------ -----------------------
165,409,216 49,140,740
Less: accumulated depreciation and amortization 22,547,445 11,040,614
------------------------ -----------------------
Property and equipment, net $ 142,861,771 $ 38,100,126
======================== =======================
Property and equipment includes certain office equipment and software under capital leases. At
March 31, 2002 and 2001, office equipment and software recorded under capital leases were
$602,149 in both years and accumulated amortization was $400,843 and $302,204, respectively.
At March 31, 2002 and 2001, construction in progress includes capitalized software totaling
approximately $642,000 and $900,000, respectively, and Airbus flight equipment not yet placed in
service totaling approximately $1,187,000 and $2,800,000, respectively.
(4) Other Accrued Expenses
The March 31, 2002 and 2001 other accrued expenses is comprised of the following:
2002 2001
---- ----
Accrued salaries and benefits $ 11,857,466 $ 11,769,806
Federal excise taxes payable 6,383,350 2,720,977
Other 3,819,266 3,745,696
------------------------ ------------------------
$ 22,060,082 $ 18,236,479
======================== ========================
(5) Lease Commitments
Aircraft Leases
At March 31, 2002 and 2001, the Company operated 27 and 25 aircraft, respectively, which are
accounted for under operating lease agreements with initial terms ranging from 2.7 years to 12
years. Certain leases allow for renewal options. During the year ended March 31, 2001, the
Company entered into aircraft leases for 16 Airbus aircraft with lease terms of approximately 12
years. Delivery dates began in June 2001 and end in October 2004. Security deposits related to
leased aircraft and future leased aircraft deliveries at March 31, 2002 and 2001 totaled
$5,293,189 and $3,957,789 and are included in security, maintenance and other deposits on the
balance sheet. Letters of credit issued to certain aircraft lessors in lieu of cash deposits
and related restricted investments to secure these letters of credit at March 31, 2002 and 2001
totaled $9,282,700 and $7,526,000, respectively.
During the year ended March 31, 2002, the Company negotiated early lease terminations on two of
its Boeing 737-200 aircraft resulting in a charge of $4,913,650, representing the payment
amounts due to terminate the lease early. The lease expiration dates were accelerated to
November 2002 and January 2003 from the original lease return dates of September 2004 and
November 2004, respectively.
In addition to scheduled future minimum lease payments, the Company is required to make monthly
maintenance deposits and a liability for accrued maintenance is established based on usage. The
lease agreements require the Company to pay taxes, maintenance, insurance, and other operating
expenses applicable to the leased property. At March 31, 2002 and 2001, aircraft maintenance
deposits totaled $51,055,190 and $42,255,002, respectively, and are reported as a component of
security, maintenance and other deposits on the balance sheet.
Any cash deposits paid to aircraft lessors for future scheduled maintenance costs to the extent
not used during the lease term remain with the lessors, and any remaining liability for
maintenance checks is reversed against the deposit balance. Maintenance deposits are unsecured
and may be subject to the risk of loss in the event the lessors are not able to satisfy their
obligations under the lease agreements. No reserves have been accrued as the Company views this
potential event as remote.
Other Leases
The Company leases an office, hangar space, spare engines and office equipment for its
headquarters, airport facilities, and certain other equipment. The Company also leases certain
airport gate facilities on a month-to-month basis.
At March 31, 2002, commitments under noncancelable operating leases (excluding maintenance
deposit requirements) with terms in excess of one year were as follows:
Operating
Leases
-------
Year ended March 31:
2003 $ 78,609,278
2004 74,549,991
2005 69,669,143
2006 55,782,987
2007 69,797,645
Thereafter 357,895,002
----------------------------
Total minimum lease payments $706,304,046
============================
Rental expense under operating leases, including month-to-month leases, for the years ended
March 31, 2002, 2001 and 2000 was $86,603,234, $80,781,897 and $65,201,876, respectively.
(6) Long-term Debt
In May 2001, the Company 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. Each
aircraft loan has a term of 120 months and is payable in equal monthly installments, including
interest payable in arrears. The loans are secured by the aircraft. During the year ended
March 31, 2002, the Company had borrowed $72,000,000 for the purchase of these three aircraft.
Each loan provides for monthly principal and interest payments ranging from $207,579 to
$218,109, bears interest with rates ranging from 6.05% to 6.71%, averaging 6.43% for the three
aircraft loans, with maturities in May, August, and September 2011, at which time balloon
payments totaling $10,200,000 are due with respect to each aircraft loan. As of March 31, 2002,
the Company had $70,057,669 of debt outstanding secured by these three Airbus aircraft.
Maturities of long-term debt are as follows:
2003 $ 3,225,651
2004 3,425,845
2005 3,656,209
2006 3,912,662
2007 4,168,783
Thereafter 51,668,519
---------------------------
$ 70,057,669
===========================
(7) Income Taxes
Income tax expense (benefit) for the years ended March 31, 2002, 2001, and 2000 consists of:
Current Deferred Total
--------- ---------- -------
Year ended March 31, 2002:
U.S. Federal $ 4,714,262 $ 3,971,594 $ 8,685,856
State and local (867,353) 463,809 (403,544)
---------------------- --------------------------- ---------------------
$ 3,846,909 $ 4,435,403 $ 8,282,312
====================== =========================== =====================
Year ended March 31, 2001:
U.S. Federal $28,441,039 $ 1,008,515 $29,449,554
State and local 3,877,611 137,500 4,015,111
---------------------- --------------------------- ---------------------
$32,318,650 $ 1,146,015 $33,464,665
====================== =========================== =====================
Year ended March 31, 2000:
U.S. Federal $ 9,785,064 $ 4,726,153 $14,511,217
State and local 1,811,343 631,814 2,443,157
---------------------- --------------------------- ---------------------
$11,596,407 $ 5,357,967 $16,954,374
====================== =========================== =====================
The differences between the Company's effective rate for income taxes and the federal statutory
rate are shown in the following table:
2002 2001 2000
---- ---- ----
Income tax expense
at the statutory rate 35% 35% 35%
State and local income tax, net of
federal income tax benefit (3%) 3% 3%
Nondeductible expenses 1% - 1%
----------------- ------------------ -----------------
33% 38% 39%
================= ================== =================
The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets (liabilities) at March 31, 2002 and 2001 are presented below:
2002 2001
---- ----
Deferred tax assets:
Accrued vacation and health insurance
liability not deductible for tax purposes 1,719,555 1,053,095
Accrued workers compensation liability
not deductible for tax purposes 483,879 302,131
Deferred rent not deductible for tax
purposes 1,157,725 -
Impairment recorded on fixed assets not
deductible for tax purposes 564,317 -
Other 207,479 150,992
--------------------------- -----------------------
Total gross deferred tax assets 4,132,955 1,506,218
=========================== =======================
Deferred tax liabilities:
Equipment depreciation and amortization (8,438,857) (1,999,553)
Prepaid commissions (622,835) -
--------------------------- -----------------------
Total gross deferred tax liabilities (9,061,692) (1,999,553)
=========================== =======================
Net deferred tax liabilities (4,928,737) (493,335)
=========================== =======================
The net deferred tax assets (liabilities) are reflected in the accompanying balance sheet as
follows:
2002 2001
---- ----
Current deferred tax assets $ 1,788,078 $ 1,506,218
Non-current deferred tax liabilities (6,716,815) (1,999,553)
------------------------- ---------------------
Net deferred tax assets $ (4,928,737) $ (493,335)
========================= ======================
During the year ended March 31, 2002, the Company recorded a credit to income tax expense
totaling $1,327,000. During the year ended March 31, 2001, the Company accrued income tax
expense at the rate of 38.7% which was greater than the actual effective tax rate of 37.6%
determined upon completion and filing of the income tax returns in December 2001. During the
year ended March 31, 2002, the Company also recorded a $441,000 reduction to income tax expense
as a result of a review and revision of state tax apportionment factors used in filing the
amended state tax returns for 2000.
(8) Warrants and Stock Purchase Rights
In October 1995, the Company issued to each of two Boeing 737-300 aircraft lessors a warrant to
purchase 150,000 shares of Common Stock for an aggregate purchase price of $500,000. In June
1996, the Company issued two warrants to a Boeing 737-200 lessor, each warrant entitling the
lessor to purchase 105,000 shares of Common Stock at an aggregate exercise price of $503,300 per
warrant. In connection with a Boeing 737-300 aircraft delivered in August 1997, the Company
issued to the lessor a warrant to purchase 82,500 shares of Common Stock at an aggregate
purchase price of $385,000. During May and June 1999, aircraft lessors exercised all 592,500
warrants with net proceeds to the Company totaling $2,391,600. To the extent that the aircraft
lessors were able to realize certain profit margins on their subsequent sale of the stock, they
were required to refund a portion of the cash security deposits they were holding. As a result
of their sale of the Company's Common Stock, $1,024,000 in cash security deposits were returned
to the Company during the year ended March 31, 2000.
In May 1998, the Company issued to its financial advisor, in connection with debt and equity
financings, a warrant to purchase 822,000 shares of the Company's Common Stock at a purchase
price of $2.00 per share. During the year ended March 31, 2000, the financial advisor exercised
the warrant with net proceeds to the Company totaling $1,644,000.
In April 1998, in connection with a private placement of shares of its Common Stock, the Company
issued a warrant to an institutional investor to purchase 1,075,393 shares of its Common Stock
at a purchase price of $2.50 per share. During the years ended March 31, 2002 and 2001, the
institutional investor exercised 525,000 and 550,394 warrants, respectively, with net proceeds
to the Company totaling $1,312,500 and $1,375,984.
In February 1997, the Board of Directors declared a dividend distribution of one Common Stock
purchase right for each share of the Company's Common Stock outstanding on March 15, 1997. Each
right entitles a shareholder to purchase one share of the Company's Common Stock at a purchase
price of $65.00 per full common share, subject to adjustment. There are currently 0.67 rights
associated with each outstanding share of Common Stock. The rights are not currently
exercisable, but would become exercisable if certain events occurred relating to a person or
group acquiring or attempting to acquire 20 percent or more of the outstanding shares of the
Company's Common Stock. The rights expire on February 20, 2007, unless redeemed by the Company
earlier. Once the rights become exercisable, each holder of a right will have the right to
receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other
securities of the Company) having a value equal to two times the exercise price of the right.
(9) Stock Option Plan
The Company has a stock option plan whereby the Board of Directors or its Compensation Committee
may grant options to purchase shares of the Company's Common Stock to employees, officers, and
directors of the Company.
Under the plan, the Company has reserved an aggregate of 6,375,000 shares of Common Stock for
issuance pursuant to the exercise of options. With certain exceptions, options issued through
March 31, 2002 generally vest over a five-year period from the date of grant and expire from
March 9, 2004 to March 31, 2012. At March 31, 2002, 1,088,075 options are available for grant
under the plan.
A summary of the Plan's stock option activity and related information for the years ended March
31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
------------------------------------------------------------------------------------------
Weight- Weight- Weight-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------------
Outstanding-beginning of year 2,203,444 $6.07 2,629,469 $3.61 2,694,531 $2.23
Granted 579,300 $14.95 517,500 $11.56 450,000 $8.94
Exercised (528,711) $3.45 (879,025) $2.18 (515,062) $1.09
Surrendered (184,000) $11.27 (64,500) $5.95 - -
------------------------------------------------------------------------------------------
2,070,033 $8.78 2,203,444 $6.07 2,629,469 $3.61
==========================================================================================
Exercisable at end of year 831,834 $6.65 911,945 $3.16 1,459,469 $1.85
Exercise prices for options outstanding under the plan as of March 31, 2002 ranged from $.667 to
$24.168 per option share. The weighted-average remaining contractual life of those options is
7.3 years. A summary of the outstanding and exercisable options at March 31, 2002, segregated
by exercise price ranges, is as follows:
Weighted-
Average
Weighted Remaining Weighted-
Exercise Price Options Average Contractual Exerciserable Average
Range Outstanding Exercise Price Life (in years) Options Exercise Price
----------------------------------------------------------------------------------------------------------------------------
$ 0.667 - $ 3.374 481,233 $1.75 4.5 322,234 $1.39
$ 5.417 - $ 8.834 733,000 6.49 7.4 314,200 6.03
$ 10.001 - $ 14.80 564,000 12.41 8.6 96,600 11.48
$15.140 - $19.461 167,500 17.22 9.2 16,500 17.57
$21.200 - $24.168 124,300 21.93 9.7 82,300 21.77
------------------------------------------------------------------------------------------
2,070,033 $8.78 7.3 831,834 $6.65
==========================================================================================
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. 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 2002,
2001 and 2000, respectively: risk-free interest rates of 4.47%, 6.02% and 5.98%, dividend
yields of 0%, 0% and 0%; volatility factors of the expected market price of the Company's common
stock of 83.75%, 56.78% and 61.38%, and a weighted-average expected life of the options of 2.6
years, 2.7 years, and 3.5 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 and earnings per share would be as follows:
2002 2001 2000
---- ---- ----
Net income:
As reported $ 16,549,990 $ 54,867,773 $ 27,009,253
Pro forma $ 14,424,422 $ 53,527,821 $ 26,230,907
Earnings per share, basic:
As reported $ 0.58 $ 2.02 $ 1.04
Proforma $ 0.50 $ 1.97 $ 1.01
Earnings per share, diluted:
As reported $ 0.56 $ 1.90 $ 0.95
Proforma $ 0.49 $ 1.86 $ 0.93
(10) Retirement Plans
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (ESOP) which inures to the benefit
of each employee of the Company, except those employees covered by a collective bargaining
agreement that does not provide for participation in the ESOP. Company contributions to the
ESOP are discretionary and may vary from year to year. In order for an employee to receive an
allocation of Company Common Stock from the ESOP, the employee must be employed on the last day
of the ESOP's plan year, with certain exceptions. The Company's annual contribution to the
ESOP, if any, will be allocated among the eligible employees of the Company as of the end of
each plan year in proportion to the relative compensation (as defined in the ESOP) earned that
plan year by each of the eligible employees. The ESOP does not provide for contributions by
participating employees. Employees will vest in contributions made to the ESOP based upon their
years of service with the Company. A year of service is an ESOP plan year during which an
employee has at least 1,000 hours of service. Vesting generally occurs at the rate of 20% per
year, beginning after the first year of service, so that a participating employee will be fully
vested after five years of service. Distributions from the ESOP will not be made to employees
during employment. However, upon termination of employment with the Company, each employee will
be entitled to receive the vested portion of his or her account balance.
During the years ended March 31, 2002, 2001 and 2000, the Company contributed 173,018, 135,000
and 150,000 shares, respectively to the plan. Total Company contributions to the ESOP from
inception through March 31, 2002 totaled 1,194,831 shares. The Company recognized compensation
expense during the years ended March 31, 2002, 2001 and 2000 of $2,368,644, $1,411,876 and
$895,412, respectively, related to its contribution to the ESOP.
Retirement Savings Plan
The Company has established a Retirement Savings Plan (401(k)). Participants may contribute
from 1% to 15% of pre-tax annual compensation. Annual individual pre-tax participant
contributions are limited to $11,000 for calendar year 2002 and $10,500 for calendar years 2001
and 2000, under the Internal Revenue Code. Participants are immediately vested in their
voluntary contributions.
The Company's Board of Directors have elected to match 50% of participant contributions up to
10% of salaries from May 2000 through December 2002. For the plan year ending December 31,
1999, the Company's Board of Directors elected to match 25% of participant contributions from
April 1999 through April 2000. During the years ended March 31, 2002, 2001, and 2000, the
Company recognized compensation expense associated with the matching contributions totaling
$2,087,984, $1,286,611 and $513,758, respectively. Future matching contributions, if any, will
be determined annually by the Board of Directors. In order to receive the matching
contribution, participants must be employed on the last day of the plan year. Participants will
vest in contributions made to the 401(k) upon their years of service with the Company. A year
of service is a 401(k) plan year during which a participant has at least 1,000 hours of
service. Vesting generally occurs at the rate of 20% per year, beginning after the first year
of service, so that a participant will be fully vested after five years of service. Upon
termination of employment with the Company, each participant will be entitled to receive the
vested portion of his or her account balance.
Retirement Health Plan
In conjunction with the Company's collective bargaining agreement with its pilots, retired
pilots and their dependents may retain medical benefits under the terms and conditions of the
Health and Welfare Plan for Employees of Frontier Airlines, Inc. ("the Plan") until age 65. The
cost of retiree medical benefits are continued under the same contribution schedule as active
employees. The following table provides a reconciliation of the changes in the Plan's benefit
obligations and fair value of assets for the year ended March 31, 2002 and 2001.
Reconciliation of benefit obligation:
2002 2001
---- ----
Obligation at beginning of period $ 344,348 $ -
Service cost 402,866 327,073
Interest cost 25,288 24,273
Benefits paid (4,627) -
Net actuarial gain (9,713) (6,998)
--------------------------------------------
Obligation at end of period $ 758,162 $ 344,348
============================================
The following is a statement of funded status as of March 31:
2002 2001
---- ----
Funded status $ (758,162) $ (344,348)
Unrecognized net actuarial gain (16,711) (6,998)
--------------------------------------------
Accrued benefit liability $ (774,873) $ (351,346)
============================================
(11) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
2002 2001 2000
----------------------------------------------------
Numerator:
Income before cumulative effect of change in
method of accounting for maintenance checks $16,549,990 $54,867,773 $26,460,244
Cumulative effect of change in method of
accounting for maintenance checks - - 549,009
----------------------------------------------------
Net income $16,549,990 $54,867,773 $27,009,253
====================================================
Denominator:
Weighted average shares outstanding,
basic 28,603,861 27,152,099 25,994,100
Dilutive effect of employee stock options 911,289 1,260,094 1,521,439
Dilutive effect of warrants - 430,590 769,493
----------------------------------------------------
Adjusted weighted-average shares
outstanding, diluted
29,515,150 28,842,783 28,285,032
====================================================
Basic earnings per share:
Income before cumulative effect of change in
method of accounting for maintenance checks 0.58 2.02 1.02
Cumulative effect of change in method of
accounting for maintenance checks - - 0.02
----------------------------------------------------
Basic earnings per share 0.58 2.02 1.04
====================================================
Diluted earnngs per share:
Before cumulative effect of
change in accounting principle 0.56 1.90 0.93
Cumulative effect of change in
accounting principle - - 0.02
----------------------------------------------------
Diluted earnings per share 0.56 1.90 0.95
====================================================
For the years ending March 31, 2002, 2001 and 2000, the Company has excluded from its
calculations of diluted earnings per share, 326,800, 97,500 and 247,500 options and warrants,
with exercise prices ranging from $15.14 to $24.17, $15.19 to $24.17, and $8.55 to $11.05,
respectively, because the exercise price of the options and warrants was less than the average
market price of the common shares for the respective year.
(12) Concentration of Credit Risk
The Company does not believe it is subject to any significant concentration of credit risk
relating to receivables. At March 31, 2002 and 2001, 64.9% and 79.5% of the Company's
receivables relate to tickets sold to individual passengers through the use of major credit
cards, travel agencies approved by the Airlines Reporting Corporation, tickets sold by other
airlines and used by passengers on Company flights, the United States Postal Service, and the
Internal Revenue Service. Receivables related to tickets sold are short-term, generally being
settled shortly after sale or in the month following ticket usage.
(13) Commitments and Contingencies
From time to time, we are engaged in routine litigation incidental to our business. We believe
there are no legal proceedings pending in which we are a party or of which any of our property
is the subject that are not adequately covered by insurance maintained by us, or which, if
adversely decided, would have a material adverse affect upon our business or financial condition.
In March 2000, the Company entered into an agreement with AVSA, S.A.R.L., as subsequently
amended, to purchase up to 31 new Airbus aircraft. We have agreed to firm purchases of 17 of
these aircraft, and have options remaining to purchase up to an additional 14 aircraft. During
the year ended March 31, 2002, we took delivery of three of these aircraft. The remaining 14
firm aircraft are scheduled to be delivered in calendar years 2002 through 2005. 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
$420,000,000 at March 31, 2002. Under the terms of the purchase agreement, the Company is
required to make scheduled pre-delivery payments. These payments are non-refundable with certain
exceptions. As of March 31, 2002, the Company has made pre-delivery payments totaling
$44,658,899 to secure these aircraft and option aircraft. Pre-delivery payments due in fiscal
year 2003 approximate $38,124,359. After pre-delivery payments, the balance of the total
purchase price must be paid upon delivery of each aircraft. In order to complete the purchase
of these aircraft, it will be necessary for the Company to secure financing. The amount of
financing required will depend on the number of aircraft purchase options exercised and the
amount of cash generated by operations prior to delivery of the aircraft. At this time, the type
of financing has not been determined except for the three initial Airbus aircraft.
(14) Selected Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2002
----
Revenues $ 123,316,357 $ 116,006,211 $ 92,556,856 $ 113,195,301
=================== =================== ================== ===================
Operating expenses $ 112,010,797 $ 114,035,857 $ 95,849,342 $ 106,793,009
=================== =================== ================== ===================
Net income $ 7,739,597 $ 7,278,583 $ 908,623 $ 623,187
=================== =================== ================== ===================
Earnings per share:
Basic 0.27 0.26 0.03 0.02
=================== =================== ================== ===================
Diluted 0.26 0.24 0.03 0.02
=================== =================== ================== ===================
2001
----
Revenues $ 112,808,744 $ 131,082,878 $ 114,212,036 $ 114,772,769
=================== =================== ================== ===================
Operating expenses $ 87,435,488 $ 100,489,658 $ 99,549,616 $ 104,680,345
=================== =================== ================== ===================
Net income $ 16,448,242 $ 20,193,576 $ 10,284,653 $ 7,941,302
=================== =================== ================== ===================
Earnings per share:
Basic 0.62 0.75 0.38 0.28
=================== =================== ================== ===================
Diluted 0.57 0.69 0.35 0.27
=================== =================== ================== ===================