Quarterly Report
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1256945
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(State or other jurisdiction of incorporated or organization) (I.R.S. Employer Identification No.)
7001 Tower Road, Denver, CO 80249
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (720) 374-4200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
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The number of shares of the Company's Common Stock outstanding as of July 31, 2001 was 28,352,102.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
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Item 1. Financial Information
Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5
Item 3: Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Balance Sheets
(Unaudited) June 30, March 31,
2001 2001
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Assets
------
Current assets:
Cash and cash equivalents $ 100,082,049 $ 109,251,426
Short-term investments 2,000,000 2,000,000
Restricted investments 11,700,000 9,100,000
Receivables, net of allowance for doubtful accounts of $387,000
and $368,000 at June 30, 2001 and March 31, 2001, respectively 21,390,685 32,380,943
Maintenance deposits 34,830,217 30,588,195
Prepaid expenses and other assets 11,355,713 10,849,080
Inventories 5,101,451 4,072,335
Deferred tax assets 2,006,759 1,506,218
Deferred lease and other expenses 27,684 45,621
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Total current assets 188,494,558 199,793,818
Security, maintenance and other deposits 49,830,465 45,680,373
Property and equipment, net 88,674,660 38,100,126
Deferred lease and other expenses 304,730 58,621
Restricted investments 11,477,760 11,683,660
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$ 338,782,173 $ 295,316,598
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Liabilities and Stockholders' Equity
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Current liabilities:
Accounts Payable $ 17,418,750 $ 21,623,067
Air traffic liability 68,740,309 62,663,237
Other accrued expenses 20,231,726 18,236,479
Accrued maintenance expense 38,247,753 33,510,531
Current portion of long-term debt 1,024,623 -
Income taxes payable 891,563 -
Current portion of obligations under capital leases 128,857 125,552
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Total current liabilities 146,683,581 136,158,866
Long-term debt 22,904,975 -
Accrued maintenance expense 12,242,711 12,175,225
Deferred tax liability 2,484,714 1,999,553
Deferred rent 618,151 -
Obligations under capital leases, excluding current portion 170,590 203,863
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Total liabilities 185,104,722 150,537,507
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Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares; none issued - -
Common stock, no par value, stated value of $.001 per share, authorized
40,000,000 shares; 28,339,602 and 28,194,602 shares issued and
outstanding at June 30, 2001 and March 31, 2001, respectively 28,340 28,195
Additional paid-in capital 78,211,474 77,606,918
Unearned ESOP shares (1,108,025) (1,662,087)
Retained earnings 76,545,662 68,806,065
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Total stockholders' equity 153,677,451 144,779,091
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$ 338,782,173 $ 295,316,598
==================================
FRONTIER AIRLINES, INC.
Statements of Income
(Unaudited)
Three Months Ended June 30,
2001 2000
---------------------------------
Revenues:
Passenger $ 120,727,839 $ 110,967,395
Cargo 1,965,573 1,225,494
Other 622,945 615,855
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Total revenues 123,316,357 112,808,744
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Operating expenses:
Flight operations 49,736,454 39,631,087
Aircraft and traffic servicing 17,845,970 13,647,785
Maintenance 18,347,190 14,390,883
Promotion and sales 16,524,763 12,461,773
General and administrative 7,234,552 6,229,618
Depreciation and amortization 2,321,868 1,074,342
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Total operating expenses 112,010,797 87,435,488
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Operating income 11,305,560 25,373,256
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Nonoperating income (expense):
Interest income 1,530,758 1,624,434
Interest expense (252,874) (17,459)
Other, net (49,683) (15,900)
---------------------------------
Total nonoperating income, net 1,228,201 1,591,075
---------------------------------
Income before income tax expense 12,533,761 26,964,331
Income tax expense 4,794,164 10,516,089
---------------------------------
Net income $ 7,739,597 $ 16,448,242
=================================
Earnings per share:
Basic $0.27 $0.62
=================================
Diluted $0.26 $0.57
=================================
Weighted average shares of
common stock outstanding:
Basic 28,288,629 26,616,671
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Diluted 29,879,414 28,909,737
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FRONTIER AIRLINES, INC.
Statement of Cash Flows
(Unaudited)
Three Months Ended June 30,
2001 2000
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Cash flows from operating activities:
Net income $ 7,739,597 $ 16,448,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Employee stock option plan compensation expense 554,062 285,938
Depreciation and amortization 2,365,341 1,115,224
Deferred tax expense (benefit) (15,380) -
Changes in operating assets and liabilities:
Restricted investments (2,600,000) -
Trade receivables 10,990,258 (5,990,567)
Security, maintenance and other deposits (4,282,507) (2,057,911)
Prepaid expenses and other assets (778,278) (801,688)
Inventories (1,029,116) (447,045)
Accounts payable (4,204,317) (1,600,283)
Air traffic liability 6,077,072 5,694,207
Other accrued expenses 1,995,247 4,517,957
Income taxes payable 891,563 5,403,008
Accrued maintenance expense 4,804,708 1,953,845
Increase in deferred rent 618,151 -
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Net cash provided by operating activities 23,126,401 24,520,927
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Cash flows from investing activities:
Decrease in short-term investments, net - 13,760,000
Increase in aircraft lease and purchase deposits, net (4,109,607) (3,830,500)
Decrease in restricted investments 205,900 -
Capital expenditures (52,896,402) (3,683,553)
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Net cash (used) provided by investing activities (56,800,109) 6,245,947
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Cash flows from financing activities:
Net proceeds from issuance of common stock 604,701 488,244
Proceeds from long-term borrowings 24,000,000 -
Principal payments on long-term borrowings (70,402) -
Principal payments on obligations under capital leases (29,968) (26,985)
---------------------------------
Net cash provided by financing activities 24,504,331 461,259
---------------------------------
Net (decrease) increase in cash and cash equivalents (9,169,377) 31,228,133
Cash and cash equivalents, beginning of
period 109,251,426 67,850,933
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Cash and cash equivalents, end of period $ 100,082,049 $ 99,079,066
=================================
FRONTIER AIRLINES, INC.
Notes to Financial Statements
June 30, 2001
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete financial statements and should
be read in conjunction with the Company's Annual Report on Form 10-K for the year ended March 31, 2001. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have
been included. The results of operations for the three months ended June 30, 2001 are not necessarily indicative of the results
that will be realized for the full year.
(2) Note Payable
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 will have a term of 120 months and will be payable in
equal monthly installments, including interest, payable in arrears. The loans are secured by the aircraft. At the end of the
term, there is a balloon payment for each aircraft loan that is not to exceed $10,200,000. As of June 30, 2001, we have borrowed
$24,000,000 for the purchase of the first Airbus aircraft. The loan provides for monthly principal and interest payments of
$218,109, bears interest at 6.714%, and matures in May 2011 with a balloon payment of $10,200,000.
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that
describe the business and prospects of Frontier Airlines, Inc. ("Frontier" or the "Company") and the expectations of our Company and
management. All statements, other than statements of historical facts, included in this report that address activities, events or
developments that we expect, believe, intend or anticipate will or may occur in the future, are forward-looking statements. When used
in this document, the words "estimate," "anticipate," "project" and similar expressions are intended to identify forward-looking
statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with
accuracy and some of which might not even be anticipated. These risks and uncertainties include, but are not limited to: the timing
of, and expense associated with, expansion and modification of our operations in accordance with our business strategy or in response
to competitive pressures or other factors; general economic factors and behavior of the fare-paying public; increased federal
scrutiny of low-fare carriers generally that may increase our operating costs or otherwise adversely affect us; actions of competing
airlines, such as increasing capacity and pricing actions of United Airlines and other competitors; the availability of suitable
aircraft, which may inhibit our ability to achieve operating economies and implement our business strategy; the unavailability of, or
inability to secure upon acceptable terms, financing necessary to purchase aircraft which we have ordered; issues relating to our
transition to an Airbus aircraft fleet; and uncertainties regarding aviation fuel prices. Because our business, like that of the
airline industry generally, is characterized by high fixed costs relative to revenues, small fluctuations in our yield per RPM or
expense per ASM can significantly affect operating results. See "Risk Factors" in our Form 10-K for the year ended March 31, 2001 as
they may be modified by the disclosures contained in this report. Additional information regarding these and other factors may be
contained in the Company's Form 10-K for its fiscal year ended March 31, 2001; the Company's Form 8-K filed May 7, 2001 and the
Company's Form 8-K filed Jan. 22, 2001, as amended by the Company's Form 8-K/A filed July 11, 2001.
Share, per share and common stock information contained in this report has been adjusted to reflect a fifty percent common stock
dividend to shareholders of record on February 19, 2001, which we paid on March
5, 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 jets. We have since expanded our fleet to 26 leased jets and one purchased Airbus aircraft,
including seven Boeing 737-200s, 18 Boeing 737-300s, and two 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 first quarter of calendar year 2005. We expect to take delivery of our third, fourth and fifth Airbus A319
aircraft in August and September 2001. We have advanced the return of a leased Boeing 737-300 aircraft to its owner from April 2002
to September 2001.
As of July 31, 2001, we operate routes linking our Denver hub to 22 cities in 18 states spanning the nation from coast to
coast. We plan to commence service between Denver and Reno/Lake Tahoe, Nevada and Austin, Texas, on October 1, 2001, each with two
daily nonstop round-trip flights. 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 currently
includes Casper, Cody, Gillette, and Cheyenne, Wyoming, Amarillo, Texas, Santa Fe, New Mexico, and Hayden, Colorado. We expect this
agreement may expand our service, in the future, into additional small to mid-size markets currently served by Great Lakes in
Colorado, Wyoming, Nebraska, South Dakota, North Dakota, Kansas, New Mexico, Utah, Arizona and Texas.
We currently use up to nine gates at our hub, Denver International Airport ("DIA"), where we operate approximately 124 daily
system flight departures and arrivals. We added Houston, Texas to our route system on May 16, 2001.
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.
As a result of the expansion of our operations and transition costs associated with the fleet replacement plan during the
quarter ended June 30, 2001, as well as hail storms that damaged five of our aircraft, our results of operations are not necessarily
indicative of future operating results or comparable to the prior quarter ended June 30, 2000.
Results of Operations
We had net income of $7,740,000 or $.26 per diluted share for the quarter ended June 30, 2001 as compared to net income of
$16,448,000 or $.57 per diluted share for the quarter ended June 30, 2000. During the quarter ended June 30, 2001, as compared to the
prior comparable period, we experienced lower fares as a result of the slowing economy. During the quarter ended June 30, 2000, we
experienced an increase in the number 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 each
of our average fare and load factor by approximately 1%. Additionally, during the quarter ended June 30, 2000, we were able to
increase our fare levels to offset increased fuel costs. The cost of fuel during the quarter ended June 30, 2001 was higher than the
quarter ended June 30, 2000, and because of the slowing economy, we were not able to maintain fares at levels necessary to offset
these costs. During the quarter ended June 30, 2001, we also were forced to cancel a significant number of flights as a result of
weather conditions in the Denver area. We believe that this also had an adverse effect on our revenue during the quarter.
During the quarter ended June 30, 2001, we took delivery of our first two Airbus aircraft. As this was a new aircraft type for
us, we were required by the Federal Aviation Administration ("FAA") to demonstrate that our crews were proficient in flying this type
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 service flights that the first aircraft was scheduled to perform. Because of this delay in receiving
necessary FAA approvals, we believe that our passenger revenues were adversely effected during the three months ended June 30, 2001.
Our cost per ASM for the quarters ended June 30, 2001 and 2000 were 9.75(cent)and 8.59(cent), respectively, an increase of 1.16(cent)or
13.5%. Cost per ASM excluding fuel for the quarters ended June 30, 2001 and 2000 were 8.22(cent)and 7.16(cent), respectively, an increase of
1.06(cent)or 14.8%. Our cost per ASM increased during the quarter ended June 30, 2001 because of an increase in flight operations
expenses (including fuel) which accounted for .44(cent)per ASM, an increase in aircraft and traffic servicing expenses of .21(cent), and an
increase in maintenance expenses of .19(cent)per ASM. These expenses were impacted by the hail damage to five of our aircraft during the
quarter ended June 30, 2001, or approximately 20% of our fleet. We incurred short-term lease expenses for substitute aircraft to
minimize the number of flight cancellations while our aircraft were 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 .16(cent), or approximately $1,800,000. Additionally, due to the number of flight cancellations as a
result of 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 quarter. During the quarter ended June 30, 2001, we incurred approximately
$2,000,000 in transition expenses associated with the induction of the Airbus aircraft which had an adverse effect on our CASM of
approximately .15(cent). These include crew salaries; travel, training and induction team expenses; and depreciation expense. We also
experienced an increase in advertising expenses to stimulate traffic in a weak economy of .22(cent)per ASM. An increase in pilots'
salaries effective in May 2001 also contributed to the increase in cost per ASM during the quarter ended June 30, 2001.
An airline's break-even load factor is the passenger load factor that will result in operating revenues being equal to
operating expenses, assuming constant revenue per passenger mile and expenses. For the quarter ended June 30, 2001, our break-even
load factor was 60.6% compared to our achieved passenger load factor of 67.6%. For the quarter ended June 30, 2000, our break-even
load factor was 49.6% compared to our achieved passenger load factor of 65.5%. Our break-even load factor increased from the prior
comparable period largely as a result of a decrease in our average fare to $134 during the quarter ended June 30, 2001 from $149
during the quarter ended June 30, 2000, compounded by an increase in our expense per ASM to 9.75(cent)for the quarter ended June 30, 2001
from 8.59(cent)for the quarter ended June 30, 2000.
The following table provides certain of our financial and operating data for the year ended March 31, 2001 and the quarters
ended June 30, 2001 and 2000.
Year
Ended
March 31, Quarters Ended June 30,
2001 2001 2000
--------------- -------------- ---------------
Passenger revenue (000s) (1) 462,609 120,728 110,967
Revenue passengers carried (000s) 3,017 846 712
Revenue passenger miles (RPMs) (000s) (2) 2,773,833 776,764 666,755
Available seat miles (ASMs) (000s) (3) 4,260,461 1,148,546 1,017,555
Passenger load factor (4) 65.1% 67.6% 65.5%
Break-even load factor (5) 52.7% 60.6% 49.6%
Block hours (6) 83,742 22,660 20,025
Departures 38,556 10,190 9,129
Average seats per departure 132 132 131
Average stage length 837 854 851
Average length of haul 919 918 936
Aircraft miles (000s) 32,276 8,701 7,768
Average daily block hour utilization (7) 9.4 9.9 9.4
Yield per RPM (cents) (8) 16.68 15.54 16.64
Total yield per RPM (cents) (9) 17.05 15.88 16.92
Total yield per ASM (cents) (10) 11.10 10.74 11.09
Expense per ASM (cents) 9.20 9.75 8.59
Expense per ASM excluding fuel (cents) 7.54 8.22 7.16
Passenger revenue per block hour 5,524 5,328 5,541
Average fare (11) 146 134 149
Average aircraft in fleet 24.5 25.2 23.5
Aircraft in fleet at end of period 25.0 27.0 24.0
Average age of aircraft at end of period 11.4 10.8 10.8
EBITDAR (000s) (12) 147,179 29,896 41,199
EBITDAR as a % of revenue 31.1% 24.2% 36.5%
(1) "Passenger revenue" includes revenues for non-revenue passengers, administrative fees, and revenue recognized for unused tickets
that are greater than one year from issuance date.
(2) "Revenue passenger miles," or RPMs, are determined by multiplying the number of fare-paying passengers carried by the distance
flown.
(3) "Available seat miles," or ASMs, are determined by multiplying the number of seats available for passengers by the number of
miles flown.
(4) "Passenger load factor" is determined by dividing revenue passenger miles by available seat miles.
(5) "Break-even load factor" is the passenger load factor that will result in operating revenues being equal to operating expenses,
assuming constant revenue per passenger mile and expenses
(6) "Block hours" represent the time between aircraft gate departure and aircraft gate arrival.
(7) "Average daily block hour utilization" represents the total block hours divided by the weighted average number of aircraft
days in service.
(8) "Yield per RPM" is determined by dividing passenger revenues by revenue passenger miles.
(9) "Total Yield per RPM" is determined by dividing total revenues by revenue passenger miles.
(10) "Total Yield per ASM" is determined by dividing passenger revenues by available seat miles.
(11) "Average fare" excludes revenue included in passenger revenue for non-revenue passengers, administrative fees, and revenue
recognized for unused tickets that are greater than one year from issuance date.
(12) "EBITDAR", or "earnings before interest, income taxes, depreciation, amortization and aircraft rentals," is a supplemental
financial measurement many airline industry analysts and we use in the evaluation of our business. However, EBITDAR should only
be read in conjunction with all of our financial statements appearing elsewhere herein, and should not be construed as an
alternative either to operating income (as determined in accordance with generally accepted accounting principles) as an
indicator of our operating performance or to cash flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity.
The following table provides our operating revenues and expenses expressed as cents per total ASMs and as a percentage of total
operating revenues, as rounded, for the year ended March 31, 2001 and the quarters ended June 30, 2001 and 2000.
Year Ended March 31, Quarters Ended June 30,
-------------------------- ------------------------------------------------------
2001 2001 2000
-------------------------- ------------------------------------------------------
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- -------
Revenues:
Passenger 10.86 97.8% 10.51 97.9% 10.91 98.4%
Cargo 0.18 1.6% 0.17 1.6% 0.12 1.1%
Other 0.06 0.6% 0.06 0.5% 0.06 0.5%
-------------------------- ------------------------------------------------------
Total revenues 11.10 100.0% 10.74 100.0% 11.09 100.0%
Operating expenses:
Flight operations 4.21 37.9% 4.33 40.3% 3.89 35.1%
Aircraft and traffic servicing 1.42 12.8% 1.55 14.4% 1.34 12.1%
Maintenance 1.54 13.8% 1.60 14.9% 1.41 12.8%
Promotion and sales 1.31 11.8% 1.44 13.4% 1.22 11.0%
General and administrative 0.59 5.4% 0.63 5.9% 0.61 5.5%
Depreciation and amortization 0.13 1.2% 0.20 1.9% 0.11 1.0%
-------------------------- ------------------------------------------------------
Total operating expenses 9.20 82.9% 9.75 90.8% 8.59 77.5%
========================== ======================================================
Total ASMs (000s) 4,260,461 1,148,546 1,017,555
Revenues
Our revenues are highly sensitive to changes in fare levels. Fare pricing policies have a significant impact on our revenues.
Because of the elasticity of passenger demand, we believe that increases in fares may result in a decrease in passenger demand in
many markets. We cannot predict future fare levels, which depend to a substantial degree on actions of competitors. When sale
prices or other price changes are initiated by competitors in our markets, we believe that we must, in most cases, match those
competitive fares in order to maintain our market share. Passenger revenues are seasonal in leisure travel markets depending on the
markets' locations and when they are most frequently patronized.
Our average fare for the quarters ended June 30, 2001 and 2000 was $134 and $149, respectively, a decrease of 10.1%. We
believe that the decrease in the average fare during the quarter ended June 30, 2001 from the prior comparable period was a result of
the slowing economy. During the quarter ended June 30, 2000 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 each of our average fare and load factor by approximately 1%.
Additionally, during the quarter ended June 30, 2000, we were able to increase our fare levels to offset increased fuel costs. The
cost of fuel during the quarter ended June 30, 2001 was higher than the quarter ended June 30, 2000, and because of the slowing
economy, we were not able to maintain fares at levels necessary to offset these costs.
Passenger Revenues. Passenger revenues totaled $120,728,000 for the quarter ended June 30, 2001 compared to $110,967,000 for
the quarter ended June 30, 2000, an increase of 8.8%. Passenger revenue includes revenues for non-revenue passengers, administrative
fees, and revenue recognized for tickets that are not used within one year from their issue dates. We carried 846,000 revenue
passengers during the quarter ended June 30, 2001 compared to 712,000 in the quarter ended June 30, 2000, an increase of 18.8%. We
had an average of 25.2 aircraft in our fleet during the quarter ended June 30, 2001 compared to an average of 23.5 aircraft during
the quarter ended June 30, 2000, an increase of 7.2%. ASMs increased to 1,148,546,000 for the quarter ended June 30, 2001 from
1,017,555,000 for the quarter ended June 30, 2000, an increase of 12.9%. RPMs for the quarter ended June 30, 2001 were 776,764,000
compared to 666,755,000 for the quarter ended June 30, 2000, an increase of 16.5%. The increase in RPMs outpaced the increase in
capacity (ASMs) resulting in an increase in our load factor of 2.1 points from 65.5% for the quarter ended June 30, 2000 to 67.6% for
the quarter ended June 30, 2001. During the quarter ended June 30, 2001, we had to cancel numerous flights as a result of the
weather conditions the Denver area experienced. We believe that this had an adverse effect on our revenue during the quarter.
Cargo revenues, consisting of revenues from freight and mail service, totaled $1,966,000 and $1,225,000 for the quarters ended
June 30, 2001 and 2000, representing 1.6% and 1.1% of total operating revenues, respectively, or an increase of 60.4%. During July
2000 an audit was performed on our contract cargo sales and services provider. The audit disclosed that for a 15 month period between
January 1, 1999 and March 31, 2000 both cash and credit card sales were remitted to us by our services provider, even though we had
collected for the cash sales directly from our customer. We therefore adjusted cargo revenue downward $423,000 during the quarter
ended June 30, 2000. Excluding the effect of this adjustment, on the prior comparable period, cargo revenue would have been
$1,648,000 for the quarter ended June 30, 2000 and the year over year increase would have been 19.3%. 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 $623,000 and
$616,000 or .5% of total operating revenues for each of the quarters ended June 30, 2001 and 2000, 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 $112,011,000 and $87,435,000 for
the quarters ended June 30, 2001 and 2000 and represented 90.8% and 77.5% of total revenue, respectively. Operating expenses
increased as a percentage of revenue during the quarter ended June 30, 2001 as a result of the decrease in the average fare from $149
during the quarter ended June 30, 2000 to $134 during the quarter ended June 30, 2000, a decrease of 10.1%, and an increase in flight
operations expenses associated with pilot training on the Airbus aircraft, increased pilot salaries, short-term aircraft lease
expenses, and hail storm damage to five of our aircraft.
Flight Operations. Flight operations expenses of $49,736,000 and $39,631,000 were 40.3% and 35.1% of total revenue for the
quarters ended June 30, 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 expenses are comprised of both the direct cost of fuel, including taxes and the cost of delivering fuel into the
aircraft. Aircraft fuel costs of $17,633,000 for 18,207,000 gallons used and $14,537,000 for 15,700,000 gallons used resulted in an
average fuel cost of 96.9(cent)and 92.6(cent)per gallon and represented 35.4% and 36.7% of total flight operations expenses for the quarters
ended June 30, 2001 and 2000, respectively. The average fuel cost per gallon increased for the quarter ended June 30, 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 quarters ended June 30, 2001 and 2000 averaged 804 and 784
gallons per block hour, respectively. Fuel consumption increased over the prior comparable period as a result of increased flight
speeds to improve on-time performance.
Aircraft lease expenses totaled $16,318,000 (13.2% of total revenue) and $14,768,000 (13.1% of total revenue) for the quarters
ended June 30, 2001 and 2000, respectively, or an increase of 10.5%. The increase is largely due to an increase in the average
number of aircraft to 25.2 from 23.5, an increase of 7.2%. During the quarter ended June 30, 2001, to minimize the number of flight
cancellations while our aircraft were being repaired, we incurred short-term lease expenses of $541,000 for aircraft to partially
replace our aircraft damaged by hail. During the first quarter of June 30, 2001 we also added our first purchased Airbus aircraft to
our fleet. This aircraft does not have lease expense associated with it.
Aircraft insurance expenses totaled $859,000 (.7% of total revenue) and $802,000 (.7% of total revenue) for the quarters ended June 30,
2001 and 2000, respectively. Aircraft insurance expenses were .11(cent)and .12(cent)per RPM for the quarters ended June 30, 2001 and 2000,
respectively.
Pilot and flight attendant salaries before payroll taxes and benefits totaled $7,775,000 and $4,923,000 or 6.4% and 4.4% of
passenger revenue for each of the quarters ended June 30, 2001 and 2000, or an increase of 57.9%. 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. During the past year, 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 7.2% increase in the average number of aircraft in
service, an increase of 13.2% in block hours, a general wage increase in flight attendant salaries, and additional crew required to
replace those who were attending training on the Airbus equipment. We pay pilot and flight attendant salaries for training,
consisting of approximately six and three weeks, respectively, prior to scheduled increases in service which can cause the
compensation expense during such periods to appear high in relationship to the average number of aircraft in service.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $17,846,000 and $13,648,000 (an increase of 30.8%)
for the quarters ended June 30, 2001 and 2000, respectively, and represented 14.5% and 12.1% of total revenue. Aircraft and traffic
servicing expenses include all expenses incurred at airports including landing fees, facilities rental, station labor, ground
handling expenses, and interrupted trip expenses associated with delayed or cancelled flights. Interrupted trip expenses are amounts
paid to other airlines to protect passengers as well as hotel, meal and other incidental expenses. Aircraft and traffic servicing
expenses will increase with the addition of new cities to our route system. During the quarter ended June 30, 2001, we served 23
cities compared to 21 during the quarter ended June 30, 2000, or an increase of 9.5%. During the quarter ended June 30, 2001, our
departures increased to 10,190 from 9,129, or 11.6%. Aircraft and traffic servicing expenses were $1,751 per departure for the
quarter ended June 30, 2001 as compared to $1,495 per departure for the quarter ended June 30, 2000, or an increase of 17.1%.
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, due to the number of flight
cancellations as a result of these weather conditions, the number of departures were less than we had planned, which caused our fixed
costs to be spread over fewer departures and, we believe, distorted our expenses per departure for the quarter.
Maintenance. Maintenance expenses of $18,347,000 and $14,391,000 were 14.9% and 12.8% of total revenue for the quarters ended
June 30, 2001 and 2000, respectively. These include all labor, parts and supplies expenses related to the maintenance of the
aircraft. Routine maintenance is charged to maintenance expense as incurred while major airframe, engine, landing gear and auxiliary
power unit overhauls are accrued monthly. Maintenance cost per block hour was $810 and $719 for the quarters ended June 30, 2001 and
2000, respectively. Maintenance costs per block hour increased as a result of hail damage to five of our aircraft during the quarter
ended June 30, 2001, estimated at $560,000 ($25 per block hour), excluding in house labor, and a general wage rate increase effective
April 2001. Additionally, due to the number of flight cancellations as a result of these weather conditions, the number of 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 quarter. During the quarter ended June 30, 2000, we performed heavy maintenance checks on two of our leased
aircraft for which we were reimbursed by the aircraft owner, thereby reducing our labor costs by $695,000, or $35 per block hour.
We did not perform anyheavy maintenance checks on our aircraft during the quarter ended June 30, 2001.
Promotion and Sales. Promotion and sales expenses totaled $16,525,000 and $12,462,000 and were 13.4% and 11% of total revenue
for the quarters ended June 30, 2001 and 2000, respectively. These include advertising expenses, telecommunications expenses, wages
and benefits for reservationists and reservations supervision as well as marketing management and sales personnel, credit card fees,
travel agency commissions and computer reservations costs. During the quarter ended June 30, 2001, promotion and sales expenses per
passenger increased to $19.53 from $17.50 for the quarter ended June 30, 2000. Promotion and sales expenses increased largely as a
result of an increase in advertising expenses to stimulate traffic in a slowing economy. Additionally, we have incurred costs
associated with the start-up and promotion of our frequent flyer program as well as the redesign of our web site.
General and Administrative. General and administrative expenses for the quarters ended June 30, 2001 and 2000 totaled
$7,234,000 and $6,230,000, respectively, and were 5.9% and 5.5% of total revenue, respectively. During the quarters ended June 30,
2001 and 2000, we accrued for employee performance bonuses totaling $1,065,000 and $1,951,000, respectively, or .9% and 1.7% of total
revenue for each of these quarters. General and administrative expenses include the wages and benefits for several of our executive
officers and various other administrative personnel including legal, accounting, information technology, aircraft procurement,
corporate communications, training and human resources and other expenses associated with these departments. Employee health
benefits, accrued vacation and bonus expenses, general insurance expenses including worker's compensation, and write-offs associated
with credit card and check fraud are also included in general and administrative expenses. We experienced increases in our human
resources, training and information technology expenses as a result of an increase in employees from approximately 2,200 in June 2000
to approximately 2,500 in June 2001, an increase of 13.6%. Because of the increase in personnel, our health insurance benefit
expenses and accrued vacation expense increased accordingly. During the quarter ended June 30, 2001, our accrued vacation expense
increased by approximately $336,000 as a result of higher pilot salaries.
Depreciation and Amortization. Depreciation and amortization expenses of $2,322,000 and $1,074,000, an increase of 116.1%, were
approximately 1.9% and 1% of total revenue for the quarters ended June 30, 2001 and 2000, respectively. These expenses include
depreciation of aircraft and aircraft components, office equipment, ground station equipment, other fixed assets. Amortization of
start-up and route development costs are not included as these expenses have been expensed as incurred. Depreciation expense
increased over the prior year as a result of depreciation expense associated with our first 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 $1,228,000 for the quarter ended June 30, 2001 compared to
$1,591,000 for the quarter ended June 30, 2000. Interest income decreased to $1,531,000 from $1,624,000 during the quarter ended
June 30, 2001 from the prior comparable period as a result of a decrease in interest rates. Interest expense increased to $253,000
for the quarter ended June 30, 2001 from $17,000 as a result of interest expense associated with the financing of the first purchased
Airbus aircraft received in May 2001.
Income Tax Expense. We accrued income taxes of $4,794,000 and $10,516,000 or 38.25% and 39% of taxable income during the
quarters ended June 30, 2001 and 2000, respectively.
Liquidity and Capital Resources
Our balance sheet reflected cash and cash equivalents and short-term investments of $102,100,000 and $111,251,000 at June 30,
2001 and March 31, 2001, respectively. At June 30, 2001, total current assets were $188,495,000 as compared to $146,684,000 of total
current liabilities, resulting in working capital of $41,811,000. 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 working
capital is largely a result of cash flows used by investing activities, principally the purchase of our first aircraft and spare
parts for the new Airbus fleet
Cash provided by operating activities for the quarter ended June 30, 2001 was $23,126,000. This is attributable to our net
income for the period, decreases in trade receivables, increases in air traffic liability, other accrued expenses, income taxes
payable, and accrued maintenance expense, offset by increases in restricted investments, security, maintenance and other deposits,
prepaid expenses and inventories, and a decrease in accounts payable. Cash provided by operating activities for the quarter ended
June 30, 2000 was $24,521,000. This is attributable to our net income for the period, increases in air traffic liability, other
accrued expenses, income taxes payable, and accrued maintenance expense, offset by increases in trade receivables, security,
maintenance and other deposits, prepaid expenses and inventories, and a decrease in accounts payable.
Cash used by investing activities for the quarter ended June 30, 2001 was $56,800,000. We used $4,110,000 for pre-delivery
payments, net of those applied to the purchase of our first Airbus aircraft, for future purchases of Airbus aircraft and a cash
security deposit on the first leased Airbus aircraft. During the quarter ended June 30, 2001, we converted two purchase options into
firmly ordered 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 $9,203,000. We also used $52,896,000 for the purchase of this aircraft and to purchase rotable
aircraft components to support the Airbus fleet, as well as a spare engine for the Boeing fleet, and other general equipment
purchases. Cash provided by investing activities for the quarter ended June 30, 2000 was $6,246,000. We had maturities of
$13,760,000 in short-term investments, net of purchases, comprised of certificates of deposit and government-backed agencies with
maturities of one year or less. During the quarter ended June 30, 2000, we made cash security deposits totaling $3,831,000
associated with a leased Boeing 737-300 delivered during that quarter and 16 Airbus aircraft we have agreed to lease with delivery
dates which began in June 2001. During the quarter ended June 30, 2000, we used $3,684,000 for capital expenditures for rotable
aircraft components, maintenance equipment and tools, aircraft leasehold costs and improvements, computer equipment and software for
enhancements to our internet booking site and our reservation system.
Cash provided by financing activities for the quarters ended June 30, 2001 and 2000 was $24,504,000 and $461,000, respectively.
During the quarters ended June 30, 2001 and 2000, we received $605,000 and $488,000, respectively, from the exercise of common stock
options and warrants. During the quarter ended June 30, 2001, we borrowed $24,000,000 to finance the purchase of our first Airbus
aircraft.
As of July 31, 2001, we leased 25 Boeing 737 type aircraft and one Airbus A319 aircraft under operating leases with expiration
dates ranging from 2001 to 2013. Under these leases, we were required to make cash security deposits or issue letters of credit to
secure the lease obligations. At June 30, 2001, we had made cash security deposits and had arranged for issuance of letters of
credit totaling $4,370,000 and $10,009,000, respectively. Accordingly, our restricted cash balance includes $10,009,000 that
collateralize the outstanding letters of credit. Additionally, we make deposits for maintenance of these aircraft. At June 30, 2001
and 2000, we had maintenance deposits of $46,562,000 and $28,893,000, respectively.
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 29 new Airbus
aircraft. We have agreed to firm purchases of 14 of these aircraft, and have options to purchase up to an additional 15 aircraft.
During the quarter ended June 30, 2001, we took delivery of the first 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 June 30, 2001, we had made pre-delivery payments on future deliveries totaling $32,209,000 to secure these
aircraft and option aircraft. As a complement to this purchase, in April and May 2000 we signed two agreements to lease 16 new Airbus
aircraft, one of which had been delivered to us as of June 30, 2001. As of June 30, 2001, we had made cash security deposits on the
remaining 15 aircraft we agreed to lease and had arranged for issuance of letters of credit totaling $300,000 and $2,883,000,
respectively, to secure these leases. 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 $386,200,000 as of June 30,
2001. We expect to be operating up to 37 purchased and leased Airbus aircraft by the first quarter of calendar 2005. As discussed
below, we have secured a financing commitment for the first three purchased Airbus A319 aircraft. To complete the purchase of the
remaining aircraft we must secure additional aircraft financing. We are exploring various financing alternatives, including, but not
limited to, domestic and foreign bank financing, public debt financing such as enhanced equipment trust certificates, and leveraged
lease arrangements. The additional amount of financing required will depend on the number of aircraft purchase options we exercise
and the amount of cash generated by operations prior to delivery of the aircraft. While we believe that such financing will be
available to us, there can be no assurance that financing will be available when required, or on acceptable terms. The inability to
secure such financing could 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.
Additionally, in order to maximize the efficiency of our fleet replacement plan, we will continue to endeavor to return certain
leased B737 aircraft to their owners on dates other than the currently scheduled lease expiration dates for these aircraft. If we
are unable to negotiate such different return dates with the aircraft owners, or sublease these aircraft to third parties, we may
incur additional expense which may have a material adverse effect on us.
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 will have a term of 120 months and will be payable in equal
monthly installments, including interest, payable in arrears. At the end of the term, there is a balloon payment for each aircraft
loan that is not to exceed $10,200,000. As of June 30, 2001, we have borrowed $24,000,000 for the purchase of the first Airbus
aircraft. The loan provides for monthly principal and interest payments of $218,109, bears interest at 6.714%, and matures in May
2011 with a balloon payment of $10,200,000.
We also expect to incur significant costs, as well as realize certain cost savings, in connection with our transition from a
Boeing to an Airbus fleet. Incident to our transition in fleet type, we incur costs in excess of our normal operations including
additional crew and mechanics to replace these employees while attending Airbus training. Simulator training for pilot training is
provided by Airbus at its expense. Accounting rules require that we treat this as a non-cash expense and reduce the capitalized
value of the aircraft. We incur travel and other training expenses as we train our employees, as well as for aircraft deliveries.
As the Airbus enter scheduled service, we expect to realize savings associated with improved fuel efficiency of these aircraft
compared to our current Boeing fleet, as well as reduced maintenance expenses associated with newer aircraft compared to our present
more mature fleet. We will pay maintenance reserves to lessors to cover long-term maintenance events on the airframe, engines, and
landing gear under our Airbus leases at lower rates than under our current Boeing fleet. These cost savings are reduced by increased
costs for landing fees as the Airbus aircraft weigh more than the Boeing aircraft.
During July 2001, our mechanics voted to be represented by the International Brotherhood of Teamsters. Negotiations have not
yet begun.
We believe that our existing cash balances coupled with cash flows from operations are and will be adequate to fund our
operations for the foreseeable future. However, as discussed above, we will require financing in order to fund future purchases of
Airbus A319 and A318 aircraft. Cash necessary to finance aircraft acquisitions are expected to be obtained from internally generated
funds from operations and external financing arrangements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The risk inherent in our market risk sensitive position is the potential loss arising from an adverse change in the price of
fuel as described below. The sensitivity analysis presented does not consider either the effect that such an adverse change may have
on overall economic activity or additional action management may take to mitigate our exposure to such a change. Actual results may
differ from the amounts disclosed. At the present time, we do not utilize fuel price hedging instruments to reduce our exposure to
fluctuations in fuel prices.
Our earnings are affected by changes in the price and availability of aircraft fuel. Market risk is estimated as a
hypothetical 10 percent increase in the average cost per gallon of fuel for the year ended March 31, 2001. Based on fiscal year 2001
actual fuel usage, such an increase would have resulted in an increase to aircraft fuel expense of approximately $7,104,000 in fiscal
year 2001. Comparatively, based on projected fiscal year 2002 fuel usage, such an increase would result in an increase to aircraft
fuel expense of approximately $8,608,000 in fiscal year 2002. The increase in exposure to fuel price fluctuations in fiscal year
2002 is due to the increase of our average aircraft fleet size during the year ended March 31, 2001, projected increases to our fleet
during the year ended March 31, 2002 and related gallons purchased.
Our average cost per gallon of fuel for the period ended June 30, 2001 increased 4.7% over the average cost for the quarter
ended June 30, 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating
Expenses."
We will also be susceptible to market risk associated with changes in interest rates on loans outstanding and long-term debt
obligations to fund the purchases of our Airbus aircraft. 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 will have a term
of 120 months and will be payable in equal monthly installments, including interest, payable in arrears. At the end of the term,
there is a balloon payment for each aircraft loan that is not to exceed $10,200,000. As of June 30, 2001, we have borrowed
$24,000,000 for the purchase of the first Airbus aircraft. The loan provides for monthly principal and interest payments of
$218,109, bears interest at 6.714%, and matures in May 2011 with a balloon payment of $10,200,000.
PART II. OTHER
INFORMATION
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
Exhibit
Numbers
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(a) Exhibits
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.
(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, which report was amended by
Form 8-K/A filed on July 11, 2001.
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: August 2, 2001 By: /s/ Samuel D. Addoms
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Samuel D. Addoms, President, Chief Executive Officer and
Chief Financial Officer
Date: August 2, 2001 By: /s/ Elissa A. Potucek
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Elissa A. Potucek, Vice President, Controller,
Treasurer and Principal Accounting Officer