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As confidentially submitted to the Securities and Exchange Commission on January 22, 2021.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Frontier Group Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   4512   46-3681866

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

4545 Airport Way

Denver, CO 80239

(720) 374-4200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Barry L. Biffle

President and Chief Executive Officer

Frontier Group Holdings, Inc.

4545 Airport Way

Denver, CO 80239

(720) 374-4200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Anthony J. Richmond

Miles P. Jennings

Latham & Watkins LLP

140 Scott Drive

Menlo Park, CA 94025

Telephone: (650) 328-4600

Facsimile: (650) 463-2600

 

Howard M. Diamond

Senior Vice President, General Counsel & Secretary

Frontier Group Holdings, Inc.

4545 Airport Way

Denver, CO 80239

Telephone: (720) 374-4200

 

Alan F. Denenberg

Stephen Salmon

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, CA 94025

Telephone: (650) 752-2000

Facsimile: (650) 752-2115

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

CALCULATION OF REGISTRATION FEE

 

 

TITLE OF EACH CLASS OF

SECURITIES TO BE REGISTERED

 

PROPOSED

MAXIMUM
AGGREGATE
OFFERING PRICE(1)

  AMOUNT OF
REGISTRATION FEE(2)

Common Stock, $0.001 par value per share

  $               $            

 

 

(1)

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

(2)

Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED                     , 2021.

            Shares

 

 

LOGO

Frontier Group Holdings, Inc.

Common Stock

 

 

This is the initial public offering of shares of our common stock. We are offering            shares. The selling stockholder identified in this prospectus is offering             shares of our common stock. We will not receive any of the proceeds from the sale of any shares by the selling stockholder.

It is currently estimated that the public offering price per share will be between $            and $            . Currently, no public market exists for our shares. We have applied to have our common stock listed on the Nasdaq Global Select Market under the symbol “FRNT.”

 

 

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 21.

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per
Share
     Total  

Public offering price

   $                    $                

Underwriting discounts and commissions(1)

     

Proceeds to us (before expenses)

     

Proceeds to the selling stockholder

     

 

(1)

See the “Underwriting” section beginning on page 181 for additional information regarding underwriting compensation.

The selling stockholder named herein has granted the underwriters an option to purchase up to            additional shares of common stock, at the initial public offering price, less the underwriting discount, for 30 days from the date of this prospectus. We will not receive any of the proceeds from the sale of shares by the selling stockholder upon any such exercise.

The underwriters expect to deliver the shares to purchasers on or about                    , 2021.

 

 

Citigroup


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LOGO

 


Table of Contents

CONTENTS

 

     Page  

SUMMARY

     1  

THE OFFERING

     10  

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

     12  

OPERATING STATISTICS

     17  

GLOSSARY OF AIRLINE TERMS

     18  

RISK FACTORS

     21  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     55  

USE OF PROCEEDS

     57  

DIVIDEND POLICY

     58  

CAPITALIZATION

     59  

DILUTION

     61  

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

     63  

OPERATING STATISTICS

     68  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     69  

INDUSTRY BACKGROUND

     95  

BUSINESS

     98  

MANAGEMENT

     121  

EXECUTIVE COMPENSATION

     130  

DIRECTOR COMPENSATION

     154  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     156  

PRINCIPAL AND SELLING STOCKHOLDER

     158  

DESCRIPTION OF PRINCIPAL INDEBTEDNESS

     160  

DESCRIPTION OF CAPITAL STOCK

     167  

SHARES ELIGIBLE FOR FUTURE SALE

     174  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     177  

UNDERWRITING

     181  

LEGAL MATTERS

     189  

EXPERTS

     189  

WHERE YOU CAN FIND MORE INFORMATION

     189  

INDEX TO FINANCIAL STATEMENTS

     F-1  

We are responsible for the information contained in this prospectus or contained in any free writing prospectus prepared by or on behalf of us to which we have referred you. Neither we, the underwriters, nor the selling stockholder have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission and we take no responsibility for any other information that others may give you. We and the selling stockholder are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, operating results or financial condition may have changed since such date.

Until            , 2021 (25 days after the date of this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor any of the underwriters have taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

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SUMMARY

This summary highlights selected information about us and the common stock being offered by us and the selling stockholder. It may not contain all of the information that is important to you. Before investing in our common stock, you should read this entire prospectus carefully for a more complete understanding of our business and this offering, including our consolidated financial statements and the accompanying notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

Frontier Airlines is an ultra low-cost carrier whose business strategy is focused on Low Fares Done Right®. We offer flights throughout the United States and to select near international destinations in the Americas. Our unique strategy is underpinned by our low-cost structure and superior low-fare brand. As of September 30, 2020, we had a fleet of 102 narrow-body Airbus A320 family aircraft, which based on our aircraft order book with Airbus that was amended in December 2020, we expect to grow to 165, including 144 A320neo (New Engine Option) family aircraft, by the end of 2025. During the 12 months ended September 30, 2019 and 2020, we served approximately 22 million and 14 million passengers, respectively, across a network of approximately 110 airports.

In December 2013, we were acquired by an investment fund managed by Indigo Denver Management Company, LLC, or Indigo, an affiliate of Indigo Partners, LLC, or Indigo Partners, an experienced and successful global investor in ultra low-cost carriers, or ULCCs. Following the acquisition, Indigo reshaped our management team to include experienced veterans of the airline industry. Working with Indigo and supported by a highly productive workforce, our management team developed and implemented our unique Low Fares Done Right strategy, which significantly reduced our unit costs, introduced low fares, provided the choice of optional services to our customers, enhanced our operational performance and improved the customer experience. Through the implementation of our new operating model, we have positioned our brand as a leading low-fare airline and have seen a dramatic improvement to our profitability.

The implementation of Low Fares Done Right has significantly reduced our cost base by increasing aircraft utilization, transitioning to larger aircraft, maximizing seat density, renegotiating our distribution agreements, realigning our network, replacing our reservation system, enhancing our website, boosting employee productivity and contracting with specialists to provide us with select operating and other services. As a result of these and other initiatives, we were able to reduce our CASM (excluding fuel) from 7.89¢ for the year ended December 31, 2013 to 5.55¢ for the year ended December 31, 2019, and our Adjusted CASM (excluding fuel) from 7.89¢ for the year ended December 31, 2013 to 5.44¢ for the year ended December 31, 2019, an improvement of 30% and 31%, respectively. For the nine months ended September 30, 2020, our CASM (excluding fuel) was 6.97¢ and our Adjusted CASM (excluding fuel) was 8.40¢ on lower than normal aircraft utilization resulting from the coronavirus (“COVID-19”) pandemic. For a discussion and reconciliation of CASM to Adjusted CASM (excluding fuel), please see “Glossary of Airline Terms” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

The COVID-19 pandemic has presented significant challenges to the global airline industry since February 2020, but we have worked diligently to navigate such challenges by implementing disciplined capacity deployment, protecting liquidity and cash flow, and further strengthening our health and safety initiatives.

As a result of such efforts, we believe we are well positioned to take full advantage of the recovery that we believe is already underway. For instance, throughout the pandemic, the U.S. airline industry has seen stronger domestic demand than international demand, and the segments of domestic travel that have recovered fastest have been VFR (visiting friends or relatives) and vacation travel (which we refer to herein as leisure travel) in contrast to business travel.



 

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We design our route network to capture low fare demand among VFR and leisure travelers and our three largest bases are Denver, Orlando and Las Vegas, which draw a significant proportion of leisure travelers. In the six months ending February 2020, according to a post-travel survey we conducted, 89% of our customers were flying for leisure travel reasons. We believe the restrictions and health concerns that have depressed demand during the pandemic are also likely to lead to increased levels of pent-up demand for VFR and leisure travel. As a result, we expect to see a significant recovery in our performance as the U.S. market recovers, which we presently expect to accelerate during the second half of 2021 and we expect holiday travel to be particularly strong as customers make up for trips they missed in 2020. With our current network of approximately 110 destinations served, we plan to strategically deploy our capacity where demand is highest during the recovery in order to achieve normal capacity levels. More broadly, after being restricted from travel, we expect many customers to take advantage of the opportunity to travel more in the coming years. We also expect new working patterns and the increasing growth of remote work to lead to more employees not living where their offices are based. We expect our sustainable low fares driven by our industry leading low costs to enable us to grow our network profitably and take advantage of new demand patterns as they arise.

In addition to low unit costs, a key component of our Low Fares Done Right success has been attracting customers with low fares and garnering repeat business by delivering a high value, family-friendly customer experience with a more upscale look and feel than historically experienced on ULCCs globally. For instance, we currently offer flexible optional services through both unbundled and bundled service options. Our bundled options include The Works, a hassle-free option that includes a guaranteed seat assignment, carry-on and checked baggage, ticket refundability and changes, and priority boarding, all at an attractive low price and available only on our website, and The Perks, which enables customers to book the same amenities included in The Works, excluding refundability and ticket changes, through our website and third-party distribution channels. We operate a customer-friendly digital platform that includes our website and mobile app, which makes booking and travel easy and more enjoyable for our customers. We also promote and sell products in-flight to enhance the customer experience. Our brand and product are also family-friendly, featuring popular animals on our aircraft tails, novelty cards for children and amenity packages tailored for families. We reward our repeat customers through our Frontier Miles (formerly EarlyReturns) frequent flyer program, which we rebranded and enhanced with a number of new features in 2018, and we also offer our Discount Den membership program, which provides subscribers with exclusive access to some of our lowest fares.

Low Fares Done Right also differentiates Frontier from the historical ULCC model by providing a more dependable and higher quality customer service experience than traditionally offered by such carriers. We pioneered this concept in the United States through our disciplined approach to operational integrity and by using a modern fleet with comfortable cabin seating and offering other amenities, including extra seat padding and our Stretch extra space seating option on all of our flights. Our commitment to operational integrity is reflected in our approach to recruiting, workforce training and employee engagement, which we believe enables us to offer a standardized and predictable travel experience. We believe the association of our brand with our ability to achieve a high level of operational performance will continue to differentiate us from the other U.S. ULCCs and enable us to generate greater customer loyalty.

The combination of low unit costs, high quality service and dependability that makes Low Fares Done Right successful has enabled us to diversify our network across a wide range of VFR and leisure destinations as well as implement a network strategy that primarily targets markets where our low fares stimulate demand. Our current network is geographically diversified across the United States and our top five cities for the 12 months ended September 30, 2020 were Denver (18% of departures), Orlando (11%), Las Vegas (8%), Philadelphia (4%), and Atlanta (3%). As a leisure and VFR focused airline, we fly a low average frequency to and from individual destinations as our customers are generally not focused on frequency but instead on getting the best value for travel. As a result, for the year ended December 31, 2020, the average daily frequency for the routes we operated was 0.7 flights/day. Our schedule of flights available for sale as of January 2021 includes 347 routes across a network of approximately 110 airports, with each route, on average, representing less than 0.3% of our total capacity.



 

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We believe that our business model, including serving a wide range of destinations, and routes and using low fares to stimulate demand, positions us to benefit from significant growth opportunities, including as the U.S. market recovers from the COVID-19 pandemic. For instance, DOT statistics indicate that on the 111 routes where we began nonstop service in 2017 and served for at least three of six months ended September 30, 2018, passenger volume grew by approximately 34% in total, as measured by comparing passenger volume in the six months ending two years after the commencement period. At the end of those periods, our market share of passenger volumes on such routes was approximately 24%, which represented approximately 34% of passenger volumes on such routes during the six month period prior to our entry into the market. We believe our entry into new markets stimulates substantial passenger volume growth because of our ability to operate profitably while offering significantly lower fares than other airlines. For example, on the same 111 routes noted above, DOT data indicates our average gross fare, including taxes and fees, but excluding fees for ancillary services, was approximately $68, as compared to an average gross fare of approximately $148 on all other airlines, for the six months after we had established a presence in those markets. Based upon our analysis of DOT data, during the 12 months ended December 31, 2019, passengers on over 273 million United States domestic journeys paid a fare that was at least 30% above our cost basis per passenger during the same period for the stage length associated with such fares. Such domestic journeys were operated by non-ULCCs and are within the range of A320 family aircraft and exclude flights arriving or departing from federally slot-controlled airports and flights operating entirely within the state of Hawaii. As a result, we believe that there are a significant number of markets in which we could operate profitably with our low fares, and we believe our entry into such markets could drive substantial passenger growth in those markets.

We believe we are in a better position than the other U.S. ULCCs to capitalize on this market stimulation opportunity as a result of our strong presence in high-demand markets and underserved markets, including mid-sized cities. For example, we believe we have an opportunity to provide service on approximately 524 additional domestic routes between airports within our existing network that are not currently served by a ULCC, which compares to an opportunity for Spirit Airlines (“Spirit”) to serve up to approximately 218 additional domestic routes between points in its existing network and for Allegiant Travel Company (“Allegiant”) to serve up to approximately 137 additional domestic routes between points in its existing network. Such domestic routes are currently not operated by ULCCs, are within the range of A320 family aircraft, and exclude flights arriving or departing from federally slot-controlled airports and flights with a market size of less than 100 passengers per day each way.

According to the DOT, there were over 590 million domestic passenger journeys in the United States during the 12 months ended December 31, 2019, and the 5-year (12 months ended December 31, 2014 to December 31, 2019) compound annual growth rate for domestic passenger journeys was approximately 5.5%. Based upon the foregoing, and subject to the U.S. market fully recovering from the COVID-19 pandemic, we believe that over the next 10 years there is an opportunity for U.S. ULCCs to stimulate demand of over 159 million incremental annual domestic passengers, as compared to the year ended December 31, 2019, when U.S. ULCCs flew approximately 72 million passengers.

The ULCC operating strategy is more mature in Europe than it is in the United States. For example, at the time that Spirit adopted a ULCC model in 2007, three European ULCCs, EasyJet, Ryanair and Wizz Air, already had more than 4.5 times the number of aircraft in operation as did Allegiant Travel Company, or Allegiant, and Spirit. The size of the European ULCCs’ operations is evidence of the substantial increases in passenger volumes they have been able to drive since their adoption of ULCC operating models, which first started in the mid-1990s. Over the 15-year period from the end of 2002 to 2017, according to World Bank and public filings of other carriers, total passenger volume in Europe had a compound annual growth rate of approximately 5.4%, of which approximately 67% was attributable to ULCC growth and stimulation. During the same 15-year period, Europe’s three largest consolidated airline groups (International Airlines Group, or IAG, Lufthansa Group, and Air France-KLM) and the three European ULCCs grew passengers at a compound annual growth rate of



 

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approximately 4.4% and 14.3%, respectively. Over the last ten years, this passenger growth has coincided with a period of stability and expanding profitability margins for both the consolidated groups and the ULCCs. According to World Bank, DOT data and other public filings, ULCCs in Europe grew their market share from approximately 12% of total passengers in 2002 to approximately 42% of total passengers in 2017, whereas in the United States, ULCCs only had an aggregate market share of approximately 8% of total domestic passengers for the 12 months ended December 31, 2018.

Our Competitive Strengths

Our competitive strengths include:

Our Low-Cost Structure. Our low-cost structure, built around low ownership cost, fuel efficiency and low operational costs, is our key strategic advantage. Our unit costs, measured by Total Adjusted CASM, was the lowest in the industry for the year ended December 31, 2019. Our Total Adjusted CASM, stage length adjusted to 1,000 miles, for the year ended December 31, 2019 was 7.84¢, compared to an average of 12.85¢ for the airlines we refer to as the “Big Four” carriers, which includes American Airlines, Delta Air Lines, Southwest Airlines and United Airlines, an average of 11.74¢ for the airlines we refer to as the “Middle Three” carriers, which includes Alaska Airlines, Hawaiian Airlines and JetBlue Airways, 8.55¢ for Allegiant and 8.09¢ for Spirit, respectively. Our low-cost structure is driven by several factors:

 

   

High Aircraft Utilization. Prior to the COVID-19 pandemic, we operated with high aircraft utilization, averaging 12.2 hours per day during the year ended December 31, 2019. This compares to the domestic mainline utilization average of 10.4 hours per day for the Big Four carriers, an average of 10.6 hours per day for Middle Three carriers, and an average of 12.3 and 8.0 hours per day for Spirit and Allegiant, respectively, in each case, as measured for the 12 months ended December 31, 2019.

 

   

Modern Fleet and Attractive Order Book. We operate a modern fleet composed solely of Airbus A320 family aircraft, which are recognized as having high reliability and low operating costs. Operating a single family of aircraft provides us with several operational and cost advantages, including the ability to optimize crew scheduling, training and maintenance. Since 2013, we have steadily reduced the number of A319ceo aircraft (150 seats) in our fleet, replacing them with larger and more fuel-efficient A320ceo and A320neo aircraft (180 to 186 seats) and A321ceo aircraft (230 seats). As of September 30, 2020, the average age of our fleet was approximately four years and we have taken delivery of 85 new aircraft since the start of 2015. As of December 31, 2019, we maintained the youngest average fleet age of any U.S. airline of significant size. Our present fleet plan contemplates maintaining an average fleet age of approximately four years through December 31, 2024. In addition, we have an attractive order book of new, fuel-efficient aircraft, including, as of September 30, 2020, 158 A320neo family aircraft. As of December 31, 2019, we believe we had the highest adoption rate of new engine technology aircraft (consisting of the A220, A320neo family, A350 and similar aircraft from other manufacturers) (as a percentage of total fleet) among U.S. airlines. Based on currently announced fleet plans, we expect to maintain the highest adoption rate of new engine technology aircraft of any U.S. ULCC in the near term.

 

   

Fuel Efficient Fleet. In 2019, we had the most fuel efficient fleet of all U.S. carriers when measured by fuel gallons consumed per ASM. For the year ended December 31, 2019, we were 43% more fuel efficient than the weighted average of other U.S. airlines, making us America’s Greenest Airline. The A320neo family aircraft that we continue to place in service are expected to continue delivering approximately 15% improved fuel efficiency compared to the prior generation of A320ceo family aircraft.

 

   

High Capacity Fleet. We increased the seat density on our A319ceo aircraft from 138 seats to 150 seats and the seat density on our prior generation of A320ceo aircraft from 168 seats to 180 seats during 2015. Across our entire fleet, we have increased our average seats per departure from 145 seats in 2013



 

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to 191 seats during the nine months ended September 30, 2020, a 32% increase. Our entire fleet features new and lightweight slim-line seats, which eliminate excess weight and reduce fuel consumption per seat. As of January 2021, we had the highest seat density per A320ceo/neo and A321ceo aircraft operated by any U.S. airline.

 

   

Low-Cost Distribution Model. For the years ended December 31, 2018 and 2019 and for the nine months ended September 30, 2020, approximately 71%, 73% and 76%, respectively, of our tickets were sold directly to customers through our direct distribution channels, including our website and mobile app, our lowest cost distribution channels. We also reduced our distribution costs per passenger following the renegotiation of our distribution agreements.

 

   

Highly Productive Workforce and Specialist Providers. Prior to the COVID-19 pandemic, we had a highly productive workforce which delivers and maintains a high quality of service to our customers, with 4,625 passengers supported per full time equivalent employee for the year ended December 31, 2019. We have also recently entered into new collective bargaining agreements with several of our union-represented employee groups.

 

   

Outsourcing Model. We outsource our non-core functions, including customer call centers, lost bag services, ground handling services and catering services. The outsourcing model not only enables us to provide high quality services at low costs, but also provides flexibility for us to align our costs with capacity and demand.

Our Brand. We believe establishing our brand as a leading low-fare airline enhances our ability to generate customer loyalty. The strength of our brand is demonstrated by our significant number of repeat customers. According to a January 2019 survey we conducted with respect to recent customers who had flown with us at least once, 91% of survey respondents were repeat customers and 69% had flown with us two or more times during the previous 12 months. The key features of our brand include:

 

   

Significant customer value delivered through low fares with the choice of reasonably priced unbundled and bundled options, including The Works and The Perks.

 

   

Family-friendly elements that appeal to a large audience, such as an attentive staff, popular animals on our aircraft tails, novelty cards for children and amenity packages tailored for families, including our Kids Fly Free program.

 

   

We have been an industry leader in healthy travel initiatives and are currently the only U.S. airline conducting temperature screenings for all passengers and crew prior to boarding.

 

   

A carefully curated aesthetic for our livery, our website and mobile app, uniforms, seat design and on-board products, which are designed to look and feel more upscale than traditional ULCCs.

 

   

A strong online presence with a customer-friendly digital platform that includes our passenger reservation system, improved website and mobile app.

 

   

Our modern fleet with amenities such as extra seat padding and our Stretch seating option, which provides a comfortable 33 inch seat pitch.

 

   

An enhanced frequent flyer program, Frontier Miles, and Discount Den membership program.

Our Network Management. We plan our route network and airport footprint to focus on profitable existing routes and new routes where we believe our business model will stimulate demand and grow profitability, including those where we expect demand to be highest during the U.S. recovery from the COVID-19 pandemic. This has enabled us to reduce the seasonality of our revenue, improve utilization, lower unit costs, increase revenues and enhance profitability from 2013 through 2019. The key features of our network include:

 

   

A broad geographic footprint, which enables us to service a wide range of VFR and leisure destinations.



 

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A strong presence in high-demand markets and underserved markets, including mid-sized cities.

 

   

A disciplined and methodical approach to both route selection and the removal of underperforming routes.

 

   

An operational platform that includes nationwide crew and maintenance bases, creating access to lower-risk growth opportunities while maintaining high operational standards and enabling high utilization.

 

   

A codeshare arrangement with Volaris, a ULCC based in Mexico and an affiliate of Indigo Partners, our principal stockholder, which enables both carriers to sell tickets and connecting itineraries on select routes within the airlines’ combined networks. We believe this is the world’s first ULCC codeshare arrangement.

Our Talented ULCC Leadership Team. Our management team has extensive day-to-day experience operating ULCCs and other airlines.

 

   

Barry L. Biffle, our President and Chief Executive Officer, previously served as Chief Executive Officer of VivaColombia, Executive Vice President for Spirit and held various management roles with US Airways and American Eagle Airlines, a regional airline subsidiary of American Airlines, Inc.

 

   

James G. Dempsey, our Executive Vice President and Chief Financial Officer, previously served as Treasurer and Head of Investor Relations for Ryanair after serving in management roles within the advisory practice of PricewaterhouseCoopers.

 

   

Daniel M. Shurz, our Senior Vice President, Commercial, previously served in various roles with United Airlines and Air Canada.

 

   

Howard M. Diamond, our Senior Vice President, General Counsel and Corporate Secretary, previously served as Vice President, General Counsel, and Corporate Secretary for Thales USA.

 

   

Jake F. Filene, our Senior Vice President, Customers, previously served as our Deputy Chief Operating Officer and as Vice President, Airport Services and Corporate Real Estate for Spirit Airlines.

 

   

Trevor J. Stedke, our Senior Vice President, Operations, previously served as Vice President, Aircraft Technical Operations for Southwest Airlines.

Low Fares Done Right—Our Business Strategy

Our goal is to offer the most attractive option for air travel with a compelling combination of value, product and service, and, in so doing, to grow profitably and enhance our position among airlines in the United States. Through the key elements of our business strategy, we seek to achieve:

Low Unit Costs. We intend to strengthen and maintain our cost advantage, including by:

 

   

Maintaining high utilization levels as the U.S. market recovers from the COVID-19 pandemic.

 

   

Utilizing new generation, fuel-efficient aircraft that deliver lower operating costs compared to prior generation aircraft.

 

   

Increasing the average size and seat capacity of the aircraft in our fleet through the continued introduction and operation of new 186 -seat A320neo and up to 240-seat A321neo aircraft, and the exit of A319ceo aircraft.

 

   

Taking a disciplined approach to our operational performance in order to reduce disruption.



 

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A Superior Low-Fare Brand. In order to enhance our brand and drive revenue growth, we intend to continue to deliver a higher-quality flight experience than historically offered by ULCCs globally and generate customer loyalty by:

 

   

Continuing to offer attractive low fares.

 

   

Expanding our marketing efforts, including through the addition of new animals for each of our new aircraft, to continue to position our brand as a family-friendly ULCC.

 

   

Continuing to improve penetration of our bundle options, including The Works and The Perks.

 

   

Further enhancing our Frontier Miles offering to improve reward opportunities for our branded credit card customers.

 

   

Providing our customers a dependable, reliable, on-time and friendly travel experience.

Strong Growth Driven by an Expanding and Efficient Network. We believe that our cost structure enables us to fly to more places profitably than any other U.S. airline, but we strategically focus on routes that are most profitable. We intend to continue to utilize our disciplined and methodical approach to expand our network in an efficient manner, including by:

 

   

Strategically deploying our capacity where demand is highest during the recovery from the COVID-19 pandemic.

 

   

Continuing to take advantage of opportunities in overpriced and/or underserved markets across the U.S. and select international destinations in the Americas.

 

   

Leveraging our diverse geographic footprint and existing crew and maintenance base infrastructure to take advantage of network growth opportunities while maintaining high operational standards.

 

   

Utilizing our low-cost structure to offer low fares which organically drive growth through market stimulation.

 

   

Continuing to rebalance our network to mitigate seasonal fluctuations in our results.

 

   

Focusing on the most profitable opportunities where our cost differential drives the largest competitive advantage.

Strong Capital Structure. We intend to maintain our strong capital structure, which enables us to obtain financing for our aircraft pursuant to attractive operating leases, in order to support our growth strategies and the expansion of our fleet and network. Our capital structure is comprised of:

 

   

Our cash, cash equivalents and restricted cash, of which we had a balance of $565 million as of September 30, 2020.

 

   

As of September 30, 2020, our PDP financing facility allowed us to borrow up to an aggregate of $175 million under a secured, revolving line of credit, of which up to $25 million may be unsecured. As of September 30, 2020, there was $146 million outstanding under our PDP financing facility, which amount was subsequently reduced to $150 million when we amended the facility in December 2020.

 

   

Our pre-purchased miles facility, from which we had drawn $15 million as of September 30, 2020. The facility cannot be extended above $15 million until full extinguishment of the loan we received from the United States Department of the Treasury (the “Treasury Loan”) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

 

   

$424 million available to borrow under the Treasury Loan.



 

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Our Relationship with Indigo Partners

Indigo Partners, our principal stockholder, is an established and successful investor in ULCCs around the world. Indigo Partners has previously invested in several ULCC airlines, including Spirit, Tigerair (formerly Tiger Airways), Volaris and Wizz Air, each of which completed initial public offerings following the successful implementation of a ULCC strategy under the guidance of Indigo Partners and while Indigo Partners was a significant investor. In addition, Indigo Partners has current investments in other ULCC airlines, including JetSMART based in Chile.

Risk Factors

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” following this prospectus summary, that represent challenges we face in connection with the successful implementation of our strategy and the growth of our business. We expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance. Such factors include:

 

   

the impact the COVID-19 pandemic and measures to reduce its spread have on our business, results of operations and financial condition;

 

   

the ability to operate in an exceedingly competitive industry;

 

   

the price and availability of aircraft fuel;

 

   

any restrictions on or increased taxes applicable to charges for non-fare products and services;

 

   

changes in economic conditions;

 

   

threatened or actual terrorist attacks or security concerns;

 

   

competition from air travel substitutes;

 

   

factors beyond our control, including air traffic congestion at airports, air traffic control inefficiencies, government shutdowns, aircraft and engine defects, adverse weather conditions, increased security measures, new travel-related taxes and outbreak of disease;

 

   

our failure to implement our business strategy;

 

   

our ability to control our costs;

 

   

our ability to grow or maintain our unit revenues or maintain our non-fare revenues;

 

   

any increased labor costs, union disputes and other labor-related disruptions;

 

   

our inability to expand or operate reliably and efficiently out of airports where we maintain a large presence;

 

   

our inability to maintain a high daily aircraft utilization rate;

 

   

any changes in governmental regulation;

 

   

our reputation and business being adversely affected in the event of an emergency, accident or similar public incident involving our aircraft;

 

   

our ability to obtain financing or access capital markets;

 

   

the long-term nature of our fleet order book and the unproven new engine technology utilized by the aircraft in our order book;

 

   

our maintenance obligations;



 

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aircraft-related fixed obligations that could impair our liquidity; or

 

   

our reliance on third-party specialists and other commercial partners to perform functions integral to our operations.

Our History

Our indirect, wholly-owned subsidiary, Frontier Airlines, Inc., or Frontier, was incorporated in 1994 to operate as an airline based in Denver, Colorado. In April 2008, Frontier filed for protection under the federal bankruptcy laws and ultimately emerged from bankruptcy in October 2009 through the acquisition of Frontier by a subsidiary of Republic Airways Holdings, Inc., or Republic. We were incorporated in September 2013 as a newly-formed corporation initially wholly-owned by an investment fund managed by Indigo to facilitate the acquisition of Frontier from Republic. That acquisition was completed on December 3, 2013.

Corporate Information

Our principal executive offices are located at 4545 Airport Way, Denver, Colorado 80239. Our general telephone number is (720) 374-4200 and our website address is www.FlyFrontier.com. We have not incorporated by reference into this prospectus any of the information on our website and you should not consider our website to be a part of this document. Our website address is included in this document for reference only.

Frontier Airlines®, Frontier®, the Frontier Flying F logo, Low Fares Done Right®, LFDR®, FlyFrontier.com®, EarlyReturns®, Frontier MilesSM, Discount Den®, StretchSM, The WorksSM and The PerksSM are trademarks or servicemarks of Frontier in the United States and other countries. This prospectus also contains trademarks and tradenames of other companies.



 

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THE OFFERING

 

Common stock offered by us

            shares

 

Common stock offered by the selling stockholder

            shares

 

Common stock to be outstanding after the offering

            shares

 

Underwriters’ option to purchase             additional shares

The selling stockholder may sell up to             additional shares if the underwriters exercise their option to purchase additional shares.

Use of proceeds

  We estimate that we will receive net proceeds from this offering of approximately $             million based on an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and estimated expenses of this offering payable by us.

 

  We intend to use the net proceeds to be received by us from this offering to repay in full all amounts outstanding under our the Treasury Loan and for general corporate purposes, including cash reserves, working capital, capital expenditures, including flight equipment acquisitions, sales and marketing activities and general and administrative matters. Please see “Use of Proceeds.”

 

  An investment fund managed by Indigo is our controlling stockholder and the selling stockholder in this offering. We will not receive any of the proceeds from the sale of any shares by the selling stockholder. Please see “Principal and Selling Stockholder.”

 

Risk factors

Please see “Risk Factors” beginning on page 22 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed Nasdaq Global Select Market symbol

“FRNT”

The number of shares of our common stock outstanding after this offering is based on 5,248,109 shares outstanding as of September 30, 2020, and excludes:

 

   

an aggregate of 260,374 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2020, having a weighted average exercise price of $74.00 per share;

 

   

an aggregate of 46,236 shares of common stock issuable upon the vesting of outstanding restricted stock units as of September 30, 2020;



 

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an aggregate of 13,752 shares of common stock issuable upon the exercise of warrants issued pursuant to the Payroll Support Program Agreement with the United States Department of the Treasury (the “Treasury”), with respect to the Payroll Support Program (“PSP”) established under Subtitle B of Title IV of Division A of the CARES Act (the “PSP Warrants”), having an exercise price of $241.72 per share;

 

   

an aggregate of 62,055 shares of common stock issuable upon the exercise of warrants issued pursuant to the Payroll Support Program Extension Agreement (the “PSP2 Agreement”) with the Treasury, with respect to the Payroll Support Program (“PSP2”) established under Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (the “PSP2 Warrants”), having an exercise price of $9.00 per share and issued following September 30, 2020;

 

   

an aggregate of 645,281 shares of common stock reserved for issuance pursuant to future awards under our 2014 Equity Incentive Plan, as amended, as of September 30, 2020, which will become available for issuance under our 2021 Equity Incentive Award Plan after consummation of this offering; and

 

   

an aggregate of              shares of common stock reserved for issuance pursuant to future awards under our 2021 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective immediately prior to the consummation of this offering.

Except as otherwise indicated, information in this prospectus reflects or assumes the following:

 

   

a            -for-             split of our outstanding common stock, which will occur prior to the effectiveness of the registration statement of which this prospectus is a part;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the consummation of this offering;

 

   

no exercise of outstanding stock options or warrants subsequent to September 30, 2020; and

 

   

no exercise of the underwriters’ option to purchase up to             additional shares of our common stock from the selling stockholder.



 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following tables summarize the financial and operating data for our business for the periods presented. You should read this summary consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

We derived the summary consolidated statements of operations data for the years ended December 31, 2018 and 2019 from our audited consolidated financial statements included in this prospectus. We derived the summary consolidated statements of operations data for the nine months ended September 30, 2019 and 2020 and the summary consolidated balance sheet data as of September 30, 2020 from our unaudited financial statements included in this prospectus. The unaudited summary consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals and material non-recurring adjustments that have been separately disclosed) necessary to present fairly our financial position as of September 30, 2020 and the results of operations for the nine months ended September 30, 2019 and 2020. Our historical results are not necessarily indicative of the results to be expected in the future, and results for the nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the full year.

 

     Year Ended December 31,     Nine Months Ended September 30,  
             2018                     2019                     2019                     2020          
                 (unaudited)     (unaudited)  
     (in millions, except for share and per share data)  

Consolidated Statements of Operations Data:

        

Operating revenues:

        

Passenger

   $ 2,102     $ 2,445     $ 1,807     $ 950  

Other

     54       63       46       33  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     2,156       2,508       1,853       983  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Aircraft fuel

     589       640       468     $ 281  

Salaries, wages and benefits

     441       529       373       406  

Aircraft rent(1)

     277       368       270       266  

Station operations

     323       336       252       182  

Sales and marketing

     110       130       96       62  

Maintenance materials and repairs

     75       86       60       59  

Depreciation and amortization

     78       46       35       23  

CARES Act credits

     —         —         —         (188

Other operating expenses(1)

     171       64       58       73  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,064       2,199       1,612       1,164  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     92       309       241       (181
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest expense

     (13     (11     (8     (7

Capitalized interest

     9       11       8       5  

Interest income and other

     17       16       12       4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     13       16       12       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     105       325       253       (179

Income tax expense (benefit)

     25       74       58       (81
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 80     $ 251     $ 195     $ (98
  

 

 

   

 

 

   

 

 

   

 

 

 


 

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     Year Ended December 31,      Nine Months Ended September 30,  
             2018                      2019                      2019                      2020          
                   (unaudited)      (unaudited)  
     (in millions, except for share and per share data)  

Earnings (loss) per share:

           

Basic

     13.95        45.21        35.48        (18.71

Diluted

     13.83        45.10        35.40        (18.71

Weighted average shares outstanding:

           

Basic

     5,238,618        5,240,555        5,240,158        5,243,050  

Diluted

     5,287,484        5,252,450        5,252,006        5,243,050  

Unaudited Pro Forma Data:

           

Pro forma earnings (loss) per share:

           

Basic

           

Diluted

           

Pro forma weighted average shares outstanding:

           

Basic

           

Diluted

           

 

(1)

Prior to January 1, 2019 and our adoption of ASU 2016-02, Leases (“ASU 2016-02”) any gains on completed sale-leaseback transactions were deferred and recognized as a reduction to aircraft rent expense over the lease term for each aircraft or engine. Due to the adoption of ASU 2016-02 on January 1, 2019, gains from sale-leaseback transactions are now recognized in full immediately upon sale (subject to adjustment for off-market terms) as a reduction to other operating expense within the consolidated statement of operations, and are therefore no longer amortized over the life of the lease.

 

     Year Ended December 31,      Nine Months Ended September 30,  
             2018                      2019                      2019                      2020          
     (in millions)  

Non-GAAP financial data (unaudited):

           

Adjusted net income (loss)(1)

   $ 183      $ 276      $ 203      $ (168

EBITDA(1)

     170        355        276        (158

Adjusted EBITDA(1)

     305        387        286        (287

Adjusted EBITDAR(2)

     582        755        556        (21

 

(1)

Adjusted net income, EBITDA and Adjusted EBITDA are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of net income and EBITDA are well-recognized performance measurements in the airline industry that are frequently used by our management, as well as by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry.

Adjusted net income, EBITDA and Adjusted EBITDA have limitations as analytical tools. Some of the limitations applicable to these measures include: Adjusted net income, EBITDA and Adjusted EBITDA do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; Adjusted net income, EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; EBITDA, and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and other companies in our industry may calculate Adjusted net income, EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted net income, EBITDA and Adjusted EBITDA should not be considered in isolation from or as a substitute for performance measures calculated in accordance with GAAP. In addition, because derivations of Adjusted net income, EBITDA and Adjusted EBITDA are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, derivations of Net income and EBITDA, including Adjusted Net



 

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Income and Adjusted EBITDA, as presented may not be directly comparable to similarly titled measures presented by other companies.

For the foregoing reasons, each of Adjusted Net Income, EBITDA and Adjusted EBITDA has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

 

(2)

Adjusted EBITDAR is included as a supplemental disclosure because we believe it is useful solely as a valuation metric for airlines as its calculation isolates the effects of financing in general, the accounting effects of capital spending and acquisitions (primarily aircraft, which may be acquired directly, directly subject to acquisition debt, by capital lease or by operating lease, each of which is presented differently for accounting purposes), and income taxes, which may vary significantly between periods and for different airlines for reasons unrelated to the underlying value of a particular airline. However, Adjusted EBITDAR is not determined in accordance with GAAP, is susceptible to varying calculations and not all companies calculate the measure in the same manner. As a result, Adjusted EBITDAR, as presented, may not be directly comparable to similarly titled measures presented by other companies. In addition, Adjusted EBITDAR should not be viewed as a measure of overall performance since it excludes aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. Accordingly, you are cautioned not to place undue reliance on this information.



 

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The following table presents the reconciliation of EBITDA, Adjusted EBITDA, Adjusted EBITDAR and Adjusted net income to Net income for the periods presented below.

 

    Year Ended December 31,     Nine Months Ended September 30,  
            2018                     2019                     2019                     2020          
                (unaudited)     (unaudited)  
          (in millions)        

Adjusted net income (loss) reconciliation (unaudited):

       

Net income (loss)

    80       251       195       (98

Derivative de-designation and mark to market adjustment(a)

    —         —         —         52  

Pilot phantom equity(b)

    22       5       (13     —    

Collective bargaining contract ratification(c)

    88       22       18       —    

Loss on sale of owned aircraft(d)

    25       —         —         —    

Flight attendant early out program(e)

    —         5       5       —    

CARES Act – grant recognition and employee retention credits(f)

    —         —         —         (188

Write-off of deferred registration statement costs due to significant market uncertainty(g)

    —         —         —         7  

CARES Act – mark to market impact for warrants(h)

    —         —         —         1  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income (loss) before income taxes

    215       283       205       (226

Tax benefit (expense) related to underlying adjustments

    (32     (7     (2     58  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income (loss)

  $ 183     $ 276     $ 203     $ (168
 

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA, Adjusted EBITDA and Adjusted EBITDAR reconciliation (unaudited):

       

Net income (loss)

  $ 80     $ 251     $ 195     $ (98

Plus (minus):

       

Interest expense

    13       11       8       7  

Capitalized interest

    (9     (11     (8     (5

Interest income and other

    (17     (16     (12     (4

Income tax expense

    25       74       58       (81

Depreciation and amortization

    78       46       35       23  
 

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    170       355       276       (158

Plus (minus):

       

Derivative de-designation and mark to market adjustment(a)

    —         —         —         52  

Pilot phantom equity(b)

    22       5       (13     —    

Collective bargaining contract ratification(c)

    88       22       18       —    

Loss on sale of owned aircraft(d)

    25       —         —         —    

Flight attendant early out program(e)

    —         5       5       —    

CARES Act – grant recognition and employee retention credits(f)

    —         —         —         (188

Write-off of deferred registration statement costs due to significant market uncertainty(g)

    —         —         —         7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    305       387       286       (287

Plus: Aircraft Rent(i)

    277       368       270       266  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAR

  $ 582     $ 755     $ 556     $ (21
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Due to the significant reduction in demand resulting from COVID-19, our future anticipated consumption of fuel dropped significantly and we therefore de-designated hedge accounting in March 2020 on the derivative positions where the future consumption was not deemed probable, which primarily related to our written put options on our costless collars. The $52 million is the charge from the de-designation and the resulting mark to market impact on the quantities where consumption was not deemed probable.

(b)

Represents the impact of the change in value of phantom equity units pursuant to the Pilot Phantom Equity Plan. See “Executive Compensation—Equity Compensation Plans—Pilot Phantom Equity Plan.”



 

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(c)

Represents (i) $75 million of costs related to a one-time contract ratification incentive, plus payroll-related taxes and certain other compensation and benefits-related accruals earned through December 31, 2018 and committed to by us as part of a tentative agreement with the union representing our pilots that was reached in December 2018 and was ratified by the pilots in January 2019 and (ii) $15 million of costs related to a one-time contract ratification incentive, plus payroll-related taxes and certain other compensation and benefits-related accruals earned through March 31, 2019 and committed to by us as part of a tentative agreement with the union representing our flight attendants that was reached in March 2019 for a contract that was ratified and became effective in May 2019.

(d)

Represents losses incurred on the sale of our six owned aircraft in December 2018, which enabled us to accelerate a critical part of our fleet plan by shortening our time with certain of our older less fuel-efficient aircraft. The loss was measured as the excess of the net book value of the aircraft over the sale price at the date of sale and was recognized within other operating expenses in the consolidated statements of operations. All aircraft were held for use through the date of sale.

(e)

Represents expenses associated with an early out program agreed to in 2019 with our flight attendants, payable through 2019, 2020 and 2021.

(f)

Represents the recognition of the $177 million grant received from the U.S. government for payroll support from April 2020 through September 2020 as part of the PSP under the CARES Act, which is net of $1 million of deferred financing costs, along with $11 million of employee retention credits we qualified for under the CARES Act.

(g)

Represents the write-off of our deferred registration statement costs during the second quarter of 2020 due to the impact of the COVID-19 pandemic and the resulting uncertainty on our ability to access the capital markets.

(h)

Represents the mark to market adjustment to the value of the warrants issued as part of the funding provided under the CARES Act.

(i)

Represents aircraft rent expense included in Adjusted EBITDA. See footnote (1) above under the caption “Summary Historical Consolidated Financial and Operating Data” with respect to the effect of our adoption of ASU 2016-02 on January 1, 2019.

The following table presents our historical consolidated balance sheet data as of September 30, 2020, and on a pro forma as adjusted basis to give effect to this offering and the application of the net proceeds received by us.

 

     As of September 30, 2020  
     Actual      Pro forma
As Adjusted(1)(2)
 
     (in millions)  

Consolidated Balance Sheet Data (unaudited):

     

Cash and cash equivalents

   $ 565     

Total assets

     3,716     

Long-term debt, including current portion

     352     

Stockholders’ equity

     433     

 

(1)

The unaudited adjusted pro forma consolidated balance sheet gives effect to the receipt of the estimated net proceeds by us from the sale of shares of our common stock offered by us (based on an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds received by us, including the use of $            million to repay in full all amounts outstanding under the Treasury Loan.

(2)

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share would increase or decrease, respectively, the amount of pro forma as adjusted cash, cash equivalents and restricted cash, total assets and stockholders’ equity by $        million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease, respectively, the amount of pro forma as adjusted cash, cash equivalents and restricted cash, assets and stockholders’ equity by approximately $        million (based on an assumed initial public offering price of $         per share, the midpoint of the price range as set forth on the cover of this prospectus). The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.



 

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OPERATING STATISTICS

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
           2018                 2019           2019     2020  

Operating statistics (unaudited)(a)

        

Available seat miles (ASMs) (millions)

     24,629       28,120       20,560       12,675  

Departures

     122,784       138,570       100,802       65,536  

Average stage length (statute miles)

     1,052       1,051       1,055       1,010  

Block hours

     341,528       389,476       284,149       176,553  

Average aircraft in service

     76       88       86       79  

Aircraft—end of period

     84       98       93       102  

Average daily aircraft utilization (hours)

     12.3       12.2       12.2       8.1  

Passengers (thousands)

     19,843       22,823       16,713       8,373  

Average seats per departure

     190       192       192       191  

Revenue passenger miles (RPMs) (millions)

     20,920       24,203       17,797       8,647  

Load Factor (%)

     84.9     86.1     86.6     68.2

Fare passenger revenue per passenger ($)

     54.72       52.80       54.15       53.31  

Non-fare passenger revenue per passenger ($)

     51.20       54.33       53.97       60.21  

Other revenue per passenger ($)

     2.73       2.78       2.74       3.92  

Total revenue per passenger ($)

     108.65       109.91       110.86       117.44  

Total revenue per available seat mile (RASM) (¢)

     8.75       8.92       9.01       7.76  

Cost per available seat mile (CASM) (¢)

     8.38       7.82       7.84       9.19  

CASM (excluding fuel) (¢)

     5.99       5.55       5.56       6.97  

Adjusted CASM (¢)(b)

     7.83       7.71       7.79       10.21  

Adjusted CASM (excluding fuel) (¢)(b)

     5.44       5.44       5.52       8.40  

Non-operating expense per available seat mile (¢)

     (0.05     (0.06     (0.06     (0.02

Adjusted non-operating expense per available seat mile (¢)(c)

     (0.05     (0.06     (0.06     (0.03

Total adjusted CASM (¢)(b)

     7.78       7.65       7.73       10.18  

Fuel cost per gallon ($)

     2.25       2.22       2.21       2.29  

Fuel gallons consumed (thousands)

     261,179       288,510       211,774       122,506  

Employees (FTE)

     3,978       4,935       4,811       5,023  

 

(a)

See “Glossary of Airline Terms” for definitions of terms used in this table.

(b)

For a reconciliation of CASM to Adjusted CASM (excluding fuel), see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

(c)

For the nine months ended September 30, 2020 adjusted non-operating expense per available seat mile represents interest expense, capitalized interest income and other less the $1 million impact of mark to market adjustment to the value of warrants issued as part of the funding provided under the CARES Act, divided by ASMs.



 

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GLOSSARY OF AIRLINE TERMS

Set forth below is a glossary of industry terms used in this prospectus:

“A320 family” means, collectively, the Airbus series of single-aisle aircraft, consisting of A319ceo, A320ceo, A320neo, A321ceo and A321neo aircraft.

“A320neo family” means, collectively, the Airbus series of single-aisle aircraft that feature the new engine option, consisting of A320neo and A321neo aircraft.

“Adjusted CASM” means operating expenses, excluding special items, divided by ASMs. For a discussion of such special items and a reconciliation of CASM to Adjusted CASM (excluding fuel), please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Adjusted CASM (excluding fuel)” means operating expenses less aircraft fuel expense and excluding special items, divided by ASMs. For a discussion of such special items and a reconciliation of CASM to Adjusted CASM (excluding fuel), please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Adjusted non-operating expense per available seat mile” means interest expense, capitalized interest, interest income and other excluding special items,

divided by ASMs.

“Air traffic liability” or “ATL” means the value of tickets and other related fees sold in advance of travel.

“Available seat miles” or “ASMs” means the number of seats available for passengers multiplied by the number of miles the seats are flown.

“Average aircraft in service” means the average number of aircraft used in flight operations, as calculated on a daily basis.

“Average daily aircraft utilization” means block hours divided by number of days in the period divided by average aircraft.

“Average stage length” means the average number of statute miles flown per flight segment.

“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.

“CASM” or “unit costs” means operating expenses divided by ASMs.

“CBA” means a collective bargaining agreement.

“DOT” means the United States Department of Transportation.

“EPA” means the United States Environmental Protection Agency.

“FAA” means the United States Federal Aviation Administration.

“Fare revenue” consists of base fares for air travel, including mileage credits redeemed under our frequent flyer program, unused and expired passenger credits, other redeemed or expired travel credits and revenue derived from charter flights.



 

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“Fare revenue per passenger” means fare revenue divided by passengers.

“FTE” means full-time equivalent employee.

“GDS” means a Global Distribution System such as Amadeus, Sabre and Travelport, used by travel agencies and corporations to purchase tickets on participating airlines.

“LCC” means low-cost carrier.

“Load factor” means the percentage of aircraft seat miles actually occupied on a flight (RPMs divided by ASMs).

“NMB” means the National Mediation Board.

“Non-fare passenger revenue” consists of fees related to certain ancillary items such as baggage, service fees, seat selection, and other passenger-related revenue that is not included as part of base fares for travel.

“Non-fare passenger revenue per passenger” means non-fare passenger revenue divided by passengers.

“Non-operating expense per available seat mile” means interest expense, capitalized interest, interest income and other divided by ASMs.

“Operating revenue per ASM,” “RASM” or “unit revenue” means total operating revenue divided by ASMs.

“Other Revenue” consists primarily of services not directly related to providing transportation, such as the advertising, marketing and brand elements of the Frontier Miles (formerly EarlyReturns) affinity credit card program and commissions revenue from the sale of items such as rental cars and hotels.

“Other Revenue per passenger” means other revenue divided by passengers.

“Passengers” means the total number of passengers flown on all flight segments.

“Passenger revenue” consists of fare revenue and non-fare passenger revenue.

“PDP” means pre-delivery deposit payments, which are payments required by aircraft manufacturers in advance of delivery of the aircraft.

“RASM” means total revenue divided by ASMs.

“Revenue passenger miles” or “RPMs” means the number of miles flown by passengers.

“RLA” means the United States Railway Labor Act.

“Stage-length adjustment” refers to an adjustment that can be utilized to compare CASM and RASM across airlines with varying stage lengths. All other things being equal, the same airline will have lower CASM and RASM as stage length increases since fixed and departure related costs are spread over increasingly longer average flight lengths. Therefore, as one method to facilitate comparison of these quantities across airlines (or even across the same airline for two different periods if the airline’s average stage length has changed



 

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significantly), it is common in the airline industry to settle on a common assumed stage length and then to adjust CASM and RASM appropriately. Stage-length adjusted comparisons are achieved by multiplying base CASM or RASM by a quotient, the numerator of which is the square root of the carrier’s stage length and the denominator of which is the square root of the common stage length. Stage-length adjustment techniques require judgment and different observers may use different techniques. For stage-length adjusted CASM and RASM comparisons in this prospectus, the stage length being utilized is the aircraft stage length.

“Total Adjusted CASM” means the sum of Adjusted CASM and Adjusted Non-operating Expenses per ASM..

“Total Revenue per passenger” means the sum of fare revenue, non-fare passenger revenue, and other revenue (collectively, “Total Revenue”) divided by passengers.

“TSA” means the United States Transportation Security Administration.

“ULCC” means ultra low-cost carrier.

“VFR” means visiting friends and relatives.



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face, and many of such risks have been and will be exacerbated by the coronavirus (“COVID-19”) pandemic. If any of these risks should occur, our business, results of operations, financial condition or growth prospects could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Industry

The COVID-19 pandemic and measures to reduce its spread have had, and will likely continue to have, a material adverse impact on our business, results of operations and financial condition.

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. COVID-19 has since spread to almost every country in the world, including the United States. The World Health Organization has declared COVID-19 a pandemic. The outbreak of COVID-19 and the implementation of measures to reduce its spread have adversely impacted our business and continue to adversely impact our business in a number of ways. Multiple governments in countries we serve, principally the United States, have responded to the virus with air travel restrictions and closures or recommendations against air travel, and certain countries we serve have required airlines to limit or completely stop operations. In response to the COVID-19 pandemic, we have significantly reduced capacity from our original plan and will continue to evaluate the need for further flight schedule adjustments. While we experienced a modest uptick in demand during the latter half of the second quarter and into the third quarter of 2020, demand was negatively impacted by a resurgence of COVID-19 infections in certain domestic markets in the third and fourth quarters of 2020. The length and severity of the decline in demand due to the impacts of the COVID-19 pandemic is uncertain and, as such, we expect the adverse impact to persist during the first quarter of 2021.

During the period from the onset of the pandemic in March through September 30, 2020, we have implemented cost savings initiatives to align costs with the revenue declines resulting from the COVID-19 pandemic. In addition to reductions in our flight schedule to match current demand levels, we have also instituted various other initiatives to reduce costs and manage liquidity including:

 

   

reducing planned headcount increases;

 

   

reducing employee related costs, including:

 

   

salary reductions and/or deferrals for our officers and board members;

 

   

suspension of merit salary increases for 2020; and

 

   

voluntary paid and unpaid leave of absence programs for employees not covered under labor arrangements, as well as those covered under such arrangements, including pilots and flight attendants, that range from one month to six months;

 

   

deferring aircraft deliveries;

 

   

reducing discretionary expenses;

 

   

reaching agreements with major vendors, which are primarily related to many of our aircraft and engine leases as well as airports, for deferral of payments and deliveries into 2021;

 

   

delaying non-essential maintenance projects and reducing or suspending other discretionary spending;

 

   

reducing non-essential capital maintenance projects;

 

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securing current funding and future liquidity from the PSP, PSP2 and other financing sources; and

 

   

amending certain debt covenant metrics to align with current and expected demand.

Additionally, we also outsource certain critical business activities to third parties, including our dependence on a limited number of suppliers for our aircraft and engines. As a result, we have increased our reliance on the successful implementation and execution of the business continuity planning of such third-party service providers in the current environment. If one or more of such third parties experience operational failures as a result of the impacts from the spread of COVID-19, or claim that they cannot perform due to a force majeure event, it may have a material adverse impact on our business, results of operations and financial condition.

The extent of the impact of the COVID-19 pandemic on our business, results of operations and financial condition will depend on future developments, including the currently unknowable duration of the COVID-19 pandemic; the impact of existing and future governmental regulations, travel advisories and restrictions that are imposed in response to the COVID-19 pandemic; additional reductions to our flight capacity, or a voluntary temporary cessation of all flights, that we implement in response to the COVID-19 pandemic; and the impact of the COVID-19 pandemic on consumer behavior, such as a reduction in the demand for air travel, especially in our destination cities. The potential economic impact brought on by the COVID-19 pandemic is difficult to assess or predict, and it has already caused, and is likely to result in further, significant disruptions of global financial markets, which may reduce our ability to access capital on favorable terms or at all, and increase the cost of capital. In addition, a recession, depression or other sustained adverse economic event resulting from the spread of the coronavirus would materially adversely impact our business and the value of our common stock. The COVID-19 pandemic makes it more challenging for management to estimate future performance of our business, particularly over the near to medium term. A further significant decline in demand for our flights could have a materially adverse impact on our business, results of operations and financial condition.

On March 27, 2020, the CARES Act was signed into law. On April 30, 2020 we entered into an agreement with the Treasury (the “PSP Agreement”) to receive funding through the PSP over the second and third quarters of 2020. On September 28, 2020, we entered into an agreement with Treasury to receive additional funding through the PSP and on January 15, 2021, we agreed to the terms with Treasury for additional funding under PSP2 (the “PSP2 Agreement”). The funding we received is subject to restrictions and limitations. See “—We have agreed to certain restrictions on our business by accepting financing under the PSP and PSP2.”

The COVID-19 pandemic may also exacerbate other risks described in this “Risk Factors” section, including, but not limited to, our competitiveness, demand for our services, shifting consumer preferences and our substantial amount of outstanding indebtedness.

The airline industry is exceedingly competitive, and we compete against legacy network airlines, low-cost carriers and other ultra low-cost carriers; if we are not able to compete successfully in our markets, our business will be materially adversely affected.

We face significant competition with respect to routes, fares and services. Within the airline industry, we compete with legacy network carriers, low-cost carriers, or LCCs, and ultra low-cost carriers, or ULCCs. There are presently three very large legacy network carriers in the United States, American Airlines, Delta Air Lines and United Airlines, which together with Southwest Airlines, which classifies itself as an LCC, are commonly referred to as the “Big Four” carriers. There are presently two additional legacy network carriers in the United States, Alaska Airlines and Hawaiian Airlines, which together with JetBlue Airways, which classifies itself as an LCC, are commonly referred to as the “Middle Three” carriers. Finally, there are presently three ULCCs in the United States, Frontier, Allegiant Travel Company, or Allegiant, and Spirit Airlines, or Spirit. Competition on most of the routes we presently serve is intense, due to the large number of carriers in those markets. Furthermore, other airlines may begin service or increase existing service on routes where we currently face no or little competition. In almost all instances, our competitors are larger than us and possess significantly greater financial and other resources than we do.

 

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The airline industry is particularly susceptible to price discounting because, once a flight is scheduled, airlines incur only nominal additional costs to provide service to passengers occupying otherwise unsold seats. Increased fare or other price competition could adversely affect our operations. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to increase revenue per available seat mile. The prevalence of discount fares can be particularly acute when a competitor has excess capacity to sell. Given the high levels of excess capacity among U.S. airlines generally as a result of the COVID-19 pandemic, we expect to face significant discounted fare competition as the U.S. market recovers. Moreover, many other airlines have unbundled their services, at least in part, by charging separately for services such as baggage and advance seat selection which previously were offered as a component of base fares. This unbundling and other cost-reducing measures could enable competitor airlines to reduce fares on routes that we serve.

In addition, airlines increase or decrease capacity in markets based on perceived profitability. If our competitors increase overall industry capacity, or capacity dedicated to a particular domestic or foreign region, market or route that we serve, it could have a material adverse impact on our business. For instance, in 2017 there was widespread capacity growth across the United States, including in many of the markets in which we operate. In particular, during 2017, both Southwest Airlines and United Airlines increased their capacity in Denver. The domestic airline industry has often been the source of fare wars undertaken to grow market share or for other reasons, including, for example, actions by American Airlines in 2015 and United Airlines in 2017 to match fares offered in many of its markets by ULCCs, with resulting material adverse effects on the revenues of the airlines involved. The increased capacity across the United States in 2017 exacerbated the competitive pricing environment, particularly beginning in the second quarter of 2017, and this activity continued throughout 2018 and the first half of 2019. Given the decreased demand resulting from the COVID-19 pandemic, we expect significant price competition in the short-term and as the U.S. market recovers. If we continue to experience increased competition our business could be materially adversely affected.

We also expect new work patterns and the increased growth of remote work to lead to more employees not living where their offices re based, which could significantly alter the historical demand levels on the routes we serve. While we believe our sustainable low fares and low costs will enable us to grow our network profitably to take advantage of new demand patterns as they arise, there can be no assurance that we will be successful in doing so or that we will be able to successfully compete with other U.S. airlines on such routes. If we fail to establish ourselves in such new markets our business could be materially adversely affected.

Our growth and the success of our ULCC business model could stimulate competition in our markets through our competitors’ development of their own ULCC strategies or new market entrants. For example, certain legacy network airlines have further segmented the cabins of their aircraft in order to enable them to offer a new tier of reduced base fares designed to be competitive with those offered by us and other ULCCs. We expect the legacy airlines to continue to match low-cost carrier and ULCC pricing on portions of their network. A competitor adopting a ULCC strategy may have greater financial resources and access to lower cost sources of capital than we do, which could enable them to execute a ULCC strategy with a lower cost structure than we can. If these competitors adopt and successfully execute a ULCC business model, our business could be materially adversely affected.

There has been significant consolidation within the airline industry, including, for example, the combinations of American Airlines and US Airways, Delta Air Lines and Northwest Airlines, United Airlines and Continental Airlines, Southwest Airlines and AirTran Airways, and Alaska Airlines and Virgin America. In the future, there may be additional consolidation in the airline industry. Business combinations could significantly alter industry conditions and competition within the airline industry and could enable our competitors to reduce their fares.

The extremely competitive nature of the airline industry could prevent us from attaining the level of passenger traffic or maintaining the level of fares or revenues related to non-fare services required to sustain

 

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profitable operations in new and existing markets and could impede our growth strategy, which could harm our operating results. Due to our relatively small size, we are susceptible to a fare war or other competitive activities in one or more of the markets we serve, which could have a material adverse effect on our business, results of operations and financial condition.

Our business has been and may be materially adversely affected by the price and availability of aircraft fuel. Unexpected pricing of aircraft fuel or a shortage or disruption in the supply of aircraft fuel could have a material adverse effect on our business, results of operations and financial condition.

The cost of aircraft fuel is highly volatile and in recent years has been our largest individual operating expense, accounting for 29%, 29% and 24% of our operating expenses for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, respectively. High fuel prices or increases in fuel costs (or in the price of crude oil) could result in increased levels of expense, and we may not be able to increase ticket prices sufficiently to cover such increased fuel costs, particularly when fuel prices rise quickly. We also sell a significant number of tickets to passengers well in advance of travel, and, as a result, fares sold for future travel may not reflect such increased fuel costs. In addition, our ability to increase ticket prices to offset an increase in fuel costs is limited by the competitive nature of the airline industry and the price sensitivity associated with air travel, particularly leisure travel, and any increases in fares may reduce the general demand. Conversely, prolonged low fuel prices could limit our ability to differentiate our product and low fares from those of the legacy network airlines and LCCs, as prolonged low fuel prices could enable such carriers to, among other things, substantially decrease their costs, fly longer stages or utilize older aircraft. In addition, prolonged low fuel prices could also reduce the benefit we expect to receive from the new-technology, more fuel efficient A320neo aircraft we operate and have on order. See also “Risks Related to Our Business—We may be subject to competitive risks due to the long-term nature of our fleet order book and the unproven new engine technology utilized by the aircraft in our order book.” From August 2014 through December 2016, the price of aircraft fuel fell substantially, which benefited us by lowering our expenses. However, our average aircraft fuel prices then experienced a 20% increase from $1.88 in 2017 to $2.25 in 2018 and followed by a 1% decrease from 2018 to $2.22 in 2019. Aircraft fuel expense increased 3% in the nine months ended September 30, 2020 to $2.29 compared to 2019.] Any future fluctuations in aircraft fuel prices or sustained high or low prices could have a material adverse effect on our business, results of operations and financial condition.

Our business is also dependent on the availability of aircraft fuel (or crude oil), which is not predictable. Weather-related events, natural disasters, terrorism, wars, political disruption or instability involving oil-producing countries, changes in governmental or cartel policy concerning crude oil or aircraft fuel production, labor strikes or other events affecting refinery production, transportation, taxes, marketing, environmental concerns, market manipulation, price speculation and other unpredictable events may drive actual or perceived fuel supply shortages. Shortages in the availability of, or increases in demand for, crude oil in general, other crude oil-based fuel derivatives and aircraft fuel in particular could result in increased fuel prices and could have a material adverse effect on our business, results of operations and financial condition.

As of September 30, 2020, we had hedges in place for approximately 96% of estimated fuel consumption for the remainder of the year ending December 31, 2020. Our results for the nine months ended September 30, 2020 include operating expenses of $52 million relating to the de-designation of fuel hedges resulting from the COVID-19 pandemic on the quantities where consumption was not deemed probable. As of September 30, 2020, our hedges consisted of call options and collar structures, although we have in the past and may in the future use other instruments such as swaps on jet fuel or highly correlated commodities and fixed forward price contracts (FFPs) which allow us to lock in the price of jet fuel for specified quantities and at specified locations in future periods. We cannot assure you our fuel hedging program will be effective or that we will maintain a fuel hedging program. Even if we are able to hedge portions of our future fuel requirements, we cannot guarantee that our hedge contracts will provide an adequate level of protection against increased fuel costs or that the counterparties to our hedge contracts will be able to perform. Our fuel hedge contracts may contain margin funding requirements that could require us to post collateral to counterparties in the event of a significant drop in fuel

 

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prices in the future. Additionally, our ability to realize the benefit of declining fuel prices may be delayed by the impact of any fuel hedges in place, and we may record significant losses on fuel hedges during periods of declining prices. A failure of our fuel hedging strategy, significant margin funding requirements, overpaying for fuel through the use of hedging arrangements or our failure to maintain a fuel hedging program could prevent us from adequately mitigating the risk of fuel price increases and could have a material adverse effect on our business, results of operations and financial condition.

Restrictions on or increased taxes applicable to charges for non-fare products and services paid by airline passengers and burdensome consumer protection regulations or laws could harm our business, results of operations and financial condition.

For the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, we generated non-fare passenger revenues of $1,016 million, $1,240 million and $504 million, respectively. Our non-fare passenger revenue consists primarily of revenue generated from air travel-related services such as baggage fees, service fees, seat selection fees and other passenger-related revenue and are a component of our passenger revenue within the consolidated statements of operations. The Department of Transportation (DOT) has rules governing many facets of the airline-consumer relationship, including, for instance, consumer notice requirements, handling of consumer complaints, price advertising, lengthy tarmac delays, oversales and denied boarding process/compensation, ticket refunds, liability for loss, delay or damage to baggage, customer service commitments, contracts of carriage, consumer disclosures and the transportation of passengers with disabilities. The DOT periodically audits airlines to determine whether such airlines have violated any of the DOT rules. The DOT has conducted audits of our business and routine post-audit investigations of our business are ongoing. If the DOT determines that we are not, or have not been, in compliance with these rules or if we are unable to remain compliant, the DOT may subject us to fines or other enforcement action. For instance, in 2017 we were fined $0.4 million by the DOT for certain infractions relating to oversales, disability, customer service commitment rules, oversales disclosure and notice requirements and domestic baggage liability limit rules.

The DOT may also impose additional consumer protection requirements, including adding requirements to modify our websites and computer reservations system, which could have a material adverse effect on our business, results of operations and financial condition. The FAA Reauthorization Act of 2018, signed into law on October 5, 2018, provided for several new requirements and rulemakings related to airlines, including but not limited to: (i) prohibition on voice communication cell phone use during certain flights, (ii) insecticide use disclosures, (iii) new training policy best practices for training regarding racial, ethnic, and religious non-discrimination, (iv) training on human trafficking for certain staff, (v) departure gate stroller check-in, (vi) the protection of pets on airplanes and service animal standards, (vii) requirements to refund promptly to passengers any ancillary fees paid for services not received, (viii) consumer complaint process improvements, (ix) pregnant passenger assistance, (x) restrictions on the ability to deny a revenue passenger permission to board or involuntarily remove such passenger from the aircraft, (xi) minimum customer service standards for large ticket agents, (xii) information publishing requirements for widespread disruptions and passenger rights, (xiii) submission of plans pertaining to employee and contractor training consistent with the Airline Passengers with Disabilities Bill of Rights, (xiv) ensuring assistance for passengers with disabilities, (xv) flight attendant duty period limitations and rest requirements, including submission of a fatigue risk management plan, (xvi) submission of policy concerning passenger sexual misconduct, (xvii) development of Employee Assault Prevention and Response Plan related to the customer service agents, (xviii) increased penalties available related to harm to passengers with disabilities or damage to mobility aids and (xix) minimum dimensions for passenger seats. The U.S. Congress and the DOT have examined the increasingly common airline industry practice of unbundling the pricing of certain products and ancillary services, a practice that is a core component of our business strategy. If new laws or regulations are adopted that make unbundling of airline products and services impermissible, or more cumbersome or expensive, or if new taxes are imposed on non-fare passenger revenues, our business, results of operations and financial condition could be harmed. Congressional, Federal agency and other government scrutiny may also change industry practice or the public’s willingness to pay for non-fare ancillary services. See also “—We are subject to extensive and increasing regulation by the Federal Aviation Administration, the Department of Transportation, the Transportation Security Administration, U.S. Customs and

 

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Border Protection and other U.S. and foreign governmental agencies, compliance with which could cause us to incur increased costs and adversely affect our business and financial results.”

The demand for airline services is highly sensitive to changes in economic conditions, and another recession or similar economic downturn in the United States or globally would further weaken demand for our services and have a material adverse effect on our business, results of operations and financial condition, particularly since a substantial portion of our customers travel for leisure or other non-essential purposes.

The demand for travel services is affected by U.S. and global economic conditions. Unfavorable economic conditions, such as those exhibited in reaction to the COVID-19 pandemic, have historically reduced airline travel spending. For most passengers visiting friends and relatives VFRs and cost-conscious leisure travelers, travel is a discretionary expense, and though we believe ULCCs are best suited to attract travelers during periods of unfavorable economic conditions as a result of such carriers’ low base fares, travelers have often elected to replace air travel at such times with various other forms of ground transportation or have opted not to travel at all. Likewise, during periods of unfavorable economic conditions, businesses have deferred air travel or forgone it altogether. Travelers have also reduced spending by purchasing fewer non-fare services, which can result in a decrease in average revenue per passenger. Because airlines typically have relatively high fixed costs as a percentage of total costs, much of which cannot be mitigated during periods of lower demand for air travel, the airline business is particularly sensitive to changes in U.S. and global economic conditions. A reduction in the demand for air travel due to unfavorable economic conditions also limits our ability to raise fares to counteract increased fuel, labor and other costs. If U.S. or global economic conditions are unfavorable or uncertain for an extended period of time, it would have a material adverse effect on our business, results of operations and financial condition. In particular, the ongoing COVID-19 pandemic and associated decline in economic activity and increase in unemployment levels are expected to have a severe and prolonged effect on the global economy generally and, in turn, is expected to depress demand for air travel into the foreseeable future. Due to the uncertainty surrounding the duration and severity of the COVID-19 pandemic, we can provide no assurance as to when and at what pace demand for air travel will return to pre-pandemic levels, if at all.

We face competition from air travel substitutes.

In addition to airline competition from legacy network airlines, LCCs and other ULCCs, we also face competition from air travel substitutes. On our domestic routes, particularly those with shorter stage lengths, we face competition from some other transportation alternatives, such as bus, train or automobile. In addition, technology advancements may limit the demand for air travel. For example, video teleconferencing, virtual and augmented reality and other methods of electronic communication may reduce the need for in-person communication and add a new dimension of competition to the industry as travelers seek lower-cost substitutes for air travel. If we are unable to stimulate demand for air travel with our low base fares or if we are unable to adjust rapidly in the event the basis of competition in our markets changes, it could have a material adverse effect on our business, results of operations and financial condition.

Threatened or actual terrorist attacks or security concerns involving airlines could have a material adverse effect on our business, results of operations and financial condition.

Past terrorist attacks or attempted attacks, particularly those against airlines, have caused substantial revenue losses and increased security costs, and any actual or threatened terrorist attack or security breach, even if not directly against an airline, could have a material adverse effect on our business, results of operations and financial condition. For instance, enhanced passenger screening, increased regulation governing carry-on baggage and other similar restrictions on passenger travel may further increase passenger inconvenience and reduce the demand for air travel. In addition, increased or enhanced security measures have tended to result in higher governmental fees imposed on airlines, resulting in higher operating costs for airlines, which we may not be able to pass on to consumers in the form of higher prices. Terrorist attacks made directly on an airline,

 

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particularly in the U.S., or the fear of such attacks or other hostilities (including elevated national threat warnings or selective cancellation or redirection of flights due to terror threats), would have a negative impact on the airline industry and have a material adverse effect on our business, results of operations and financial condition.

Airlines are often affected by factors beyond their control including: air traffic congestion at airports; air traffic control inefficiencies; government shutdowns; aircraft and engine defects; adverse weather conditions; increased security measures; new travel-related taxes; or the outbreak of disease, any of which could have a material adverse effect on our business, results of operations and financial condition.

Like other airlines, our business is affected by factors beyond our control, including air traffic congestion at airports, air traffic control inefficiencies, increased security measures, new travel-related identification requirements, taxes and fees, adverse weather conditions, natural disasters and the outbreak of disease. Flight delays caused by these factors may frustrate passengers and may increase costs and decrease revenues, which in turn could adversely affect profitability. The federal government singularly controls all U.S. airspace, and airlines are completely dependent on the FAA to operate that airspace in a safe, efficient and affordable manner. The federal government also controls airport security. The air traffic control system, which is operated by the FAA, faces challenges in managing the growing demand for U.S. air travel. U.S. and foreign air-traffic controllers often rely on outdated technologies that routinely overwhelm the system and compel airlines to fly inefficient, indirect routes resulting in delays. In addition, federal government slow-downs or shutdowns may further impact the availability of federal resources, such as air traffic controllers and security personnel, necessary to provide air traffic control and airport security, which may cause delays or cancellations of flights or may impact our ability to take delivery of aircraft or expand our route network or airport footprint. Further, implementation of the Next Generation Air Transport System, or NextGen, by the FAA could result in changes to aircraft routings and flight paths that could lead to increased noise complaints and other lawsuits, resulting in increased costs. There are additional proposals before Congress that would treat a wide range of consumer protection issues, including, among other things, proposals to regulate seat size, which could increase the costs of doing business.

In addition, airlines may also experience disruptions to their operations as a result of the aircraft and engines they operate, such as manufacturing defects, spare part shortages and other factors beyond their control. For example, regulators ordered the grounding of the entire worldwide 737 MAX fleet in March 2019. Any similar or other disruption to our operations could have a material adverse effect on our business, results of operations and financial condition.

Adverse weather conditions and natural disasters, such as hurricanes, thunderstorms, blizzards, snowstorms or earthquakes, can cause flight cancellations or significant delays. Cancellations or delays due to adverse weather conditions or natural disasters, air traffic control problems or inefficiencies, breaches in security or other factors may affect us to a greater degree than other larger airlines that may be able to recover more quickly from these events, and therefore could have a material adverse effect on our business, results of operations and financial condition to a greater degree than other air carriers. Because of our high utilization, point-to-point network, operational disruptions can have a disproportionate impact on our ability to recover. In addition, many airlines re-accommodate their disrupted passengers on other airlines at prearranged rates under flight interruption manifest agreements. We have been unsuccessful in procuring any of these agreements with our peers, which makes our recovery from disruption more challenging than for larger airlines that have these agreements in place. Similarly, outbreaks of pandemic or contagious diseases, such as COVID-19, ebola, measles, avian flu, severe acute respiratory syndrome (SARS), H1N1 (swine) flu, pertussis (whooping cough) and zika virus, could result in significant decreases in passenger traffic and the imposition of government restrictions in service and could have a material adverse impact on the airline industry. New identification requirements, such as the implementation of rules under the REAL ID Act of 2005, and increased travel taxes, such as those provided in the Travel Promotion Act, enacted in March 2010, which charges visitors from certain countries a $10 fee every two years to travel into the United States to subsidize certain travel promotion efforts, could also result in decreases in passenger traffic. Any general reduction in airline passenger traffic could have a material adverse effect on our business, results of operations and financial condition.

 

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Risks associated with our presence in international emerging markets, including political or economic instability, and failure to adequately comply with existing legal requirements, may materially adversely affect us.

Some of our target growth markets include countries with less developed economies, legal systems, financial markets and business and political environments are vulnerable to economic and political disruptions, such as significant fluctuations in gross domestic product, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets, trafficking and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by us now or in the future and the resulting instability may have a material adverse effect on our business, results of operations and financial condition.

We emphasize compliance with all applicable laws and regulations and have implemented and continue to implement and refresh policies, procedures and certain ongoing training of our employees, third-party specialists and partners with regard to business ethics and key legal requirements; however, we cannot assure you that our employees, third-party specialists or partners will adhere to our code of ethics, other policies or other legal requirements. If we fail to enforce our policies and procedures properly or maintain adequate recordkeeping and internal accounting practices to record our transactions accurately, we may be subject to sanctions. In the event we believe or have reason to believe our employees, third-party specialists or partners have or may have violated applicable laws or regulations, we may incur investigation costs, potential penalties and other related costs which in turn may have a material adverse effect on our reputation, business, results of operations and financial condition.

Increases in insurance costs or reductions in insurance coverage may have a material adverse effect on our business, results of operations and financial condition.

If any of our aircraft were to be involved in a significant accident or if our property or operations were to be affected by a significant natural catastrophe or other event, we could be exposed to material liability or loss. If we are unable to obtain sufficient insurance (including aviation hull and liability insurance and property and business interruption coverage) to cover such liabilities or losses, whether due to insurance market conditions or otherwise, our business could be materially adversely affected.

We currently obtain third-party war risk (terrorism) insurance as part of our commercial aviation hull and liability policy and additional third-party war risk (terrorism) insurance through a separate policy with a different private insurance company. Our current third-party war risk (terrorism) insurance from commercial underwriters excludes nuclear, radiological and certain other events. If we are unable to obtain adequate war risk insurance or if an event not covered by the insurance we maintain were to take place, our business could be materially adversely affected.

A decline in or temporary suspension of the funding or operations of the U.S. federal government or its agencies may adversely affect our future operating results or negatively impact the timing and implementation of our growth prospects.

The success of our operations and our future growth is dependent on a number of federal agencies, specifically the FAA, DOT and TSA. In the event of a slowdown or shutdown of the federal government, such as those experienced in October 2013 and December 2018 through January 2019, certain functions of these and other federal agencies may be significantly diminished or completely suspended for an indefinite period of time, the conclusion of which is outside of our control. During such periods, it may not be possible for us to obtain the operational approvals and certifications required for events that are critical to the successful execution of our operational strategy, such as the delivery of new aircraft or the implementation of new routes. Additionally, there may be an impact to critical airport operations, particularly security, air traffic control and other functions that could cause airport delays, flight cancellations and negatively impact consumer demand for air travel.

 

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Furthermore, once a period of slowdown or government shutdown has concluded, there will likely be an operational backlog within the federal agencies, that may extend the length of time that such events continue to negatively impact our business, results of operation and financial condition beyond the end of such period.

Risks Related to Our Business

If we fail to implement our business strategy successfully, our business will be materially adversely affected.

Our growth strategy includes significantly expanding our fleet and expanding the number of markets we serve. We select target markets and routes where we believe we can achieve profitability within a reasonable timeframe, and we only continue operating on routes where we believe we can achieve and maintain our desired level of profitability. When developing our route network, we focus on gaining market share on routes that have been underserved or are served primarily by higher cost airlines where we believe we have a competitive cost advantage. Effectively implementing our growth strategy is critical for our business to achieve economies of scale and to sustain or increase our profitability. We face numerous challenges in implementing our growth strategy, including our ability to:

 

   

sustain our relatively low unit operating costs;

 

   

continue to realize attractive revenue performance;

 

   

maintain profitability;

 

   

maintain a high level of aircraft utilization; and

 

   

access airports located in our targeted geographic markets where we can operate routes in a manner that is consistent with our cost strategy.

In addition, in order to successfully implement our growth strategy, which includes the planned growth of our fleet from 102 aircraft as of September 30, 2020 to a fleet of 165 by the end of 2025 (based on our aircraft order book with Airbus that was amended in December 2020), we will require access to a large number of gates and other services at airports we currently serve or may seek to serve. We believe there are currently significant restraints on gates and related ground facilities at many of the most heavily utilized airports in the United States, in addition to the fact that three major domestic airports (JFK and LaGuardia in New York and Reagan National in Washington, D.C.) require government-controlled take-off or landing “slots” to operate at those airports. As a result, if we are unable to obtain access to a sufficient number of slots, gates or related ground facilities at desirable airports to accommodate our growing fleet, we may be unable to compete in those markets, our aircraft utilization rate could decrease, and we could suffer a material adverse effect on our business, results of operations and financial condition.

Our growth is also dependent upon our ability to maintain a safe and secure operation and will require additional personnel, equipment and facilities as we continue to induct new aircraft and continue to execute our growth plan. In addition, we will require additional third-party personnel for services we do not undertake ourselves. An inability to hire and retain personnel, secure the required equipment and facilities in a cost-effective and timely manner, efficiently operate our expanded facilities or obtain the necessary regulatory approvals may adversely affect our ability to achieve our growth strategy, which could harm our business. Furthermore, expansion to new markets may have other risks due to factors specific to those markets. We may be unable to foresee all of the existing risks upon entering certain new markets or respond adequately to these risks, and our growth strategy and our business may suffer as a result. In addition, our competitors may reduce their fares and/or offer special promotions following our entry into a new market. We cannot assure you that we will be able to profitably expand our existing markets or establish new markets.

Some of our target growth markets outside of the United States include countries with less developed economies that may be vulnerable to unstable economic and political conditions, such as significant fluctuations in gross domestic product, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by governments.

 

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The occurrence of any of these events in markets served by us and the resulting instability may adversely affect our ability to implement our growth strategy.

Our low-cost structure is one of our primary competitive advantages, and many factors could affect our ability to control our costs.

Our low-cost structure is one of our primary competitive advantages. However, we have limited control over some of our costs. For example, we have limited control over the price and availability of aircraft fuel, aviation insurance, the acquisition and cost of aircraft, airport and related infrastructure costs, taxes, the cost of meeting changing regulatory requirements and our cost to access capital or financing. In addition, the compensation and benefit costs applicable to a significant portion of our employees are established by the terms of collective bargaining agreements, which could result in increased labor costs. See “— Increased labor costs, union disputes, employee strikes and other labor-related disruption may adversely affect our business, results of operations and financial condition.” We cannot guarantee we will be able to maintain our relatively low costs. If our costs increase and we are no longer able to maintain a competitive cost structure, it could have a material adverse effect on our business, results of operations and financial condition.

We may not be able to grow or maintain our unit revenues or maintain our non-fare revenues.

A key component of our Low Fares Done Right strategy is attracting customers with low fares and garnering repeat business by delivering a high-quality, family-friendly customer experience with a more upscale look and feel than traditionally experienced on ULCCs in the United States. We intend to continue to differentiate our brand and product in order to expand our loyal customer base and grow or maintain our unit revenues and maintain our non-fare revenues. The rising cost of aircraft and engine maintenance may impair our ability to offer low-cost fares resulting in reduced revenues. Differentiating our brand and product has required and will continue to require significant investment, and we cannot assure you that the initiatives we have implemented will continue to be successful or that the initiatives we intend to implement will be successful. If we are unable to maintain or further differentiate our brand and product from the other U.S. ULCCs, our market share could decline, which could have a material adverse effect on our business, results of operations and financial condition. We may also not be successful in leveraging our brand and product to stimulate new demand with low base fares or gain market share from the legacy airlines, particularly if the significant excess capacity caused by the COVID-19 pandemic persists.

In addition, our business strategy includes maintaining our portfolio of desirable, value-oriented, non-fare products and services. However, we cannot assure you that passengers will continue to perceive value in the non-fare products and services we currently offer and regulatory initiatives could adversely affect non-fare revenue opportunities. Failure to maintain our non-fare revenues would have a material adverse effect on our business, results of operations and financial condition. Furthermore, if we are unable to maintain our non-fare revenues, we may not be able to execute our strategy to continue to lower base fares in order to stimulate demand for air travel.

Increased labor costs, union disputes, employee strikes and other labor-related disruption, may adversely affect our business, results of operations and financial condition.

Our business is labor intensive, with labor costs representing approximately 21%, 24% and 35% of our total operating costs for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, respectively. As of September 30, 2020, approximately 88% of our workforce was represented by labor unions. We have recently ratified labor agreements with several of the labor unions representing our employees and in March 2019 we reached a tentative agreement with the union representing our flight attendants, which was ratified on May 15, 2019. See “Business—Employees.” We cannot assure you that our labor costs going forward will remain competitive or that any new agreements into which we enter will not have terms with higher labor costs or that the negotiations of such labor agreements will not result in any work stoppages.

 

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Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act, or the RLA. Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board, or the NMB. This process continues until either the parties have reached agreement on a new collective bargaining agreement, or the parties have been released to “self-help” by the NMB. In most circumstances, the RLA prohibits strikes; however, after release by the NMB, carriers and unions are free to engage in self-help measures such as lockouts and strikes.

From June to November 2018, we experienced disruptions to our flight operations during our labor negotiations with the union representing our pilots, Air Line Pilots Association, or ALPA, which materially impacted our business and results of operations for the period. Upon reaching a tentative agreement with ALPA in December 2018, our flight operations returned to normal. However, we are unable to determine the extent to which this period of prolonged disruption may have harmed our reputation or the length of time it may take for our business to recover from such harm, if ever. In addition, the agreement, which became effective in January 2019, includes a significant increase in the annual compensation of our pilots as well as a one-time ratification incentive payment to our pilots of $75 million, plus payroll related taxes. We can provide no assurance that we will not experience another operational disruption resulting from any future negotiations or disagreements with our pilots, nor can we provide assurance that we will not experience an operational disruption as a result of negotiations or disagreements with any of our other union-represented employee groups. In addition, we cannot provide any estimate with regard to the amount or probability of future compensation increases, ratification incentives or other costs that may come as a result of future negotiations with our pilots or our other union represented groups. Future operational disruptions or other costs related to labor negotiations, including reputational harm that may come as a result of such disruptions, if any, may have a material adverse impact on our business, results of operations and financial condition.

In addition, the terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency, superior profitability or other factors, to bear higher costs than we can. One or more of our competitors may also significantly reduce their labor costs, thereby providing them with a competitive advantage over us. Our labor costs may also increase in connection with our growth and we could also become subject to additional collective bargaining agreements in the future as non-unionized workers may unionize. The occurrence of any such event may have a material adverse impact on our business, results of operations and financial condition.

Our inability to expand or operate reliably or efficiently out of airports where we maintain a large presence could have a material adverse effect on our business, results of operations and financial condition and brand.

We are highly dependent on markets served from airports that are significant to our business, including Denver, Orlando and Las Vegas, as well as high-traffic locations, such as Philadelphia, Cleveland, Tampa, Chicago, Fort Myers and Atlanta. Our results of operations may be affected by actions taken by governmental or other agencies or authorities having jurisdiction over our operations at these and other airports, including, but not limited to:

 

   

increases in airport rates and charges;

 

   

limitations on take-off and landing slots, airport gate capacity or other use of airport facilities;

 

   

termination of our airport use agreements, some of which can be terminated by airport authorities with little notice to us;

 

   

increases in airport capacity that could facilitate increased competition;

 

   

international travel regulations such as customs and immigration;

 

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increases in taxes;

 

   

changes in the law that affect the services that can be offered by airlines, in general and in particular markets or at particular airports;

 

   

restrictions on competitive practices;

 

   

the adoption of statutes or regulations that impact or impose additional customer service standards and requirements, including security standards and requirements; and

 

   

the adoption of more restrictive locally-imposed noise regulations or curfews.

Our existing lease at Denver International Airport expires in December 2021 with an option to extend for two additional one-year periods. We cannot assure you that renewal of the lease will occur on acceptable terms or at all, or that the new lease will not include additional or increased fees. In general, any changes in airport operations could have a material adverse effect on our business, results of operations and financial condition.

Negative publicity regarding our customer service could have a material adverse effect on our business, results of operations and financial condition.

Our business strategy includes the differentiation of our brand and product from the other U.S. airlines, including other ULCCs, in order to increase customer loyalty and drive future ticket sales. We intend to accomplish this by continuing to offer passengers dependable customer service. However, in the past, we have experienced a relatively high number of customer complaints related to, among other things, our customer service and reservations and ticketing systems. In particular, we have generally experienced a higher volume of complaints when we implemented changes to our unbundling policies, such as charging for baggage. These complaints, together with reports of lost baggage, delayed and cancelled flights, and other service issues, are reported to the public by the DOT. In addition, we could become subject to complaints about our booking practices. For instance, in 2017 we were fined $0.4 million by the DOT for certain infractions relating to oversales, rules related to passengers with disabilities, customer service commitment rules, oversales disclosure and notice requirements and domestic baggage liability limit rules. If we do not meet our customers’ expectations with respect to reliability and service, our brand and product could be negatively impacted, which could result in customers deciding not to fly with us and adversely affect our business and reputation.

We rely on maintaining a high daily aircraft utilization rate to implement our low-cost structure, which makes us especially vulnerable to flight delays, flight cancellations, aircraft unavailability or unplanned reductions in demand such as has been caused by the COVID-19 pandemic.

We have maintained a high daily aircraft utilization rate. Our average daily aircraft utilization was 12.3 hours, 12.2 hours and 8.1 hours for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, respectively. Aircraft utilization is the average amount of time per day that our aircraft spend carrying passengers. Part of our business strategy is to maximize revenue per aircraft through high daily aircraft utilization, which is achieved, in part, by quick turnaround times at airports so we can fly more hours on average in a day. Aircraft utilization is reduced by delays and cancellations caused by various factors, many of which are beyond our control, including air traffic congestion at airports or other air traffic control problems or outages, labor availability, adverse weather conditions, increased security measures or breaches in security, international or domestic conflicts, terrorist activity, or other changes in business conditions. A significant portion of our operations are concentrated in markets such as Denver, the Northeast and northern Midwest regions of the United States, which are particularly vulnerable to weather, airport traffic constraints and other delays, particularly in the winter months. In addition, pulling aircraft out of service for unscheduled and scheduled maintenance may materially reduce our average fleet utilization and require that we re-accommodate passengers or seek short-term substitute capacity at increased costs. Further, an unplanned reduction in demand such as has been caused by the COVID-19 pandemic will reduce the utilization of our fleet and result in a related increase in unit costs, which may be material. Due to the relatively small size of our fleet, our point-to-point

 

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network and high daily aircraft utilization rate, the unexpected unavailability of one or more aircraft and resulting reduced capacity or even a modest decrease in demand could have a material adverse effect on our business, results of operations and financial condition.

It has only been a limited period since our current business and operating strategy has been implemented.

Following our acquisition by an investment fund managed by Indigo Denver Management Company, LLC, or Indigo, an affiliate of Indigo Partners, LLC, or Indigo Partners, in 2013 and the implementation of our current business and operating strategy in 2014, we recorded net income of $80 million, $251 million for the years ended December 31, 2018 and 2019 and net loss of $98 million for the nine months ended September 30, 2020, respectively, which, with respect to 2018 and 2019, are higher levels of net income than we had achieved prior to our acquisition. While we recorded an annual profit for the years ended December 31, 2018 and 2019, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or an annual basis. In turn, this may cause the trading price of our common stock to decline and may materially adversely affect our business.

On December 11, 2020, the FDA issued an emergency use authorization for the Pfizer and BioNTech vaccine for the prevention of COVID-19. On December 18, 2020, the FDA issued an emergency use authorization for the Moderna vaccine for the prevention of COVID-19. While it will take time for the vaccine to be widely distributed, we expect confidence in travel to increase as the vaccine distribution occurs, particularly in the domestic leisure market that our business is focused on, and recovery to occur by the second half of 2021.

We are subject to various environmental and noise laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.

We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise, including those relating to emissions to the air, discharges (including storm water discharges) to surface and subsurface waters, safe drinking water and the use, management, disposal and release of, and exposure to, hazardous substances, oils and waste materials. We are or may be subject to new or proposed laws and regulations that may have a direct effect (or indirect effect through our third-party specialists or airport facilities at which we operate) on our operations. In addition, U.S. airport authorities are exploring ways to limit de-icing fluid discharges. Any such existing, future, new or potential laws and regulations could have an adverse impact on our business, results of operations and financial condition.

Similarly, we are subject to environmental laws and regulations that require us to investigate and remediate soil or groundwater to meet certain remediation standards. Under certain laws, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws may be strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of wastes directly attributable to us.

In addition, the International Civil Aviation Organization, or ICAO, and jurisdictions around the world have adopted noise regulations that require all aircraft to comply with noise level standards, and governmental authorities in several U.S. and foreign cities are considering or have already implemented aircraft noise reduction programs, including the imposition of overnight curfews and limitations on daytime take-offs and landings. Compliance with existing and future environmental laws and regulations, including emissions limitations and more restrictive or widespread noise regulations, that may be applicable to us could require significant expenditures, increase our cost base and have a material adverse effect on our business, results of operations and financial condition, and violations thereof can lead to significant fines and penalties, among other sanctions.

We generally participate with other airlines in fuel consortia and fuel committees at our airports, which agreements generally include cost-sharing provisions and environmental indemnities that are generally joint and several among the participating airlines. Any costs (including remediation and spill response costs) incurred by

 

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such fuel consortia could also have an adverse impact on our business, results of operations and financial condition.

We are subject to risks associated with climate change, including increased regulation to reduce emissions of greenhouse gases.

Concern about climate change and greenhouse gases may result in additional regulation or taxation of aircraft emissions in the United States and abroad. In particular, in June 2015, the EPA announced a proposed endangerment finding that aircraft engine greenhouse gas (GHG) emissions cause or contribute to air pollution that may reasonably be anticipated to endanger public health or welfare. If the EPA makes a final, positive endangerment finding, the EPA is obligated under the Clean Air Act to set GHG emissions standards for aircraft. Several states are also considering or have adopted initiatives to regulate emissions of GHGs, primarily through the planned development of GHG emissions inventories and/or regional cap-and-trade programs. On March 6, 2017, ICAO adopted new carbon dioxide (CO2) certification standards for new aircraft beginning in 2020. The new CO2 standards began applying to new aircraft type designs in 2020, and will begin to apply to aircraft type designs already in production as of 2023. In-production aircraft that do not meet the standard by 2028 will no longer be able to be produced unless their designs are modified to meet the new standards.

In the event that such legislation or regulation is enacted in the United States or in the event similar legislation or regulation is enacted in jurisdictions in which we operate or may operate in the future, it could result in significant costs for us and the airline industry. In addition to direct costs, such regulation may have a greater effect on the airline industry through increases in fuel costs that could result from fuel suppliers passing on increased costs that they incur under such a system.

Our reputation and business could be adversely affected in the event of an emergency, accident or similar public incident involving our aircraft or personnel.

We are exposed to potential significant losses and adverse publicity in the event that any of our aircraft or personnel is involved in an emergency, accident, terrorist incident or other similar public incident, which could expose us to significant reputational harm and potential legal liability. In addition, we could face significant costs or lost revenues related to repairs or replacement of a damaged aircraft and its temporary or permanent loss from service. We cannot assure you that we will not be affected by such events or that the amount of our insurance coverage will be adequate in the event such circumstances arise, and any such event could cause a substantial increase in our insurance premiums. In addition, any future emergency, accident or similar incident involving our aircraft or personnel, even if fully covered by insurance or even if it does not involve our airline, may create an adverse public perception about our airline or that the equipment we fly is less safe or reliable than other transportation alternatives, or, in the case of our aircraft, could cause us to perform time-consuming and costly inspections on our aircraft or engines, any of which could have a material adverse effect on our business, results of operations and financial condition.

We have agreed to certain restrictions on our business by accepting financing under the CARES Act.

On March 27, 2020, the CARES Act was signed into law. The CARES Act provided liquidity in the form of loans, loan guarantees, and other investments to air carriers, such as us, that incurred, or are expected to incur, covered losses such that the continued operations of the business are jeopardized, as determined by Treasury.

On April 30, 2020, the Company reached an agreement with the U.S. government under which the Company would receive $205 million of installment funding comprised of a $174 million grant (“CARES Act Grant”) for payroll support for the period from April 2020 through September 30, 2020, and a $31 million unsecured 10-year, low interest loan (PSP Promissory Note). In addition, on September 30, 2020, the Treasury provided the Company with an additional disbursement under the PSP of $6 million, comprised of an additional $4 million toward the CARES Act Grant, and $2 million toward the PSP Promissory Note. In connection with our

 

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participation in the PSP, we also issued to the Treasury warrants pursuant to a warrant agreement to purchase up to 13,752 shares of our common stock, par value $0.0001 per share, with an exercise price of $241.72 per share (the value of a share of common stock on April 9, 2020 as determined by a third-party valuation).

On September 28, 2020, we entered into a $574 million secured term loan facility with Treasury, of which we borrowed $150 million. As of September 30, 2020, we have issued 62,055 UST Warrants in conjunction with the first draw on the loan. The UST Warrants expire in five years from the date of issuance, are transferable, have no voting rights and contain customary terms regarding anti-dilution. If the Treasury or any subsequent warrant holder exercises the UST Warrants, the interest of our holders of common stock would be diluted and we would be partially owned by the U.S. government, which could have a negative impact on our common stock price, and which could require increased resources and attention by our management.

On January 15, 2021, we entered into an agreement with Treasury for an additional $140 million under the PSP2.

In connection with our participation in the PSP and PSP2, we are, and continue to be, subject to certain restrictions and limitations, including, but not limited to:

 

   

Restrictions on payment of dividends and stock buybacks until the later of March 31, 2022 or one year after the Treasury Loan facility is repaid;

 

   

Requirements to maintain certain levels of scheduled services (including to destinations where there may currently be significantly reduced or no demand);

 

   

A prohibition on involuntary terminations or furloughs of employees (except for health, disability, cause, or certain disciplinary reasons) through March 31, 2021 and the requirements to recall employees involuntarily terminated or furloughed after September 30, 2020;

 

   

A prohibition on reducing the salary, wages, or benefits of our employees (other than our executive officers or independent contractors, or as otherwise permitted under the terms of the PSP) through March 31, 2021;

 

   

Limits on certain executive compensation including limiting pay increases and severance pay or other benefits upon terminations, until the later of October 1, 2022 or one year after the Treasury Loan facility is repaid;

 

   

Limitations on the use of the grant funds exclusively for the continuation of payment of employee wages, salaries and benefits; and

 

   

Additional reporting and recordkeeping requirements relating to the PSP and PSP2 funds.

These restrictions and requirements could materially adversely impact our business, results of operations and financial condition by, among other things, requiring us to change certain of our business practices and to maintain or increase cost levels to maintain scheduled service and employment with little or no offsetting revenue, affecting retention of key personnel and limiting our ability to effectively compete with others in our industry who may not be receiving funding and may not be subject to similar limitations.

We cannot predict whether the assistance from Treasury through the PSP will be adequate to continue to pay our employees for the duration of the COVID-19 pandemic or whether additional assistance will be required or available in the future. There can be no assurance that loans or other assistance will be available through the CARES Act or any future legislation, or whether we will be eligible to receive any additional assistance, if needed.

Further, the Treasury Loan Agreement includes affirmative and negative covenants that restrict our ability to, among other things, dispose of certain assets, merge, consolidate or sell assets, incur certain additional indebtedness or pay certain dividends. In addition, we are required to maintain unrestricted cash and cash

 

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equivalents and unused commitments available under all revolving credit facilities aggregating not less than $250 million and to maintain a minimum ratio of the borrowing base of the collateral. If we do not meet the minimum collateral coverage ratio, we must either provide additional collateral to secure our obligations under the Treasury Loan Agreement or repay the loans by an amount necessary to maintain compliance with the collateral coverage ratio.

We expect to use a portion of the proceeds from this offering to repay in full all outstanding amounts under the Treasury Loan facility and to terminate such agreement.

We are highly dependent upon our cash balances and operating cash flows.

As of September 30, 2020, we had $989 million of total available liquidity, including $565 million of cash and cash equivalents and $424 million available to borrow under the Treasury Loan facility. Furthermore, we have access to a facility to finance a portion of certain aircraft pre-delivery payments, or PDPs, from which we had drawn $146 million as of September 30, 2020. As of September 30, 2020, our PDP financing facility enables us to borrow up to an aggregate of $175 million under a secured, revolving line of credit, of which up to $25 million may be unsecured. In December, 2020 the aggregate amount available under the PDP financing facility was amended to be $150 million. In addition, we have a pre-purchased miles facility of which we had drawn the full $15 million available as of such date. The dollar amount available under the pre-purchased miles facility is based on the aggregate amount of fees payable by Barclays Bank to us for pre purchased miles on a calendar year basis, up to an aggregate maximum amount of $200 million. As of September 30, 2020, we had drawn $15 million under our pre-purchased miles facility and, under the Treasury Loan two initiatives in crew payroll and travel expenses facility, we are restricted from accessing additional amounts until full repayment and cancellation of the loan. Following such date, the amount available to us out of the $200 million will be based on our ability to meet certain financial ratios. These facilities are not adequate to finance our operations, and thus we will continue to be dependent on our operating cash flows (if any) and cash balances to fund our operations, provide capital reserves and to make scheduled payments on our aircraft-related fixed obligations, including substantial PDPs, related to the aircraft we have on order. In addition, we have sought, and may continue to seek, financing from other available sources to fund our operations in order to mitigate the impact of the COVID-19 pandemic on our financial position and operations, including through the payroll support program or loan program with Treasury.

At September 30, 2020, we failed to maintain the fixed charge coverage ratio required pursuant to our PDP facility (the “FCCR Test”). If the FCCR test is not maintained, we are required to test the loan to collateral ratio for the underlying aircraft in the credit facility that are subject to financing (the “LTV Test”) and make any pre-payments or post additional collateral required in order to reduce the loan to value on each aircraft in the credit facility that are subject to financing below a ratio threshold. The performance of the LTV Test did not result in any required pre-payment or posting of additional collateral as there was sufficient equity associated with the underlying aircraft in the facility. In addition, we amended our pre-delivery credit facility during the fourth quarter of 2020 to provide for a waiver of the FCCR Test until the first quarter of 2022. We have also obtained a waiver of relief for the covenant provisions through the fourth quarter of 2020 related to one of our credit card processors that represents less than 10% of total revenues, which may require future waivers or an amendment to existing covenants to reflect the downturn due to COVID-19.

As of September 30, 2020, we were not subject to any credit card holdbacks, although if we fail to maintain certain liquidity and other financial covenants, our credit card processors have the right to hold back credit card remittances to cover our obligations to them, which would result in a reduction of unrestricted cash that could be material. In addition, while we recently have been able to arrange aircraft lease financing that does not require that we maintain a maintenance reserve account, we are required by some of our aircraft leases, and could in the future be required, to fund reserves in cash in advance for scheduled maintenance to act as collateral for the benefit of lessors. In those circumstances, a portion of our cash is therefore unavailable until after we have completed the scheduled maintenance in accordance with the terms of the operating leases. Based on the age of our fleet and our growth strategy, we expect these maintenance deposits to decrease as we enter into operating leases for newly-

 

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acquired aircraft that do not require reserves. If we fail to generate sufficient funds from operations to meet our operating cash requirements or do not obtain a line of credit, other borrowing facility or equity financing, we could default on our operating lease and fixed obligations. Our inability to meet our obligations as they become due would have a material adverse effect on our business, results of operations and financial condition.

Our ability to obtain financing or access capital markets may be limited.

We have significant obligations to purchase aircraft and spare engines that we have on order from Airbus, CFM International, an affiliate of General Electric Company, and Pratt & Whitney. As of September 30, 2020, we had an obligation to purchase 158 A320neo family aircraft by the end of 2028 (based on our aircraft order book with Airbus that was amended in December 2020), three of which have committed operating leases. We intend to evaluate financing options for the remaining aircraft. There are a number of factors that may affect our ability to raise financing or access the capital markets in the future, including our liquidity and credit status, our operating cash flows, market conditions in the airline industry, U.S. and global economic conditions, the general state of the capital markets and the financial position of the major providers of commercial aircraft financing. We cannot assure you that we will be able to source external financing for our planned aircraft acquisitions or for other significant capital needs, and if we are unable to source financing on acceptable terms, or unable to source financing at all, our business could be materially adversely affected. To the extent we finance our activities with additional debt, we may become subject to financial and other covenants that may restrict our ability to pursue our business strategy or otherwise constrain our growth and operations.

We may be subject to competitive risks due to the long-term nature of our fleet order book and the unproven new engine technology utilized by the aircraft in our order book.

At present, we have existing aircraft purchase commitments through 2028, all of which are for Airbus A320neo family aircraft. In response to the COVID-19 pandemic, we came to an agreement with Airbus to defer four deliveries into 2021 and took five less deliveries during the nine months ended September 30, 2020 as compared to the prior year period. In addition, of the 158 A320neo family aircraft we have committed to purchase by 2028 (based on our aircraft order book with Airbus that was amended in December 2020), 24 will be equipped with the LEAP engine manufactured by CFM International, an affiliate of General Electric Company. The remaining 134 engines on our order book will be equipped with Pratt & Whitney GTF engines. The A320neo family includes next generation engine technology as well as aerodynamic refinements, large curved sharklets, weight savings, a new aircraft cabin with larger hand luggage spaces and an improved air purification system. While the A320neo family represents the latest step in the modernization of the A320 family of aircraft, the aircraft only entered commercial service in January 2016, and we are one of the first airlines to utilize the A320neo and LEAP engine. As a result, we are subject to those risks commonly associated with the initial introduction of a new aircraft type, including with respect to the A320neo’s actual, sustained fuel efficiency and other projected cost savings, which may not be realized, as well as the reliability and maintenance costs associated with a new aircraft and engine. In addition, it could take several years to determine whether the reliability and maintenance costs associated with a new aircraft and engine would have a significant impact on our operations. If we are unable to realize the potential competitive advantages we expect to achieve through the implementation of the A320neo aircraft and LEAP engines into our fleet or if we experience unexpected costs or delays in our operations as a result of such implementation, our business, results of operations and financial condition could be materially adversely affected. Furthermore, as technological evolution occurs in our industry, through the use of composites and other innovations, we may be competitively disadvantaged because we have existing extensive fleet commitments that would prohibit us from adopting new technologies on an expedited basis.

In addition, while our operation of a single family of aircraft provides us with several operational and cost advantages, any FAA directive or other mandatory order relating to our aircraft or engines, including the grounding of any of our aircraft for any reason, could potentially apply to all or substantially all of our fleet, which could materially disrupt our operations and negatively affect our business, results of operations and financial condition.

 

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Our maintenance costs will increase over the near term, we will periodically incur substantial maintenance costs due to the maintenance schedules of our aircraft fleet and obligations to the lessors and we could incur significant maintenance expenses outside of such maintenance schedules in the future.

As of September 30, 2020, the operating leases for zero, seven, four, six, four and eight aircraft in our fleet were scheduled to terminate during the remainder of 2020, 2021, 2022 2023, 2024 and 2025, respectively. In certain circumstances, such operating leases may be extended. Prior to such aircraft being returned, we will incur costs to restore these aircraft to the condition required by the terms of the underlying operating leases. The amount and timing of these so-called “return conditions” costs can prove unpredictable due to uncertainty regarding the maintenance status of each particular aircraft at the time it is to be returned and it is not unusual for disagreements to ensue between the airline and the leasing company as to the required maintenance on a given aircraft or engine.

In addition, we currently have an obligation to purchase 158 A320neo family aircraft by the end of 2028 (based on our aircraft order book with Airbus that was amended in December 2020). We expect that these new aircraft will require less maintenance when they are first placed in service (sometimes called a “maintenance holiday”) because the aircraft will benefit from manufacturer warranties and also will be able to operate for a significant period of time, generally measured in years, before the most expensive scheduled maintenance obligations, known as heavy maintenance, are first required. Following these new initial maintenance holiday periods, the new aircraft we have an obligation to acquire will require more maintenance as they age and our maintenance and repair expenses for each newly purchased aircraft will be incurred at approximately the same intervals. Moreover, because a large portion of our future fleet will be acquired over a relatively short period, significant maintenance to be scheduled on each of these planes may occur concurrently with other aircraft acquired around the same time, meaning we may incur our heavy maintenance obligations across large portions of our fleet around the same time. These more significant maintenance activities result in out-of-service periods during which our aircraft are dedicated to maintenance activities and unavailable to fly revenue service.

Outside of scheduled maintenance, we incur from time to time unscheduled maintenance which is not forecast in our operating plan or financial forecasts, and which can impose material unplanned costs and the loss of flight equipment from revenue service for a significant period of time. For example, a single unplanned engine event can require a shop visit costing several million dollars and cause the engine to be out of service for a number of months.

Furthermore, the terms of some of our lease agreements require us to pay maintenance reserves to the lessor in advance of the performance of major maintenance, resulting in our recording significant prepaid deposits on our consolidated balance sheet. In addition, the terms of any lease agreements that we enter into in the future could also require maintenance reserves in excess of our current requirements. We expect scheduled and unscheduled aircraft maintenance expenses to increase over the next several years. Any significant increase in maintenance and repair expenses would have a material adverse effect on our business, results of operations and financial condition. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Aircraft Maintenance.”

We have a significant amount of aircraft-related fixed obligations that could impair our liquidity and thereby harm our business, results of operations and financial condition.

The airline business is capital intensive and, as a result, many airline companies are highly leveraged. As of September 30, 2020, all 102 aircraft in our fleet were financed under operating leases. For the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, we incurred aircraft rent of $277 million, $368 million and $266 million, respectively, and paid maintenance deposits of $28 million, $18 million and $12 million, respectively. As of September 30, 2020, we had future operating lease obligations of approximately $2,280 million and future principal debt obligations of $362 million. For the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, we made cash payments for

 

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interest related to debt of $11 million, $10 million and $6 million, respectively. In addition, we have significant obligations for aircraft and spare engines that we have ordered from Airbus and CFM International for delivery over the next several years. Also, in April 2020, we entered into an agreement with the Treasury for which we received $205 million in funding through the payroll support program, in the form of a grant and a low-interest 10-year note, and in September 2020 we entered into a $574 million secured term loan facility with Treasury, of which we borrowed $150 million. The funding from Treasury subjected us to certain restrictions and limitations. Our ability to pay the fixed costs associated with our contractual obligations will depend on our operating performance, cash flow and our ability to secure adequate financing, which will in turn depend on, among other things, the success of our current business strategy, fuel price volatility, any significant weakening or improving in the U.S. economy, availability and cost of financing, as well as general economic and political conditions and other factors that are, to some extent, beyond our control. The amount of our aircraft related fixed obligations and our obligations under our other debt arrangements could have a material adverse effect on our business, results of operations and financial condition and could:

 

   

require a substantial portion of cash flow from operations be used for operating lease and maintenance deposit payments, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

   

limit our ability to make required PDPs, including those payable to our aircraft and engine manufacturers for our aircraft and spare engines on order;

 

   

limit our ability to obtain additional financing to support our expansion plans and for working capital and other purposes on acceptable terms or at all;

 

   

make it more difficult for us to pay our other obligations as they become due during adverse general economic and market industry conditions because any related decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled payments;

 

   

reduce our flexibility in planning for, or reacting to, changes in our business and the airline industry and, consequently, place us at a competitive disadvantage to our competitors with lower fixed payment obligations; and

 

   

cause us to lose access to one or more aircraft and forfeit our maintenance and other deposits if we are unable to make our required aircraft lease rental payments and our lessors exercise their remedies under the lease agreement including cross default provisions in certain of our leases.

A failure to pay our operating lease, debt, fixed cost, and other obligations or a breach of our contractual obligations could result in a variety of adverse consequences, including the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to cure our breach, fulfill our obligations, make required lease payments or otherwise cover our fixed costs, which would have a material adverse effect on our business, results of operations and financial condition.

We rely on third-party specialists and other commercial partners to perform functions integral to our operations.

We have entered into agreements with third-party specialists to furnish certain facilities and services required for our operations, including ground handling, catering, passenger handling, engineering, maintenance, refueling, reservations and airport facilities as well as administrative and support services. We are likely to enter into similar service agreements in new markets we decide to enter, and we cannot assure you that we will be able to obtain the necessary services at acceptable rates.

Although we seek to monitor the performance of third parties that furnish certain facilities or provide us with our ground handling, catering, passenger handling, engineering, maintenance, refueling, reservations and airport facilities, the efficiency, timeliness and quality of contract performance by third-party specialists are often beyond our control, and any failure by our third-party specialists to perform up to our expectations may have an

 

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adverse impact on our business, reputation with customers, our brand and our operations. In addition, we could experience a significant business disruption if we were to change vendors or if an existing provider ceased to be able to serve us. We expect to be dependent on such third-party arrangements for the foreseeable future.

We rely on third-party distribution channels to distribute a portion of our airline tickets.

We rely on third-party distribution channels, including those provided by or through global distribution systems, or GDSs, conventional travel agents and online travel agents, or OTAs, to distribute a portion of our airline tickets, and we expect in the future to rely on these channels to collect a portion of our non-fare revenues. These distribution channels are more expensive and at present have less functionality in respect of non-fare revenues than those we operate ourselves, such as our website. Certain of these distribution channels also effectively restrict the manner in which we distribute our products. To remain competitive, we will need to successfully manage our distribution costs and rights, and improve the functionality of third-party distribution channels, while maintaining an industry-competitive cost structure. Negotiations with key GDSs and OTAs designed to manage our costs, increase our distribution flexibility, and improve functionality could be contentious, could result in diminished or less favorable distribution of our tickets, and may not provide the functionality we require to maximize non-fare revenues. In addition, in the last several years there has been significant consolidation among GDSs and OTAs, including the acquisition by Expedia of both Orbitz and Travelocity, and the acquisition by Amadeus of Navitaire (the reservations system that we use). This consolidation and any further consolidation could affect our ability to manage our distribution costs due to a reduction in competition or other industry factors. Any inability to manage such costs, rights and functionality at a competitive level or any material diminishment in the distribution of our tickets could have a material adverse effect on our competitive position and our results of operations. Moreover, our ability to compete in the markets we serve may be threatened by changes in technology or other factors that may make our existing third-party sales channels impractical, uncompetitive or obsolete.

We rely heavily on technology and automated systems to operate our business, and any failure of these technologies or systems or any failure on our part to implement any new technologies or systems could materially adversely affect our business.

We are highly dependent on technology and computer systems and networks to operate our business. These technologies and systems include our computerized airline reservation system provided by Navitaire, now a unit of Amadeus, flight operations systems, telecommunications systems, mobile app, airline website, maintenance systems and check-in kiosks. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information. The Navitaire reservations system, which is hosted and maintained under a long-term contract by a third-party specialist, is critical to our ability to issue, track and accept electronic tickets, conduct check-in, board and manage our passengers through the airports we serve and provide us with access to global distribution systems, which enlarge our pool of potential passengers. There are many instances in the past where a reservations system malfunctioned, whether due to the fault of the system provider or the airline, with a highly adverse effect on the airline’s operations, and such a malfunction has in the past and could in the future occur on our system, or in connection with any system upgrade or migration in the future. We also rely on third-party specialists to maintain our flight operations systems, and if those systems are not functioning, we could experience service disruptions, which could result in the loss of important data, increase our expenses, decrease our operational performance and temporarily stall our operations.

Any failure of the technologies and systems we use could materially adversely affect our business. In particular, if our reservation system fails or experiences interruptions, and we are unable to book seats for a period of time, we could lose a significant amount of revenue as customers book seats on other airlines, and our reputation could be harmed. In addition, replacement technologies and systems for any service we currently utilize that experiences failures or interruptions may not be readily available on a timely basis, at competitive rates or at all. Furthermore, our current technologies and systems are heavily integrated with our day-to-day

 

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operations and any transition to a new technology or system could be complex and time-consuming. In the event that one or more of our primary technology or systems vendors fails to perform, and a replacement system is not available or if we fail to implement a replacement system in a timely and efficient manner, our business could be materially adversely affected.

Unauthorized incursions of our information technology infrastructure could compromise the personally identifiable information of our passengers, prospective passengers or personnel and expose us to liability, damage our reputation and have a material adverse effect on our business, results of operations and financial condition.

In the processing of our customer transactions and as part of our ordinary business operations, we and certain of our third-party specialists collect, process, transmit and store a large volume of personally identifiable information, including email addresses and home addresses and financial data such as credit and debit card information. The security of the systems and network where we and our third-party specialists store this data is a critical element of our business, and these systems and our network may be vulnerable to cyberattacks and other security issues. Recently, several high-profile consumer-oriented companies have experienced significant data breaches, which have caused those companies to suffer substantial financial and reputational harm. While we have taken precautions to avoid an unauthorized incursion of our computer systems, we cannot assure you that our precautions are either adequate or implemented properly to prevent and detect a data breach and its adverse financial and reputational consequences to our business. We are also subject to laws relating to privacy of personal data. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of or access to the personally identifiable information of our passengers, prospective passengers or personnel could result in governmental investigation, civil liability or regulatory penalties under laws protecting the privacy of personal information, any or all of which could disrupt our operations and have a material adverse effect on our business, results of operations and financial condition. Additionally, any material failure by us or our third-party specialists to maintain compliance with the Payment Card Industry security requirements or to rectify a data security issue may result in fines and restrictions on our ability to accept credit and debit cards as a form of payment.

We are subject to increasing legislative, regulatory and customer focus on privacy issues and data security in the United States and abroad. In addition, a number of our commercial partners, including credit card companies, have imposed data security standards on us, and these standards continue to evolve. We will continue our efforts to meet our privacy and data security obligations; however, it is possible that certain new obligations may be difficult to meet and could increase our costs. Additionally, we must manage evolving cybersecurity risks. We have been the target of cybersecurity attacks in the past and expect that we will continue to be in the future. A significant cybersecurity incident could result in a range of potentially material negative consequences for us, including unauthorized access to, disclosure, modification, misuse, loss or destruction of company systems or data; theft of sensitive, regulated or confidential data, such as personal identifying information or our intellectual property; the loss of functionality of critical systems through ransomware, denial of service or other attacks; and business delays, service or system disruptions, damage to equipment and injury to persons or property. The costs and operational consequences of responding to and remediating an incident may be substantial. Further, we could be exposed to litigation, regulatory enforcement or other legal action as a result of an incident, carrying the potential for damages, fines, sanctions or other penalties, as well injunctive relief requiring costly compliance measures. A cybersecurity incident could also impact our brand, harm our reputation and adversely impact our relationship with our customers, employees and stockholders. Failure to appropriately address these issues could also give rise to potentially material legal risks and liabilities.

We depend on a sole-source supplier for our aircraft and two suppliers for our engines.

A critical cost-saving element of our business strategy is to operate a single-family aircraft fleet; however, our dependence on the Airbus A320 family aircraft for all of our aircraft and on CFM International and Pratt & Whitney for our engines makes us vulnerable to any design defects, mechanical problems or other technical or

 

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regulatory issues associated with this aircraft type or these engines. In the event of any actual or suspected design defects or mechanical problems with the Airbus A320 family aircraft or CFM International or Pratt & Whitney engines, whether involving our aircraft or that of another airline, we may choose or be required to suspend or restrict the use of our aircraft. Our business could also be materially adversely affected if the public avoids flying on our aircraft due to an adverse perception of the Airbus A320 family aircraft or CFM International or Pratt & Whitney engines, whether because of safety concerns or other problems, real or perceived, or in the event of an accident involving such aircraft or engines. Separately, if Airbus, CFM International or Pratt & Whitney becomes unable to perform its contractual obligations and we must lease or purchase aircraft from another supplier, we would incur substantial transition costs, including expenses related to acquiring new aircraft, engines, spare parts, maintenance facilities and training activities, and we would lose the cost benefits from our current single-fleet composition, any of which would have a material adverse effect on our business, results of operations and financial condition. These risks may be exacerbated by the long-term nature of our fleet and order book and the unproven new engine technology to be utilized by the aircraft in our order book. See also “—We may be subject to competitive risks due to the long-term nature of our fleet order book and the unproven new engine technology utilized by the aircraft in our order book.”

Although we have significantly reconfigured our network since 2013, our business remains dependent on the Denver market and increases in competition or congestion or a reduction in demand for air travel in this market would harm our business.

We are highly dependent on the Denver market where we maintain a large presence, with 37% of our flights during the 12 months ended September 30, 2020 having Denver International Airport as either their origin or destination. We have experienced an increase in flight delays and cancellations at this airport due to airport congestion which has adversely affected our operating performance and results of operations. We have also experienced increased competition since 2017 from carriers adding flights to and from Denver. Also, flight operations in Denver can face extreme weather challenges in the winter, which, at times, has resulted in severe disruptions in our operation and the occurrence of material costs as a consequence of such disruptions. Our business could be further harmed by an increase in the amount of direct competition we face in the Denver market or by continued or increased congestion, delays or cancellations. Our business would also be harmed by any circumstances causing a reduction in demand for air transportation in the Denver area, such as adverse changes in local economic conditions, health concerns, adverse weather conditions, negative public perception of Denver, terrorist attacks or significant price or tax increases linked to increases in airport access costs and fees imposed on passengers.

We are subject to extensive regulation by the Federal Aviation Administration, the Department of Transportation, Transportation Security Administration, U.S. Customs and Border Protection and other U.S. and foreign governmental agencies, compliance with which could cause us to incur increased costs and adversely affect our business, results of operations and financial condition.

Airlines are subject to extensive regulatory and legal compliance requirements, both domestically and internationally, that involve significant costs. In the last several years, Congress has passed laws and the FAA, DOT and TSA have issued regulations, orders, rulings and guidance relating to the operation, safety, and security of airlines that have required significant expenditures. We expect to continue to incur expenses in connection with complying with such laws and government regulations, orders, rulings and guidance. Additional laws, regulations, taxes and increased airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel. If adopted, these measures could have the effect of raising ticket prices, reducing revenue, and increasing costs. For example, the DOT has broad authority over airlines and their consumer and competitive practices, and has used this authority to issue numerous regulations and pursue enforcement actions, including rules and fines relating to the handling of lengthy tarmac delays, consumer notice requirements, consumer complaints, price and airline advertising, oversales and involuntary denied boarding process and compensation, ticket refunds, liability for loss, delay or damage to baggage, customer service commitments, contracts of carriage and the transportation of passengers

 

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with disabilities. Among these is the series of Enhanced Airline Passenger Protection rules issued by the DOT. In addition, the FAA Reauthorization Act of 2018, signed into law on October 5, 2018, provided for several new requirements and rulemakings related to airlines, including but not limited to: (i) prohibition on voice communication cell phone use during certain flights, (ii) insecticide use disclosures, (iii) new training policy best practices for training regarding racial, ethnic, and religious non-discrimination, (iv) training on human trafficking for certain staff, (v) departure gate stroller check-in, (vi) the protection of pets on airplanes and service animal standards, (vii) requirements to refund promptly to passengers any ancillary fees paid for services not received, (viii) consumer complaint process improvements, (ix) pregnant passenger assistance, (x) restrictions on the ability to deny a revenue passenger permission to board or involuntarily remove such passenger from the aircraft, (xi) minimum customer service standards for large ticket agents, (xii) information publishing requirements for widespread disruptions and passenger rights, (xiii) submission of plans pertaining to employee and contractor training consistent with the Airline Passengers with Disabilities Bill of Rights, (xiv) ensuring assistance for passengers with disabilities, (xv) flight attendant duty period limitations and rest requirements, including submission of a fatigue risk management plan, (xvi) submission of policy concerning passenger sexual misconduct, (xvii) development of Employee Assault Prevention and Response Plan related to the customer service agents, (xviii) increased penalties available related to harm to passengers with disabilities or damage to mobility aids, and (xix) minimum dimensions for passenger seats. In addition, the FAA issued its final regulations governing pilot rest periods and work hours for all airlines certificated under Part 121 of the Federal Aviation Regulations. The rule known as FAR 117, which became effective January 4, 2014, impacts the required amount and timing of rest periods for pilots between work assignments and modifies duty and rest requirements based on the time of day, number of scheduled segments, time zones and other factors. In addition, Congress enacted a law and the FAA issued regulations requiring U.S. airline pilots to have a minimum number of hours as a pilot in order to qualify for an Air Transport Pilot certificate, which all pilots on U.S. airlines must obtain. Compliance with these rules may increase our costs, while failure to remain in full compliance with these rules may subject us to fines or other enforcement action. FAR 117 and the minimum pilot hour requirements may also reduce our ability to meet flight crew staffing requirements. We cannot assure you that compliance with these and other laws, regulations, orders, rulings and guidance will not have a material adverse effect on our business, results of operations and financial condition.

In addition, the TSA mandates the federalization of certain airport security procedures and imposes additional security requirements on airports and airlines, some of which is funded by a security fee imposed on passengers and collected by airlines. We cannot forecast what additional security and safety requirements may be imposed in the future or the costs or revenue impact that would be associated with complying with such requirements.

Our ability to operate as an airline is dependent on our obtaining and maintaining authorizations issued to us by the DOT and the FAA. The FAA from time to time issues directives and other mandatory orders relating to, among other things, operating aircraft, the grounding of aircraft, maintenance and inspection of aircraft, installation of new safety-related items, and removal and replacement of aircraft parts that have failed or may fail in the future. These requirements can be issued with little or no notice, can impact our ability to efficiently or fully utilize our aircraft, and could result in the temporary grounding of aircraft types altogether, such as the March 2019 grounding of the Boeing 737 MAX fleet. A decision by the FAA to ground, or require time-consuming inspections of or maintenance on, our aircraft, for any reason, could negatively affect our business, results of operations and financial condition. Federal law requires that air carriers operating scheduled service be continuously “fit, willing and able” to provide the services for which they are licensed. Our “fitness” is monitored by the DOT, which considers managerial competence, operations, finances, and compliance record. In addition, under federal law, we must be a U.S. citizen (as determined under applicable law). Please see “Business—Foreign Ownership.” While the DOT has seldom revoked a carrier’s certification for lack of fitness, such an occurrence would render it impossible for us to continue operating as an airline. The DOT may also institute investigations or administrative proceedings against airlines for violations of regulations. For instance, in 2017 we were fined $0.4 million by the DOT for certain infractions relating to oversales, rules related to passengers with disabilities, customer service commitment rules, oversales disclosure and notice requirements

 

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and domestic baggage liability limit rules. There is an FAA enforcement matter pending, involving certain alleged infractions of medical kit requirements, which we have disputed and are in discussions with the FAA to resolve.

International routes are regulated by air transport agreements and related agreements between the United States and foreign governments. Our ability to operate international routes is subject to change, as the applicable agreements between the United States and foreign governments may be amended from time to time. Our access to new international markets may be limited by the applicable air transport agreements between the U.S. and foreign governments and our ability to obtain the necessary authority from the U.S. and foreign governments to fly the international routes. In addition, our operations in foreign countries are subject to regulation by foreign governments and our business may be affected by changes in law and future actions taken by such governments, including granting or withdrawal of government approvals, airport slots and restrictions on competitive practices. We are subject to numerous foreign regulations in the countries outside the United States where we currently provide service. If we are not able to comply with this complex regulatory regime, our business could be significantly harmed. Please see “Business—Government Regulation.”

Changes in legislation, regulation and government policy have affected, and may in the future have a material adverse effect on our business.

Changes in, and uncertainty with respect to, legislation, regulation and government policy at the local, state or federal level have affected, and may in the future significantly impact, our business and the airline industry. Specific legislative and regulatory proposals that could have a material impact on us in the future include, but are not limited to, infrastructure renewal programs; changes to operating and maintenance requirements and immigration and security policy and requirements; modifications to international trade policy, including withdrawing from trade agreements and imposing tariffs; changes to consumer protection laws; public company reporting requirements; environmental regulation; tax legislation and antitrust enforcement. Any such changes may make it more difficult and/or more expensive for us to obtain new aircraft or engines and parts to maintain existing aircraft or engines or make it less profitable or prevent us from flying to or from some of the destinations we currently serve. To the extent that any such changes have a negative impact on us or the airline industry in general, including as a result of related uncertainty, these changes may materially impact our business, financial condition, results of operations and cash flows.

Any tariffs imposed on commercial aircraft and related parts imported from outside the United States may have a material adverse effect on our fleet, business, results of operations and financial condition.

Certain of the products and services that we purchase, including our aircraft and related parts, are sourced from suppliers located in foreign countries, and the imposition of new tariffs, or any increase in existing tariffs, by the U.S. government on the importation of such products or services could materially increase the amounts we pay for them. In early October 2019, the World Trade Organization ruled that the United States could impose $7.5 billion in retaliatory tariffs in response to illegal European Union subsidies to Airbus. On October 18, 2019, the United States imposed these tariffs on certain imports from the European Union, including a 10% tariff on new commercial aircraft. In February 2020, the United States announced an increase to this tariff from 10% to 15%. These tariffs apply to aircraft that we are already contractually obligated to purchase. These tariffs are under continuing review and at any time could be increased, decreased, eliminated or applied to a broader range of products we use. The imposition of these tariffs may substantially increase the cost of, among other things, imported new Airbus aircraft and parts required to service our Airbus fleet, which in turn could have a material adverse effect on our business, financial condition and/or results of operations. We may also seek to postpone or cancel delivery of certain aircraft currently scheduled for delivery, and we may choose not to purchase as many aircraft as we intended in the future. Any such action could have a material adverse effect on the size of our fleet, business, results of operations and financial condition.

 

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If we are unable to attract and retain qualified personnel at reasonable costs or fail to maintain our company culture, our business could be harmed.

Our business is labor intensive. We require large numbers of pilots, flight attendants, maintenance technicians and other personnel. We compete against other U.S. airlines for pilots, mechanics and other skilled labor and certain U.S. airlines offer wage and benefit packages exceeding ours. The airline industry has from time to time experienced a shortage of qualified personnel. In particular, as more pilots in the industry approach mandatory retirement age, the U.S.    airline industry is being affected by a pilot shortage. As is common with most of our competitors, we have faced considerable turnover of our employees. As a result of the foregoing, there can be no assurance that we will be able to attract or retain qualified personnel or may be required to increase wages and/or benefits in order to do so. In addition, we may lose personnel due to the impact of COVID-19 on aviation and we may lose executives as a result of restrictions imposed under the CARES Act. Such restrictions may present retention challenges in the case of executives presented with alternative, non-airline opportunities or with opportunities from airlines that are not subject to such restrictions because they never entered into such Treasury loans or have repaid their Treasury loans prior to us. If we are unable to hire, train and retain qualified employees, our business could be harmed and we may be unable to implement our growth plans.

In addition, as we hire more people and grow, we believe it may be increasingly challenging to continue to hire people who will maintain our company culture. Our company culture, which we believe is one of our competitive strengths, is important to providing dependable customer service and having a productive, accountable workforce that helps keep our costs low. As we continue to grow, we may be unable to identify, hire or retain enough people who meet the above criteria, including those in management or other key positions. Our company culture could otherwise be adversely affected by our growing operations and geographic diversity. If we fail to maintain the strength of our company culture, our competitive ability and our business, results of operations and financial condition could be harmed.

Our business could be materially adversely affected if we lose the services of our key personnel.

Our success depends to a significant extent upon the efforts and abilities of our senior management team and key financial and operating personnel. In particular, we depend on the services of our senior management team, particularly Barry L. Biffle, our President and Chief Executive Officer, and James G. Dempsey, our Executive Vice President and Chief Financial Officer. Competition for highly qualified personnel is intense, and the loss of any executive officer, senior manager, or other key employee without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on our business, results of operations and financial condition. We do not maintain key-man life insurance on our management team.

We rely on our private equity sponsor.

Our majority stockholder is presently an investment fund managed by Indigo, an affiliate of Indigo Partners, a private equity fund with significant expertise in the ultra low-cost airline space. This expertise has been available to us through the representatives Indigo has on our board of directors and through a Professional Services Agreement that was put in place in connection with the 2013 acquisition from Republic and pursuant to which we pay Indigo Partners a fee of approximately $375,000 per quarter, plus expenses. Several members of our board of directors are also affiliated with Indigo Partners and we pay each of them an annual fee as compensation. Our engagement of Indigo Partners pursuant to the Professional Services Agreement will continue until the date that Indigo Partners and its affiliates own less than 10% of the 5.2 million shares of our common stock acquired by an affiliate of Indigo Partners in December 2013. After this offering, Indigo Partners may nonetheless elect to reduce its ownership in our company or reduce its involvement on our board of directors, which could reduce or eliminate the benefits we have historically achieved through our relationship with Indigo Partners such as management expertise, industry knowledge and volume purchasing. For a further description of our Professional Services Agreement, please see “Certain Relationships and Related Party Transactions—

 

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Management Services.” See also “—Risks Related to Owning Our Common Stock—Indigo’s current control of the Company severely limits the ability of our stockholders to influence matters requiring stockholder approval and could adversely affect our other stockholders and the interests of Indigo could conflict with the interests of other stockholders.”

Our quarterly results of operations fluctuate due to a number of factors, including seasonality.

We expect our quarterly results of operations to continue to fluctuate due to a number of factors, including actions by our competitors, price changes in aircraft fuel and the timing and amount of maintenance expenses. As a result of these and other factors, quarter-to-quarter comparisons of our results of operations and month-to-month comparisons of our key operating statistics may not be reliable indicators of our future performance. In addition, seasonality may cause our quarterly and monthly results to fluctuate since passengers tend to fly more during the summer months and less in the winter months, apart from the holiday season. We cannot assure you that we will find profitable markets in which to operate during the winter season. Such periods of low demand for air travel during the winter months could have a material adverse effect on our business, results of operations and financial condition.

Our lack of membership in a marketing alliance or codeshare arrangements (other than with Volaris) could harm our business and competitive position.

Many airlines, including the domestic legacy network airlines (American, Delta and United), have marketing alliances with other airlines, under which they market and advertise their status as marketing alliance partners. These alliances, such as oneworld, SkyTeam, and Star Alliance, generally provide for codesharing, frequent flyer program reciprocity, coordinated scheduling of flights to permit convenient connections and other joint marketing activities. In addition, certain of these alliances involve highly integrated antitrust immunized joint ventures. Such arrangements permit an airline to market flights operated by other alliance members as its own. This increases the destinations, connections and frequencies offered by the airline and provides an opportunity to increase traffic on that airline’s segment of flights connecting with alliance partners. We currently do not have any marketing alliances or codeshare arrangements with U.S. or foreign airlines, other than the codeshare arrangement we entered into with Volaris in 2018. Our lack of membership in any other marketing alliances and codeshare arrangements puts us at a competitive disadvantage to traditional network carriers who are able to attract passengers through more widespread alliances, particularly on international routes, and that disadvantage may result in a material adverse effect on our business, results of operations and financial condition.

Risks Related to Owning Our Common Stock

The market price of our common stock may be volatile, which could cause the value of an investment in our stock to decline.

Prior to this offering, there has been no public market for shares of our common stock, and an active public market for these shares may not develop or be sustained after this offering. We and the representatives of the underwriters determined the initial public offering price of our common stock through negotiation. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, the market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

 

   

announcements concerning our competitors, the airline industry or the economy in general;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

   

media reports and publications about the safety of our aircraft or the aircraft type we operate;

 

   

new regulatory pronouncements and changes in regulatory guidelines;

 

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changes in the price of aircraft fuel;

 

   

announcements concerning the availability of the type of aircraft we use;

 

   

general and industry-specific economic conditions;

 

   

changes in financial estimates or recommendations by securities analysts or failure to meet analysts’ performance expectations;

 

   

sales of our common stock or other actions by investors with significant shareholdings, including sales by our principal stockholders;

 

   

trading strategies related to changes in fuel or oil prices; and

 

   

general market, political and other economic conditions.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. Broad market fluctuations may materially adversely affect the trading price of our common stock.

In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources and have a material adverse effect on our business, results of operations and financial condition.

If securities or industry analysts do not publish research or reports about our business or publish negative reports about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities and industry analysts may publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, the trading price of our common stock would likely decline. If one or more of these analysts ceases to cover our company or fails to publish reports on us regularly, demand for our stock could decrease, which may cause the trading price of our common stock and the trading volume of our common stock to decline.

Purchasers of our common stock in this offering will experience immediate and substantial dilution in the tangible net book value of their investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $            in net tangible book value per share from the price you paid. In addition, as of September 30, 2020, we had outstanding options to purchase 260,374 shares of our common stock, 46,236 shares of common stock issuable upon the vesting of outstanding restricted stock units, an aggregate of 645,281 shares of common stock reserved for issuance pursuant to future awards under our 2014 Equity Incentive Plan, an aggregate of              shares of common stock reserved for issuance pursuant to future awards under our 2021 Equity Incentive Award Plan. The exercise of these outstanding options or the issuance of such reserved shares will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution” elsewhere in this prospectus.

The issuance or sale of shares of our common stock, or rights to acquire shares of our common stock, or the exercise of the PSP Warrants, PSP2 Warrants or UST Warrants issued to the Treasury, could depress the trading price of our common stock.

We may conduct future offerings of our common stock, preferred stock or other securities that are convertible into or exercisable for our common stock to finance our operations or fund acquisitions, or for other

 

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purposes. In connection with our participation in the PSP, we issued to Treasury 13,752 PSP Warrants in consideration for the receipt of funding from Treasury and warrants to the Treasury in connection with the secured loan provided under the Loan and Guarantee Agreement (the “Treasury Loan Agreement”) we entered into with Treasury pursuant to the CARES Act, which are exercisable for up to approximately 62,055 shares of our common stock related to the initial $150 million borrowing that was made thereunder. Moreover, we may issue additional warrants to the Treasury exercisable for up to approximately 175,410 shares of our common stock, assuming we draw the full $424 million amount of the secured loan provided under the Treasury Loan Agreement. See “—We have agreed to certain restrictions on our business by accepting financing under the CARES Act.” Further, we reserve shares of our common stock for future issuance under our equity incentive plans, which shares are eligible for sale in the public market to the extent permitted by the provisions of various agreements and, to the extent held by affiliates, the volume and manner of sale restrictions of Rule 144. If these additional shares are sold, or if it is perceived that they will be sold, into the public market, the price of our common stock could decline substantially. If we issue additional shares of our common stock or rights to acquire shares of our common stock, if any of our existing stockholders sells a substantial amount of our common stock, or if the market perceives that such issuances or sales may occur, then the trading price of our common stock may significantly decline. In addition, our issuance of additional shares of common stock will dilute the ownership interests of our existing common stockholders.

The value of our common stock may be materially adversely affected by additional issuances of common stock or preferred stock by us or sales by our principal stockholder.

Any future issuances or sales of our common stock by us will be dilutive to our existing common stockholders. We had 5,248,109 shares of common stock outstanding as of September 30, 2020. All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act. The holders of substantially all of the outstanding shares of our common stock have signed lock-up agreements with the underwriters of this offering, under which they have agreed, subject to certain exceptions, not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any of our common stock or securities convertible into or exchangeable or exercisable for shares of our common stock, enter into a transaction which would have the same effect, without the prior written consent of certain of the underwriters, for a period of 180 days after the date of this prospectus. After this offering, an investment fund managed by Indigo, the holder of approximately 5.2 million shares of our common stock as of September 30, 2019, will be entitled to rights with respect to registration of such shares under the Securities Act pursuant to a registration rights agreement. Please see “Certain Relationships and Related Transactions—Registration Rights” elsewhere in this prospectus. Sales of substantial amounts of our common stock in the public or private market, a perception in the market that such sales could occur, or the issuance of securities exercisable or convertible into our common stock, could adversely affect the prevailing price of our common stock.

Indigo’s current control of the Company severely limits the ability of our stockholders to influence matters requiring stockholder approval and could adversely affect our other stockholders and the interests of Indigo could conflict with the interests of other stockholders.

When this offering is completed, an investment fund managed by Indigo will beneficially own

approximately     % of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock from Indigo as the selling stockholder.

As a result, Indigo will be able to exert a significant degree of influence or actual control over our management and affairs and over matters requiring stockholder approval, including the election of directors, a merger, consolidation or sale of all or substantially all of our assets and other significant business or corporate transactions.

Until such time as Indigo and its affiliates beneficially own shares of our common stock representing less than a majority of the voting rights of our common stock, Indigo will have the ability to take stockholder action

 

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by written consent without calling a stockholder meeting and to approve amendments to our amended and restated certificate of incorporation and amended and restated bylaws and to take other actions without the vote of any other stockholder. Investors in this offering will not be able to affect the outcome of any stockholder vote during such time. As a result, Indigo will have the ability to control all such matters affecting us, including:

 

   

the composition of our board of directors and, through our board of directors, any determination with respect to our business plans and policies;

 

   

our acquisition or disposition of assets;

 

   

our financing activities, including the issuance of additional equity securities;

 

   

any determinations with respect to mergers, acquisitions and other business combinations;

 

   

corporate opportunities that may be suitable for us and Indigo;

 

   

the payment of dividends on our common stock; and

 

   

the number of shares available for issuance under our stock plans for our existing and prospective employees.

This concentrated control will limit the ability of other stockholders to influence corporate matters and, as a result, we may take actions that our other stockholders do not view as beneficial. Indigo’s voting control may also discourage or block transactions involving a change of control of Frontier, including transactions in which you, as a stockholder, might otherwise receive a premium for your shares over the then-current market price. For example, this concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could cause the market price of our common stock to decline or prevent our stockholders from realizing a premium over the market price for their common stock. Moreover, Indigo is not prohibited from selling a controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your shares of common stock. Accordingly, your shares of common stock may be worth less than they would be if Indigo did not maintain voting control over us.

In addition, the interests of Indigo could conflict with the interests of other stockholders. According to a Form 20-F filed by Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (an airline based in Mexico doing business as Volaris) with the SEC in April 2019, investment funds managed by Indigo Partners hold approximately 15.1% of the outstanding Series A Common Stock and 49.1% of the outstanding Series B Common Stock of Volaris and two of our directors, William A. Franke and Brian H. Franke, are members of the board of directors of Volaris, with Brian H. Franke serving as chair since April 2020. We entered into a codeshare arrangement with Volaris in January 2018. As of September 30, 2020, we did not compete directly with Volaris on any of our routes other than one route that we currently operate during different months of the year. However, there can be no assurances that we will not compete directly with Volaris in the future. Furthermore, neither Indigo Partners, its portfolio companies, funds or other affiliates, nor any of their officers, directors, agents, stockholders, members or current or future partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities or lines of business in which we operate. See “—Our certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities.”

For additional information about our relationship with Indigo and Indigo Partners, please see “Certain Relationships and Related Party Transactions” and “Principal and Selling Stockholder” elsewhere in this prospectus.

Our anti-takeover provisions may delay or prevent a change of control, which could adversely affect the price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws to be in effect immediately prior to the consummation of this offering contain provisions that may make it difficult to remove

 

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our board of directors and management and may discourage or delay “change of control” transactions, which could adversely affect the price of our common stock. These provisions include, among others:

 

   

our board of directors is divided into three classes, with each class serving for a staggered three-year term, which prevents stockholders from electing an entirely new board of directors at an annual meeting;

 

   

no cumulative voting in the election of directors, which prevents the minority stockholders from electing director candidates;

 

   

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

   

from and after such time as Indigo and its affiliates no longer hold a majority of the voting rights of our common stock, actions to be taken by our stockholders may only be effected at an annual or special meeting of our stockholders and not by written consent;

 

   

from and after such time as Indigo and its affiliates no longer hold a majority of the voting rights of our common stock, special meetings of our stockholders can be called only by the Chairman of the Board or by our corporate secretary at the direction of our board of directors;

 

   

advance notice procedures that stockholders, other than Indigo for so long as it and its affiliates hold a majority of the voting rights of our common stock, must comply with in order to nominate candidates to our board of directors and propose matters to be brought before an annual meeting of our stockholders may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company;

 

   

from and after such time as Indigo and its affiliates hold less than a majority of the voting rights of our common stock, a majority stockholder vote is required for removal of a director only for cause (and a director may only be removed for cause), and a 6623% stockholder vote is required for the amendment, repeal or modification of certain provisions of our certificate of incorporation and bylaws; and

 

   

our board of directors may, without stockholder approval, issue series of preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting power of, holders of our common stock or could also be used as a method of discouraging, delaying or preventing a change of control.

Certain anti-takeover provisions under Delaware law also apply to our company. While we have elected not to be subject to the provisions of Section 203 of the DGCL in our amended and restated certificate of incorporation to be in effect immediately prior to the consummation of this offering, such certificate of incorporation will provide that in the event Indigo Partners and its affiliates cease to beneficially own at least 15% of the then outstanding shares of our voting common stock, we will automatically become subject to Section 203 of the DGCL to the extent applicable. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its voting stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction.

Our certificate of incorporation and bylaws currently provide, and our restated certificate of incorporation and amended and restated bylaws will provide, for an exclusive forum in the Court of Chancery of the State of Delaware for certain disputes between us and our stockholders, and that the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action under the Securities Act of 1933.

Our certificate of incorporation and bylaws currently provide, and our restated certificate of incorporation and amended and restated bylaws, which will become effective immediately prior to the completion of this offering, will provide, that: (i) unless we consent in writing to the selection of an alternative forum, the Court of

 

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Chancery of the State of Delaware (or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware) will, to the fullest extent permitted by law, be the sole and exclusive forum for: (A) any derivative action or proceeding brought on behalf of the company, (B) any action asserting a claim for or based on a breach of a fiduciary duty owed by any of our current or former director, officer, other employee, agent or stockholder to the company or our stockholders, including without limitation a claim alleging the aiding and abetting of such a breach of fiduciary duty, (C) any action asserting a claim against the company or any of our current or former director, officer, employee, agent or stockholder arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws or as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, or (D) any action asserting a claim related to or involving the company that is governed by the internal affairs doctrine; (ii) unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations promulgated thereunder; (iii)    any person or entity purchasing or otherwise acquiring or holding any interest in shares of capital stock of the company will be deemed to have notice of and consented to these provisions; and (iv) failure to enforce the foregoing provisions would cause us irreparable harm, and we will be entitled to equitable relief, including injunctive relief and specific performance, to enforce the foregoing provisions. Nothing in our current certificate of incorporation or bylaws or our restated certificate of incorporation or amended and restated bylaws precludes stockholders that assert claims under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), from bringing such claims in federal court to the extent that the Exchange Act confers exclusive federal jurisdiction over such claims, subject to applicable law.

We believe these provisions may benefit us by providing increased consistency in the application of Delaware law and federal securities laws by chancellors and judges, as applicable, particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. If a court were to find the choice of forum provision that is contained in our current certificate of incorporation or bylaws or will be contained in our restated certificate of incorporation or amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, results of operations, and financial condition. For example, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such a forum selection provision as written in connection with claims arising under the Securities Act.

The choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our current or former director, officer, other employee, agent, or stockholder to the company, which may discourage such claims against us or any of our current or former director, officer, other employee, agent, or stockholder to the company and result in increased costs for investors to bring a claim.

Our certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities.

Our certificate of incorporation will provide for the allocation of certain corporate opportunities between us and Indigo. Under these provisions, neither Indigo, its portfolio companies, funds or other affiliates, nor any of their agents, stockholders, members, partners, officers, directors and employees will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities or lines of business in which we operate. For instance, a director of our company who also serves as a stockholder, member, partner, officer, director or employee of Indigo or any of its portfolio companies, funds or other affiliates may pursue certain acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisitions or other opportunities may not be available to us. These potential conflicts of interest could

 

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have a material adverse effect on our business, results of operations or financial condition, if attractive corporate opportunities are allocated by Indigo to itself or its portfolio companies, funds or other affiliates instead of to us. The terms of our certificate of incorporation are more fully described in “Description of Capital Stock.”

Our corporate charter and bylaws include provisions limiting ownership and voting by non-U.S. citizens.

To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our amended and restated certificate of incorporation and amended and restated bylaws to be in effect immediately prior to the consummation of this offering restrict voting and control of shares of our common stock by non-U.S. citizens. The restrictions imposed by federal law currently require that we must be owned and controlled by U.S. citizens, that no more than 25.0% of our voting stock be owned or controlled, directly or indirectly, by persons or entities who are not U.S. citizens, as defined in Title 49 of the U.S. Code, that no more than 49.0% of our stock be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into “open skies” air transport agreements with the U.S., and that our president and at least two-thirds of the members of our board of directors and other managing officers be U.S. citizens. Our amended and restated certificate of incorporation and bylaws to be in effect immediately prior to the consummation of this offering provide that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the “foreign stock record,” would result in a loss of their voting rights in the event and to the extent that the aggregate foreign ownership of the outstanding common stock exceeds the foreign ownership restrictions imposed by federal law. Our amended and restated bylaws further provide that no shares of our common stock will be registered on the foreign stock record if the amount so registered would exceed the foreign ownership restrictions imposed by federal law. If it is determined that the amount registered in the foreign stock record exceeds the foreign ownership restrictions imposed by federal law, shares will be removed from the foreign stock record in reverse chronological order based on the date of registration therein, until the number of shares registered therein does not exceed the foreign ownership restrictions imposed by federal law. We are currently in compliance with these ownership restrictions. See “Business—Foreign Ownership” and “Description of Capital Stock—Anti-Takeover Provisions of Our Certificate of Incorporation and Bylaws—Limited Ownership and Voting by Foreign Owners.”

We expect to be a “controlled company” within the meaning of the Nasdaq Stock Market rules, and, as a result, expect to qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Following the consummation of this offering, we expect that Indigo will continue to control approximately     % of our outstanding common stock. As a result, we expect to be a “controlled company” within the meaning of the Nasdaq Stock Market rules and exempt from the obligation to comply with certain corporate governance requirements, including the requirements that a majority of our board of directors consists of “independent directors,” as defined under the rules of the Nasdaq Stock Market, and that we have a compensation committee and a nominating and corporate governance committee that are composed entirely of independent directors. These exemptions do not modify the requirement for a fully independent audit committee, which is permitted to be phased-in as follows: (1) one independent committee member at the time of our initial public offering; (2) a majority of independent committee members within 90 days of our initial public offering; and (3) all independent committee members within one year of our initial public offering. Similarly, once we are no longer a “controlled company,” we must comply with the independent board committee requirements as they relate to the compensation committee and the nominating and corporate governance committee, on the same phase-in schedule as set forth above, with the trigger date being the date we are no longer a “controlled company” as opposed to our initial public offering date. Additionally, we will have 12 months from the date we cease to be a “controlled company” to have a majority of independent directors on our board of directors.

If we utilize the “controlled company” exemption, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq Stock

 

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Market. Our status as a controlled company could make our common stock less attractive to some investors or otherwise adversely affect its trading price.

As of the date of this prospectus, we are prohibited from making repurchases of our common stock and paying dividends on our common stock as required by the CARES Act. Following the end of those restrictions, we cannot guarantee that we will repurchase shares of our common stock or pay dividends on our common stock, or that our capital deployment program will enhance long-term stockholder value. Our capital deployment program could increase the volatility of the price of our common stock and diminish our cash reserves.

In connection with our receipt of payroll support under the PSP and PSP2, we agreed not to repurchase shares of our common stock until the later of March 31, 2022 or one year after the Treasury Loan facility loan is repaid. In addition, we are prohibited from repurchasing shares of our common stock through the later of until the later of March 31, 2022 or one year after the Treasury Loan facility loan is repaid. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, restrictions contained in current or future financing instruments, business prospects and such other factors as our board of directors deems relevant.

General Risk Factors

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members or executive officers.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002, as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act, related rules implemented or to be implemented by the Securities and Exchange Commission, or the SEC, and the listing rules of the Nasdaq Stock Market. In recent years, the expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, our common stock could be delisted, which could restrict our access to capital, and we could be subject to fines, sanctions and other regulatory action and potentially civil litigation.

We will be required to assess our internal control over financial reporting on an annual basis, and any future adverse findings from such assessment could result in a loss of investor confidence in our financial reports, result in significant expenses to remediate any internal control deficiencies and have a material adverse effect on our business, results of operations and financial condition.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and beginning with our Annual Report on Form 10-K for the year ending December 31, 2022, our management will be required to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. The rules governing management’s assessment of our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In connection with the attestation process by our independent

 

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registered public accounting firm, we may encounter problems or delays in implementing any requested improvements and receiving a favorable attestation. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the Nasdaq Stock Market, regulatory investigations, civil or criminal sanctions and litigation, any of which would have a material adverse effect on our business, results of operations and financial condition.

We may become involved in litigation that may have a material adverse effect on our business, results of operations and financial condition.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. In particular, in recent years, there has been significant litigation in the United States and abroad involving patents and other intellectual property rights. We have in the past faced, and may face in the future, claims by third parties that we infringe upon their intellectual property rights. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we believe that we have meritorious claims or defenses. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effect on our business, results of operations and financial condition.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

   

the impact of the continuing COVID-19 pandemic;

 

   

the competitive environment in our industry and on the routes and cities we serve;

 

   

changes in our fuel cost;

 

   

changes in restrictions on, or increased taxes applicable to charges for, non-fare products and services;

 

   

the impact of U.S. and global economic conditions;

 

   

air travel substitutes;

 

   

threatened or actual terrorist attacks, global instability and potential U.S. military actions or activities;

 

   

factors beyond our control, including air traffic congestion, aircraft and engine defects, adverse weather, federal government shutdowns, security measures, travel-related identification requirements and taxes and outbreak of disease such as the COVID-19 pandemic;

 

   

our presence in international emerging markets;

 

   

insurance costs;

 

   

temporary suspensions of the funding or operations of the U.S. federal government;

 

   

our ability to implement our business strategy successfully;

 

   

our ability to keep costs low;

 

   

our ability to grow or maintain our unit revenues or maintain our non-fare revenues;

 

   

increased labor costs, union disputes, employee strikes and other labor-related disruptions;

 

   

our inability to expand or operate reliably and efficiently out of airports where we maintain a large presence;

 

   

negative publicity regarding our customer service;

 

   

our inability to maintain a high daily aircraft utilization rate;

 

   

environmental and noise laws and regulations;

 

   

our reputation and business being adversely affected in the event of an emergency, accident or similar public incident involving our aircraft or personnel;

 

   

our liquidity and dependence on cash balances and operating cash flows;

 

   

our ability to obtain financing or access capital markets;

 

   

the long-term nature of our fleet order book and the unproven new engine technology utilized by the aircraft in our order book;

 

   

our maintenance obligations;

 

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aircraft-related fixed obligations that could impair our liquidity;

 

   

our reliance on third-party specialists and other commercial partners to perform functions integral to our operations;

 

   

our reliance on automated systems and the risks associated with changes made to those systems;

 

   

use of personal data;

 

   

our sole-source supplier for our aircraft and engines;

 

   

our reliance on the Denver market;

 

   

governmental regulation;

 

   

our ability to attract and retain qualified personnel;

 

   

loss of key personnel;

 

   

reliance on private equity sponsor;

 

   

operational disruptions;

 

   

lack of marketing alliances and codeshare arrangements; and

 

   

other risk factors included under “Risk Factors” in this prospectus.

In addition, in this prospectus, the words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to our company, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date of this prospectus. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $             million, based on an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from any sale of shares in this offering by the selling stockholder, whether in the firm offering or upon any exercise of the underwriters’ option to purchase additional shares. Each $1.00 increase (decrease) in the assumed public offering price of $             per share would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $             million. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $             million, assuming that the assumed offering price stays the same. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.

We currently expect to use the net proceeds from this offering as follows:

 

   

to repay in full all amounts outstanding under the Treasury Loan; and

 

   

all remaining amounts for general corporate purposes, including cash reserves, working capital, capital expenditures, including flight equipment acquisitions, sales and marketing activities, and general and administrative matters.

Our expected use of the net proceeds to us from this offering represents our current intentions based upon our present plans and business condition. As such, our management will retain discretion over the use of the net proceeds from this offering.

Pending the use of the proceeds to be received by us from this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities, certificates of deposit or government securities.

 

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DIVIDEND POLICY

In September 2018 and February 2019, we declared cash dividends with respect to our common stock in the amounts of $38.47 and $28.85 per share, respectively (representing aggregate obligations of $221 million and $166 million, respectively, after giving effect to related adjustments for the benefit of holders of stock options and phantom equity units).

In connection with our receipt of financial assistance under the PSP and PSP2, we agreed not to make dividend payments in respect of our common stock through October 1, 2022. We also entered into the Treasury Loan Agreement and, as a result, we are prohibited from paying dividends on our common stock through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

As of September 30, 2020, we had $424 million available to borrow from our Treasury Loan. The following table sets forth our cash, cash equivalents and restricted cash, current maturities of long-term debt, net and capitalization as of September 30, 2020:

 

   

on an actual basis; and

 

   

on a pro forma as adjusted basis to give effect to (i) this offering and the application of the net proceeds to be received by us and (ii) a dividend expected to be paid immediately prior to the consummation of this offering.

You should read this capitalization table together with our financial statements and the related notes appearing at the end of this prospectus, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, and other financial information included in this prospectus.

 

     As of September 30, 2020  
     Actual     Pro Forma As
Adjusted(1)(2)
 
     (unaudited)
(in millions)
    (unaudited)  

Cash, cash equivalents and restricted cash

   $ 565                     
  

 

 

   

 

 

 

Current maturities of long-term debt, net

   $ 116    
  

 

 

   

 

 

 

Long-term debt, less current maturities

   $ 236    
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock (voting), $0.001 par value, 12,000,000 shares of common stock (voting) authorized, 5,248,109 (unaudited) shares issued and outstanding as of September 30, 2020;     shares authorized,     shares issued and outstanding pro forma as adjusted

   $ —      

Common stock (non-voting), $0.001 par value, 2,000,000 shares of common stock (non-voting) authorized, no shares issued and outstanding;     shares authorized,     issued and outstanding pro forma as adjusted

     —      

Preferred stock, $0.001 par value, 1,000,000 shares of preferred stock authorized, no shares issued and outstanding;     shares authorized,     issued and outstanding pro forma as adjusted

     —      

Additional paid-in capital

     58    

Retained earnings

     388    

Accumulated other comprehensive loss

     (13  
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 433    
  

 

 

   

 

 

 

Total capitalization

   $ 785    
  

 

 

   

 

 

 

 

(1)

The unaudited adjusted pro forma capitalization table gives effect to the receipt of the estimated net proceeds by us from the sale of shares of our common stock offered by us (based on an assumed initial public offering price of $    per share, the midpoint of the price range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds received by us (based on an assumed initial public offering price of $    per share, the midpoint of the price range set forth on the cover of this prospectus), including the use of $    million to repay in full all amounts outstanding under the Treasury Loan.

(2)

Each $1.00 increase or decrease in the assumed initial public offering price of $    per share would increase or decrease, respectively, the amount of cash, cash equivalents and restricted cash, additional paid-in capital, total stockholders’ equity and total capitalization by $    million (assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease, respectively, the

 

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  amount of cash, cash equivalents and restricted cash, stockholders’ equity and total capitalization by approximately $     million (based on an assumed initial public offering price of $    per share, the midpoint of the price range as set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

The outstanding share information in the table above is based on 5,248,109 shares outstanding as of September 30, 2020, and excludes:

 

   

an aggregate of 260,374 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2020, having a weighted average exercise price of $74.00 per share;

 

   

an aggregate of 46,236 shares of common stock issuable upon the vesting of outstanding restricted stock units as of September 30, 2020;

 

   

an aggregate of 13,752 shares of common stock issuable upon the exercise of warrants issued pursuant to the Payroll Support Program Agreement with the Treasury, with respect to the Payroll Support Program (“PSP”) established under Subtitle B of Title IV of Division A of the CARES Act (the “PSP Warrants”), having an exercise price of $241.72 per share;

 

   

an aggregate of 62,055 shares of common stock issuable upon the exercise of warrants issued pursuant to the Payroll Support Program Extension Agreement (the “PSP2 Agreement”) with the Treasury, with respect to the Payroll Support Program (“PSP2”) established under Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (the “PSP2 Warrants”), having an exercise price of $9.00 per share;

 

   

an aggregate of 645,281 shares of common stock reserved for issuance pursuant to future awards under our 2014 Equity Incentive Plan, as amended, as of September 30, 2020, which will become available for issuance under our 2021 Equity Incentive Award Plan after consummation of this offering; and

 

   

an aggregate of     shares of common stock reserved for issuance pursuant to future awards under our 2021 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective immediately prior to the consummation of this offering.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after the offering.

The historical net tangible book value of our common stock as of September 30, 2020 was $433 million, or $     per share. Historical net tangible book value per share is determined by dividing the net tangible book value by the number of shares of outstanding common stock. If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock.

After giving effect to our issuance of      shares of common stock at an assumed initial public offering price of $     per share of common stock, the mid-point of the range of the estimated initial offering price of between $     and $     as set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and estimated offering expenses payable by us, our pro forma net tangible book value as adjusted as of September 30, 2020 would have been approximately $     million, or approximately $     per pro forma share of common stock. This represents an immediate increase in pro forma net tangible book value of $     per share to our existing stockholders and an immediate dilution of $     per share to new investors in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price

      $                

Historical net tangible book value per share as of September 30, 2020

   $                   

Pro forma decrease in net tangible book value per share

     
  

 

 

    

Pro forma net tangible book value per share as of September 30, 2020

     

Increase in pro forma net tangible book value per share attributable to this offering

     
  

 

 

    

Pro forma net tangible book value per share, as adjusted(1)

     
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $    
     

 

 

 

 

(1)

Pro forma net tangible book value per share, as adjusted, gives effect to (i) this offering (based on the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus), and (ii) a $            million dividend expected to be paid immediately prior to the consummation of this offering.

Each $1.00 increase or decrease in the assumed public offering price of $     per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase or decrease, respectively, our pro forma net tangible book value, as adjusted to give effect to this offering, by $     million, or $     per share, and the dilution per share to investors participating in this offering by $     per share (assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. At the assumed public offering price per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, an increase of 1,000,000 in the number of shares we are offering would increase our pro forma net tangible book value, as adjusted to give effect to this offering, by approximately $     million, or $     per share, and decrease the dilution per share to investors participating in this offering by $     per share, and a decrease of 1,000,000 in the number of shares we are offering would decrease our pro forma net tangible book value, as adjusted to give effect to this offering, by approximately $     million, or $     per share, and increase the dilution per share to investors participating in this offering by $     per share. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. We will not receive any of the proceeds from any sale of shares of our common

 

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stock in this offering by the selling stockholder, including if the underwriters exercise their option to purchase additional shares of our common stock from the selling stockholder; accordingly, there is no dilutive impact as a result of these sales.

The table below summarizes as of September 30, 2020, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by existing stockholders, and (ii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $    per share (in thousands except per share and percentage data).

 

     Shares Purchased      Total Consideration      Average Price
Per Share
 
     Number      Percent      Amount      Percent  

Existing Stockholders

                                           $                                        $                

New investors

         $           $    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

        100      $          100     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The outstanding share information in the table above is based on 5,248,109 shares outstanding as of September 30, 2020, and excludes:

 

   

an aggregate of 260,374 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2020, having a weighted average exercise price of $74.00 per share;

 

   

an aggregate of 46,236 shares of common stock issuable upon the vesting of outstanding restricted stock units as of September 30, 2020;

 

   

an aggregate of 13,752 shares of common stock issuable upon the exercise of warrants issued pursuant to the Payroll Support Program Agreement with the Treasury, with respect to the Payroll Support Program (“PSP”) established under Subtitle B of Title IV of Division A of the CARES Act (the “PSP Warrants”), having an exercise price of $241.72 per share;

 

   

an aggregate of 62,055 shares of common stock issuable upon the exercise of warrants issued pursuant to the Payroll Support Program Extension Agreement (the “PSP2 Agreement”) with the Treasury, with respect to the Payroll Support Program (“PSP2”) established under Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (the “PSP2 Warrants”), having an exercise price of $9 per share;

 

   

an aggregate of 645,281 shares of common stock reserved for issuance pursuant to future awards under our 2014 Equity Incentive Plan, as amended, as of September 30, 2020, which will become available for issuance under our 2021 Equity Incentive Award Plan after consummation of this offering; and

 

   

an aggregate of     shares of common stock reserved for issuance pursuant to future awards under our 2021 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective immediately prior to the consummation of this offering.

If the underwriters exercise in full their option to purchase additional shares of our common stock from the selling stockholder, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon completion of this offering. The total consideration paid by our existing stockholders would be approximately $    million, or     %, and the total consideration paid by investors purchasing shares in this offering would be $    million, or     %.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

You should read the following selected consolidated historical financial and operating data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the financial statements and related notes included in this prospectus.

We derived the selected consolidated statements of operations data for the years ended December 31, 2018 and 2019 and the selected consolidated balance sheet data as of December 31, 2018 and 2019 from our audited consolidated financial statements included in this prospectus. We derived the selected consolidated statements of operations data for the years ended December 31, 2016 and 2017 and the selected consolidated balance sheet data as of December 31, 2016 and 2017 from our audited consolidated financial statements not included in this prospectus. We derived the summary consolidated statements of operations data for the nine months ended September 30, 2019 and 2020 and the summary consolidated balance sheet data as of September 30, 2020 from our unaudited financial statements included in this prospectus. The unaudited selected consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals and material non-recurring adjustments that have been separately disclosed) necessary to present fairly our financial position as of September 30, 2020 and the results of operations for the nine months ended September 30, 2019 and 2020. Our historical results are not necessarily indicative of the results to be expected in the future, and results for the nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the full year.

 

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    Year Ended December 31,     Nine Months Ended
September 30,
 
    2016     2017     2018     2019     2019     2020  
          (unaudited)     (unaudited)  
    (in millions, except for share and per share data)  

Consolidated Statements of Operations Data:

           

Operating revenues:

           

Passenger

  $ 1,678     $ 1,880     $ 2,102     $ 2,445     $ 1,807     $ 950  

Other

    36       38       54       63       46       33  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    1,714       1,918       2,156       2,508       1,853       983  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Aircraft fuel

    343       456       589       640       468       281  

Salaries, wages and benefits

    287       362       441       529       373       406  

Aircraft rent(1)

    209       257       277       368       270       266  

Station operations

    233       237       323       336       252       182  

Sales and marketing

    83       94       110       130       96       62  

Maintenance materials and repairs

    59       79       75       86       60       59  

Depreciation and amortization

    75       65       78       46       35       23  

CARES Act credits

    —         —         —         —         —         (188

Other operating expenses(1)

    108       123       171       64       58       73  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,397       1,673       2,064       2,199       1,612       1,164  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    317       245       92       309       241       (181
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

           

Interest expense

    (9     (10     (13     (11     (8     (7

Capitalized interest

    6       6       9       11       8       5  

Interest income and other

    2       7       17       16       12       4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (1     3       13       16       12       2  

Income (loss) before income taxes

    316       248       105       325       253       (179

Income tax expense (benefit)

    116       86       25       74       58       (81
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 200     $ 162     $ 80     $ 251     $ 195     $ (98
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

           

Basic

  $ 36.66     $ 30.32     $ 13.95     $ 45.21     $ 35.48     $ (18.71

Diluted

  $ 36.14     $ 29.64     $ 13.83     $ 45.10     $ 35.40     $ (18.71

Weighted-average shares outstanding:

           

Basic

    5,236,978       5,237,034       5,238,618       5,240,555       5,240,158       5,243,050  

Diluted

    5,315,653       5,450,945       5,287,484       5,252,450       5,252,006       5,243,050  

 

(1)

Prior to January 1, 2019 and our adoption of ASU 2016-02, Leases, (“ASU 2016-02”) any gains on completed sale-leaseback transactions were deferred and recognized as a reduction to aircraft rent expense over the lease term for each aircraft or engine. Due to the adoption of ASU 2016-02 on January 1, 2019, gains from sale-leaseback transactions (subject to adjustment for off-market terms) are now recognized in full immediately upon sale as a reduction to other operating expense within the consolidated statement of operations, and are therefore no longer amortized over the life of the lease.

 

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     Year Ended December 31,      Nine Months
Ended
September 30,
 
     2016      2017      2018      2019      2019      2020  
     (in millions)  

Non-GAAP financial data (unaudited):

                 

Adjusted net income (loss)(1)

   $ 236      $ 206      $ 183      $ 276      $ 203      $ (168

EBITDA(1)

     392        310        170        355        276        (158

Adjusted EBITDA(1)

     436        376        305        387        286        (287

Adjusted EBITDAR(2)

     641        635        582        755        556        (21

 

(1)

Adjusted net income, EBITDA and Adjusted EBITDA are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of net income and EBITDA are well recognized performance measurements in the airline industry that are frequently used by our management, as well as by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry.

Adjusted net income, EBITDA and Adjusted EBITDA have limitations as analytical tools. Some of the limitations applicable to these measures include: Adjusted net income, EBITDA and Adjusted EBITDA do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; Adjusted net income, EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; EBITDA, and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts or cash requirements related to our warrants; although depreciation and amortization are non- cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and other companies in our industry may calculate Adjusted net income, EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted net income, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition, because derivations of Adjusted net income, EBITDA and Adjusted EBITDA are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, derivations of Net income and EBITDA, including Adjusted Net Income and Adjusted EBITDA, as presented may not be directly comparable to similarly titled measures presented by other companies.

For the foregoing reasons, each of Adjusted Net Income, EBITDA and Adjusted EBITDA has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

 

(2)

Adjusted EBITDAR is included as a supplemental disclosure because we believe it is useful solely as a valuation metric for airlines as its calculation isolates the effects of financing in general, the accounting effects of capital spending and acquisitions (primarily aircraft, which may be acquired directly, directly subject to acquisition debt, by capital lease or by operating lease, each of which is presented differently for accounting purposes), and income taxes, which may vary significantly between periods and for different airlines for reasons unrelated to the underlying value of a particular airline. However, Adjusted EBITDAR is not determined in accordance with GAAP, is susceptible to varying calculations and not all companies calculate the measure in the same manner. As a result, Adjusted EBITDAR, as presented, may not be directly comparable to similarly titled measures presented by other companies. In addition, Adjusted EBITDAR should not be viewed as a measure of overall performance since it excludes aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. Accordingly, you are cautioned not to place undue reliance on this information.

 

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The following table presents the reconciliation of Net income to Adjusted net income, EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the periods presented below.

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2016     2017     2018     2019     2019     2020  
    (in millions)  

Adjusted net income (loss) reconciliation (unaudited):

           

Net income (loss)

  $ 200     $ 162     $ 80     $ 251     $ 195     $ (98

Derivative de-designation and mark to market adjustment(a)

    —         —         —         —         —         52  

Lease Modification Program(b)

    16       (2     —         —         —         —    

Pilot phantom equity(c)

    40       19       22       5       (13     —    

Collective bargaining contract ratification(d)

    —         —         88       22       18       —    

Loss on sale of owned aircraft(e)

    —         —         25       —         —         —    

Flight attendant settlement and early out program(f)

    —         49       —         5       5       —    

CARES Act – grant recognition and employee retention credits(g)

    —         —         —         —         —         (188

Write-off of deferred registration statement costs due to significant market uncertainty(h)

    —         —         —         —         —         7  

CARES Act – mark to market impact for warrants(i)

    —         —         —         —         —         1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income (loss) before income taxes

    256       228       215       283       205       (226

Tax benefit (expense) related to underlying adjustments

    (20     (22     (32     (7     (2     58  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income (loss)

  $ 236     $ 206     $ 183     $ 276     $ 203     $ (168
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA, Adjusted EBITDA and Adjusted EBITDAR reconciliation (unaudited):

           

Net income (loss)

  $ 200     $ 162     $ 80     $ 251     $ 195     $ (98

Plus (minus):

           

Interest expense

    9       10       13       11       8       7  

Capitalized interest

    (6     (6     (9     (11     (8     (5

Interest income and other

    (2     (7     (17     (16     (12     (4

Income tax expense

    116       86       25       74       58       (81

Depreciation and amortization

    75       65       78       46       35       23  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    392       310       170       355       276       (158

Plus (minus):

           

Derivative de-designation and mark to market adjustment(a)

    —         —         —         —         —         52  

Lease Modification Program(b)

    4       (2     —         —         —         —    

Pilot phantom equity(c)

    40       19       22       5       (13  

Collective bargaining contract ratification(d)

    —         —         88       22       18       —    

Loss on sale of owned aircraft(e)

    —         —         25       —         —         —    

Flight attendant settlement and early out program(f)

    —         49       —         5       5       —    

CARES Act – grant recognition and employee retention credits(g)

    —         —         —         —         —         (188

Write-off of deferred registration statement costs due to significant market uncertainty(h)

    —         —         —         —         —         7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    436       376       305       387       286       (287

Plus: Aircraft Rent(j)

    205       259       277       368       270       266  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAR

  $ 641     $ 635     $ 582     $ 755     $ 556     $ (21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Due to the significant reduction in demand resulting from COVID-19, our future anticipated consumption of fuel dropped significantly and we therefore de-designated hedge accounting in March 2020 on the derivative positions and quantities where the future consumption was not deemed probable, which primarily related to our written put options on our costless collars. The $52 million is the charge from the de-designation and the resulting mark to market impact on the quantities where consumption was not deemed probable.

(b)

Represents (i) accelerated depreciation of $12 million for the year 2016 and aircraft rent of $4 million for the year ended December 31, 2016 as a result of significantly shortened lease terms with respect to such aircraft. During 2017, a $2 million benefit was recognized as a result of costs associated with returning the aircraft to the lessor being lower than previously estimated.

(c)

Represents the impact of the change in value and vesting of phantom equity units pursuant to the Pilot Phantom Equity Plan. See “Executive Compensation—Equity Compensation Plans—Pilot Phantom Equity Plan.”

 

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(d)

Represents (i) $75 million of costs related to a one-time contract ratification incentive, plus payroll-related taxes and certain other compensation and benefits-related accruals earned through December 31, 2018 and committed to by us as part of a tentative agreement with the union representing our pilots that was reached in December 2018 and was ratified by the pilots in January 2019 and (ii) $15 million of costs related to a one-time contract ratification incentive, plus payroll-related taxes and certain other compensation and benefits-related accruals earned through March 31, 2019 and committed to by us as part of a tentative agreement with the union representing our flight attendants that was reached in March 2019 for a contract that was ratified and became effective in May 2019.

(e)

Represents losses incurred on the sale of our six owned aircraft in December 2018, which enabled us to accelerate a critical part of our fleet plan by shortening our time with certain of our older less fuel-efficient aircraft. The loss was measured as the excess of the net book value of the aircraft over the sale price at the date of sale and was recognized within other operating expenses in the consolidated statements of operations. All aircraft were held for use through the date of sale.

(f)

Represents the $40 million settlement and $3 million of payroll taxes relating to the Letter of Agreement entered into with the union representing our flight attendants (AFA-CWA) on March 15, 2017. Additionally, includes expenses associated with an early out program for our flight attendants during 2017 and 2019 and ratification of our aircraft technicians and material specialists collective bargaining agreements during 2017.

(g)

Represents the recognition of the $177 million grant received from the U.S. government for payroll support from April 2020 through September 2020 as part of the Payroll Support Program (“PSP”) under the CARES Act, which is net of $1 million of deferred financing costs, along with $11 million of employee retention credits we qualified for under the CARES Act.

(h)

Represents the write-off of our deferred registration statement costs during the second quarter of 2020 due to the impact of the COVID-19 pandemic and the resulting uncertainty on our ability to access the capital markets.

(i)

Represents the mark to market adjustment to the value of the warrants issued as part of the funding provided under the CARES Act.

(j)

Represents aircraft rent expense included in Adjusted EBITDA. Excludes aircraft rent expense (benefit) of $4 million and $(2) million for the years ended 2016 and 2017, respectively, included in Lease Modification Program (excluding depreciation). See footnote (1) above under the caption “Selected Consolidated Financial and Operating Data” with respect to the effect of our adoption of ASU 2016-02 on January 1, 2019.

The following table presents our historical consolidated balance sheet data as of the dates presented.

 

     As of December 31,      As of
September 30,
 
     2016      2017      2018      2019      2020  
                   (in millions)                
                                 (unaudited)  

Consolidated Balance Sheet Data:

              

Cash, cash equivalents and restricted cash

   $ 618      $ 717      $ 698      $ 768      $ 565  

Total assets

     1,341        1,569        1,514        3,864        3,716  

Long-term debt, including current portion

     237        303        214        245        352  

Stockholders’ equity

     423        429        280        542        433  

 

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OPERATING STATISTICS

 

     Year Ended December 31,     Nine Months
Ended
September 30,
 
     2016     2017     2018     2019     2019     2020  

Operating statistics (unaudited)(a)

            

Available seat miles (ASMs) (millions)

     18,366       22,049       24,629       28,120       20,560       12,675  

Departures

     99,369       107,387       122,784       138,570       100,802       65,536  

Average stage length (statute miles)

     1,060       1,104       1,052       1,051       1,055       1,010  

Block hours

     279,347       308,860       341,528       389,476       284,149       176,553  

Average aircraft in service

     61       68       76       88       86       79  

Aircraft - end of period

     66       78       84       98       93       102  

Average daily aircraft utilization (hours)

     12.6       12.4       12.3       12.2       12.2       8.1  

Passengers (thousands)

     14,937       17,008       19,843       22,823       16,713       8,373  

Average seats per departure

     173       184       190       192       192       191  

Revenue passenger miles (RPMs) (millions)

     16,015       18,907       20,920       24,203       17,797       8,647  

Load Factor (%)

     87.2     85.8     84.9     86.1     86.6     68.2

Fare passenger revenue per passenger ($)

     66.15       59.88       54.72       52.80       54.15       53.31  

Non-fare passenger revenue per passenger ($)

     46.22       50.67       51.20       54.33       53.97       60.21  

Other revenue per passenger ($)

     2.33       2.19       2.73       2.78       2.74       3.92  

Total revenue per passenger ($)

     114.70       112.74       108.65       109.91       110.86       117.44  

Total revenue per available seat mile (RASM) (¢)

     9.33       8.70       8.75       8.92       9.01       7.76  

Cost per available seat mile (CASM) (¢)

     7.61       7.59       8.38       7.82       7.84       9.19  

CASM (excluding fuel) (¢)

     5.74       5.52       5.99       5.55       5.56       6.97  

Adjusted CASM (¢)(b)

     7.30       7.29       7.83       7.71       7.79       10.21  

Adjusted CASM (excluding fuel) (¢)(b)

     5.43       5.22       5.44       5.44       5.52       8.40  

non-operating expense per available seat mile (¢)

     0.01       (0.02     (0.05     (0.06     (0.06     (0.02

Adjusted non-operating expense per available seat mile (¢)(c)

     0.01       (0.02     (0.05     (0.06     (0.06     (0.03

Total adjusted CASM (¢)(b)

     7.31       7.27       7.78       7.65       7.73       10.18  

Fuel cost per gallon ($)

     1.59       1.88       2.25       2.22       2.21       2.29  

Fuel gallons consumed (thousands)

     215,830       241,879       261,179       288,510       211,774       122,506  

Employees (FTE)

     3,163       3,584       3,978       4,935       4,811       5,023  

 

(a)

See “Glossary of Airline Terms” for definitions of terms used in this table.

(b)

For a reconciliation of CASM to Adjusted CASM (excluding fuel), see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

(c)

For the nine months ended September 30, 2020, adjusted non-operating expense per available seat mile represents interest expense, capitalized interest, interest income and other less the $1 million impact of mark to market adjustment to the value of the warrants issued as part of the funding provided under the CARES Act, divided by ASMs.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

Frontier Airlines is an ultra low-cost carrier whose business strategy is focused on Low Fares Done Right®. We offer flights throughout the United States and to select near international destinations in the Americas. Our unique strategy is underpinned by our low-cost structure and superior low-fare brand. As of September 30, 2020, we had a fleet of 102 narrow-body Airbus A320 family aircraft, which based on our aircraft order book with Airbus that was amended in December 2020, we expect to grow to 165, including 144 A320neo (New Engine Option) family aircraft, by the end of 2025. During the 12 months ended September 30, 2019 and 2020, we served approximately 22 million and 14 million passengers, respectively, across a network of approximately 110 airports.

In December 2013, we were acquired by an investment fund managed by Indigo Denver Management Company, LLC, or Indigo, an affiliate of Indigo Partners, LLC, or Indigo Partners, an experienced and successful global investor in ultra low-cost carriers, or ULCCs. Following the acquisition, Indigo reshaped our management team to include experienced veterans of the airline industry. Working with Indigo and supported by a highly productive workforce, our management team developed and implemented our unique Low Fares Done Right strategy, which significantly reduced our unit costs, introduced low fares, provided the choice of optional services to our customers, enhanced our operational performance and improved the customer experience. Through the implementation of our new operating model, we have positioned our brand as a leading low-fare airline and have seen a dramatic improvement to our profitability. In particular, we have nearly tripled the size of the airline by as measured by ASMs, established a network platform across North America, Central America and the Caribbean servicing approximately 110 cities, ordered 134 aircraft and delivered 89 A320 family aircraft increasing the size of our fleet from 53 to 102 aircraft as of September 30, 2020, renegotiated labor deals with our trade unions, enhanced cash flow generation and have successfully navigated the airline through the ongoing coronavirus (“COVID-19”) pandemic.

The implementation of Low Fares Done Right has significantly reduced our cost base by increasing aircraft utilization, transitioning to larger aircraft, maximizing seat density, renegotiating our distribution agreements, realigning our network, replacing our reservation system, enhancing our website, boosting employee productivity and contracting with specialists to provide us with select operating and other services. As a result of these and other initiatives, we were able to reduce our CASM (excluding fuel) from 7.89¢ for the year ended December 31, 2013 to 5.55¢ for the year ended December 31, 2019, and our Adjusted CASM (excluding fuel) from 7.89¢ for the year ended December 31, 2013 to 5.44¢ for the year ended December 31, 2019, an improvement of 30% and 31%, respectively. For the nine months ended September 30, 2020, our CASM (excluding fuel) was 6.97¢ and our Adjusted CASM (excluding fuel) was 8.40¢ on lower than normal aircraft utilization resulting from the COVID-19 pandemic.

The COVID-19 pandemic has presented significant challenges to the global airline industry since February 2020, but we have worked diligently to navigate such challenges by implementing disciplined capacity deployment, protecting liquidity and cash flow, and further strengthening our health and safety initiatives. As a result of such efforts, we believe we are well positioned to take full advantage of the recovery that we believe is already underway. For instance, throughout the pandemic, the U.S. airline industry has seen stronger domestic demand than international demand, and the segments of domestic travel that have recovered fastest have been

 

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VFR (visiting friends or relatives) and vacation travel (which we refer to herein as leisure travel) in contrast to business travel. We design our route network to capture low fare demand among VFR and leisure travelers and our three largest bases are Denver, Orlando and Las Vegas, which draw a significant proportion of leisure travelers. In the six months ending February 2020, according to a post-travel survey we conducted, 89% of our customers were flying for leisure travel reasons. We believe the restrictions and health concerns that have depressed demand during the pandemic are also likely to lead to increased levels of pent-up demand for VFR and leisure travel.

As a result, we expect to see a significant recovery in our performance as the U.S. market recovers, which we presently expect to accelerate during the second half of 2021 and we expect holiday travel to be particularly strong as customers make up for trips they missed in 2020. With our current network of approximately 110 destinations served, we plan to strategically deploy our capacity where demand is highest during the recovery in order to achieve normal capacity levels.

More broadly, after being restricted from travel, we expect many customers to take advantage of the opportunity to travel more in the coming years. We also expect new working patterns and the increasing growth of remote work to lead to more employees not living where their offices are is based. We expect our sustainable low fares driven by our industry leading low costs to enable us to grow our network profitably and take advantage of new demand patterns as they arise.

Impact of the COVID-19 Pandemic

In December 2019, the novel strain of coronavirus was reported in Wuhan, China and, on March 11, 2020, the World Health Organization classified the virus as a pandemic. The rapid spread of this pandemic, or fear of such an event, along with government mandated restrictions on travel, required stay-in-place orders, and other social distancing measures resulted in a drastic decline in near-term air travel demand beginning in the United States in March of 2020, causing reductions in revenues and income levels as compared to prior period performance.

While we experienced a modest uptick in demand during the latter half of the second quarter and into the third quarter of 2020, demand was negatively impacted by a resurgence of COVID-19 infections in certain domestic markets. The length and severity of the decline in demand due to the impacts of the COVID-19 pandemic is uncertain and, as such, we expect the adverse impact to persist into 2021.

On December 11, 2020, the U.S. Food and Drug Administration (the “FDA”) issued an emergency use authorization for the Pfizer and BioNTech vaccine for the prevention of COVID-19. On December 18, 2020, the FDA issued an emergency use authorization for the Moderna vaccine for the prevention of COVID-19. While it will take time for the vaccine to be widely distributed, we expect confidence in travel to increase as the vaccine distribution occurs, particularly in the domestic leisure market that our business is focused on, and recovery to occur by the second half of 2021.

In response to the impacts of the COVID-19 pandemic, we immediately began taking measures in March 2020 to address the significant cash outflows resulting from the sharp decline in demand and we continue to evaluate options, should the lack of demand for air travel continue beyond the near term. During the period from the onset of the pandemic in March through September 30, 2020, we reduced our flight schedule to match demand levels and implemented various other initiatives to reduce costs and manage liquidity, including:

 

   

Reducing planned headcount increases;

 

   

Reducing employee related costs, including:

 

   

Salary reductions and/or deferrals for our officers and board members;

 

   

Suspension of merit salary increases for 2020;

 

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Providing voluntary paid and unpaid leave of absence programs for employees not covered under labor arrangements, as well as those covered under such arrangements, including pilots and flight attendants, that range from one month to six months;

 

   

Deferring aircraft deliveries;

 

   

Reducing discretionary expenses;

 

   

Reaching agreements with major vendors, which are primarily related to many of our aircraft and engine leases as well as airports, for deferral of payments and deliveries until later in 2020 and into 2021;

 

   

Delaying non-essential maintenance projects and reducing or suspending other discretionary spending

 

   

Reducing non-essential capital maintenance projects;

 

   

Securing current funding and future liquidity from the CARES Act and other financing sources; and

 

   

Amending certain debt covenant metrics to better align the covenants with current and expected demand.

As a result of the measures to reduce costs and manage liquidity as outlined above, we believe our financial position and available liquidity as of the date of this prospectus, after giving effect to this offering, will allow us to continue to navigate through any short term demand declines and that we are well positioned to recover once the demand for air travel increases. As of September 30, 2020, we had $989 million of total available liquidity, including $565 million of cash and cash equivalents and $424 million available to borrow under the Treasury loan facility. During the third quarter of 2020, our cash used from operations was approximately $2 million per day. We continue to monitor the impacts of the pandemic on our operations and financial condition and believe it is probable that the plans intended to mitigate these conditions and events will alleviate liquidity risks presented.

Fleet Plan

As of September 30, 2020, we had a fleet of 102 narrow-body Airbus A320 family aircraft, which based on our aircraft order book with Airbus that was amended in December 2020, we expect to grow to 165, including 144 A320neo family aircraft, by the end of 2025. We began operating the A320neo family aircraft in October 2016. For the year ended December 31, 2019 we had the most fuel efficient fleet of all U.S. carriers when measured by fuel gallons consumed per ASM. The A320neo family aircraft that we continue to place in service are expected to continue delivering approximately 15% improved fuel efficiency compared to the prior generation of A320ceo family aircraft. As of September 30, 2020, we had an obligation to purchase 158 A320neo family aircraft by the end of 2028 (based on our aircraft order book with Airbus that was amended in December 2020), three of which had committed operating leases. We are evaluating financing options for the remaining aircraft. All of the aircraft in our fleet are financed with operating leases, the last of which is scheduled to expire by the end of 2032. As of September 30, 2020, there were no leases scheduled to expire for the remainder of 2020 and the operating leases for seven aircraft in our fleet are scheduled to expire during 2021. In certain circumstances, such operating leases may be extended. Our fleet plan will result in the retirement of all remaining A319ceo aircraft (150 seats), which we expect to replace with larger A320neo aircraft (186 seats), A321ceo aircraft (230 seats) and A321neo aircraft (up to 240 seats). In December 2018, we accelerated a component of this plan by completing the sale-leaseback of our six owned aircraft, which included four A319ceo aircraft and two A320ceo aircraft. Once the four A319ceo leases expire in December 2021, we expect that we will no longer operate any A319ceo aircraft and will exclusively operate A320ceo, A320neo, A321ceo and A321neo aircraft moving forward.

During 2018, 2019, and the nine months ended September 30, 2020, we executed sale-leaseback transactions with third-party lessors for deliveries of new Airbus A320 family aircraft, with 16 delivered in 2018, 18 delivered in 2019, and 7 delivered in the nine months ended September 30, 2020. We also completed sale-

 

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leaseback transactions on two engines in 2018, two engines in 2019, and one engine in the first nine months of 2020. Prior to January 1, 2019 and our adoption of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases, (“ASU 2016-02”), any gains on completed sale-leaseback transactions were deferred and recognized as a reduction to aircraft rent expense over the lease term for each aircraft or engine. Due to the adoption of ASU 2016-02 on January 1, 2019, gains from sale-leaseback transactions (subject to adjustment for off-market terms) are now recognized in full immediately upon sale as a reduction to other operating expense within the consolidated statement of operations, and are therefore no longer amortized over the life of the lease.

Operating Revenues

Our operating revenue consists of passenger and other revenues.

Passenger Revenues. Passenger revenue consists of base fares for air travel, including mileage credits redeemed under our frequent flyer program, unused and expired passenger credits, and other redeemed or expired travel credits. In addition, passenger revenue also includes non-fare revenues generated from air travel-related services such as baggage fees, seat selection fees, itinerary service fees, booking fees and other passenger related revenue.

Other Revenues. Other revenue primarily consists of services not directly related to providing transportation, such as the advertising, marketing and brand elements of the Frontier Miles (formerly EarlyReturns) affinity credit card program and commissions revenue from the sale of items such as rental cars and hotels.

Operating Expenses

Our operating expenses consist of the following items:

Aircraft Fuel. Aircraft fuel expense is one of our largest operating expenses. It includes jet fuel and associated into-plane costs, federal and state taxes, and gains and losses associated with fuel hedge contracts. During the nine months ended September 30, 2020, aircraft fuel included $52 million in losses associated with certain fuel hedges that were de-designated as a result of the decline in customer demand from the COVID-19 pandemic, as it was no longer probable that the estimated future fuel consumption for gallons subjected to fuel hedges would occur.

Salaries, Wages and Benefits. Salaries, wages and benefits expense includes salaries, hourly wages, bonuses, equity-based compensation and profit sharing paid to employees for their services, as well as related expenses associated with employee benefit plans, employer payroll taxes and other employee related costs. During the first and second quarter of 2019, we entered into new collective bargaining agreements with our pilot and flight attendant labor unions, which become amendable in 2024 and which provide for increases in salaries, wages and benefits during the five year contract term. As a result of COVID-19, we received $178 million under the payroll support program (“PSP”) in the CARES Act for the period from April 2020 through September 30, 2020 and expect to receive further funding of at least $140 million during the first quarter of 2021 under PSP2. The PSP funding contains certain provisions, including, among others, that there are no involuntary furloughs or pay and benefit reductions through March 31, 2021. See the “CARES Act Credits” section for more details. We also offered voluntary leave of absence programs to pilots, flight attendants and other employees to help the company reduce costs in the low demand environment.

Aircraft Rent. Aircraft rent expense consists of monthly lease charges for aircraft and spare engines under the terms of the related operating leases and is recognized on a straight-line basis. Aircraft rent expense also includes that portion of maintenance reserves, also referred to as supplemental rent, which is paid monthly to aircraft lessors for the cost of future heavy maintenance events and which is not probable of being reimbursed to us by the lessor during the lease term, as well as lease return costs, which consist of all costs that would be

 

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incurred at the return of the aircraft, including costs incurred to return the airframe and engines to the condition required by the lease. Prior to January 1, 2019 and our adoption of ASU 2016-02, aircraft rent expense was generally recognized net of any amortization of deferred gains on sale-leaseback transactions on our flight equipment. Due to the adoption of ASU 2016-02 on January 1, 2019, gains from sale-leaseback transactions (subject to adjustment for off-market terms) are now recognized in full immediately upon sale as a reduction to other operating expense within the consolidated statement of operations, and are therefore no longer amortized over the life of the lease. As of September 30, 2020, all of our 102 aircraft and 16 spare engines were financed under operating leases.

In response to the COVID-19 pandemic, beginning in March 2020, we were granted payment deferrals on leases included in our right-of-use assets for certain aircraft and engines from lessors along with airport facilities and other vendors that are not included in our right-of-use assets, which generally span two to seven months. On March 10, 2020, the FASB released Topic 842 and 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic (“FASB Q&A”) and we elected to account for lease concessions as though enforceable rights and obligations for those concessions existed at lease inception and to account for the concessions as if no changes to the lease contract were made as all deferrals resulted in substantially the same total payments as required by the original contract. We have elected to account for deferred payments as variable lease payments where the deferral payments are not recognized in our consolidated statements of operations until the payment is made. As these deferred payments are made throughout the rest of 2020 and into early 2021, we will recognize the deferred payments in aircraft rent or station operations, as applicable, in the consolidated statements of operations. As such, the deferrals related to leases had a favorable impact of $64 million to our cash flows and results of operations for the nine months ended September 30, 2020, with $50 million and $14 million relating to aircraft rent expense and station operations expense, respectively.

Station Operations. Station operations expense includes the fixed and variable fees charged by airports for the use or lease of airport facilities and fees charged by third-party vendors for ground handling, interrupted trip expenses and other related services. Station operations expense also includes the impact of the payment deferrals on certain leases associated with our airport facilities, with a favorable impact of $14 million reflected for the nine months ended September 30, 2020.

Sales and Marketing. Sales and marketing expense includes credit card processing fees, travel agent commissions and related global distribution systems fees, advertising, sponsorship and distribution costs such as the costs of our call center and costs associated with our frequent flyer program.

Maintenance Materials and Repairs. Aircraft maintenance expense includes the cost of all parts, materials and fees for repairs performed by us and our third-party vendors to maintain our fleet, excluding capitalized heavy maintenance events. It excludes direct labor cost related to our own mechanics, which are included within salaries, wages and benefits in the consolidated statements of operations.

Depreciation and Amortization. Depreciation and amortization expense includes depreciation of fixed assets we own and depreciation of leasehold improvements and finite-lived intangible assets. It also includes the amortization of heavy maintenance expenses that we defer under the deferral method of accounting for heavy maintenance events and recognize as expense on a straight-line basis until the earlier of the next estimated heavy maintenance event or the remaining lease term.

CARES Act Credits. The CARES Act became law on March 27, 2020 and includes various provisions to protect the U.S. airline industry, its employees, and many other stakeholders. On April 30, 2020, we entered into an agreement with the U.S. government under which we would receive $205 million of installment funding comprised of a $174 million grant (“CARES Act Grant”) for payroll support for the period from April 2020 through September 30, 2020, and a $31 million unsecured 10-year, low interest loan (“PSP Promissory Note”) and we granted the U.S. Treasury warrants to purchase 13,016 shares of our common stock. In addition, on September 30, 2020, the U.S. Treasury provided us with an additional disbursement under the PSP of $6 million,

 

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comprised of an additional $4 million toward the CARES Act Grant, and $2 million toward the PSP Promissory Note. Under the PSP, we issued the Treasury additional warrants to purchase 736 shares of our common stock.

The PSP funding contains certain conditions, that if not met, may require payroll assistance funds to be paid back to the U.S. government. The primary conditions include but are not limited to:

 

   

No involuntary furloughs or pay and benefit reductions until September 30, 2020

 

   

No stock buy-backs or dividends are permitted until September 30, 2021

 

   

Maintain a certain level of scheduled air transportation as deemed necessary by the Department of Transportation to ensure that all routes we had scheduled air travel to before the downturn due to the COVID-19 pandemic are still served

 

   

Put in place certain limits on the compensation and termination benefits of all non-union employees who made in excess of $425,000 in 2019, until March 24, 2022

As of September 30, 2020, we received the full $178 million under the PSP, which was recognized net of $1 million in deferred financing costs over the periods it was intended to support payroll, within CARES Act Credits in our consolidated statements of operations.

The CARES Act also provides an employee retention credit (“CARES Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages through year end. We qualified for the credit beginning on April 1, 2020 and expect to continue to receive additional credits for qualified wages through December 31, 2020. During the nine months ended September 30, 2020, we recognized $11 million related to the CARES Employee Retention Credit within CARES Act Credits in our consolidated statements of operations and other current assets in our consolidated balance sheet.

Other Operating Expenses. Other operating expenses include outside services, crew and other employee travel, information technology, property taxes and all insurance, including hull liability insurance, supplies, legal and other professional fees, facilities and all other administrative and operational overhead expenses. In addition, other operating expenses includes the quarterly fee of $375,000 as well as other expenses that we pay to Indigo Partners on a quarterly basis pursuant to the Professional Services Agreement. Beginning in 2019, as a result of the adoption of ASU 2016-02, other operating expenses also includes gains recognized in full immediately upon the completion of sale-leaseback transactions (subject to adjustment for off-market terms).

Other Income (Expense)

Interest Expense. Interest expense is related to our PDP credit facility, our floating rate building note, our unsecured debt and the PSP Promissory Note and Treasury Loan. As part of the PSP Promissory Note and the Treasury Loan, we issued to the U.S. Department of the Treasury warrants to acquire shares of common stock of FGHI, which have a five-year term and are settled in cash upon 60 days notice from the U.S. Department of Treasury. The warrants issued in conjunction with the CARES Act financing have been classified as liability based awards within other long-term liabilities within the condensed consolidated balance sheet. Given the liability based classification, at the end of each period the warrant liability is adjusted to its fair market value, calculated utilizing the Black Scholes option pricing model, with the corresponding fair market value adjustment being booked to interest expense.

Capitalized Interest. We capitalize interest attributable to pre-delivery payments as an additional cost of the related asset beginning when activities necessary to get the asset ready for its intended use commence. We capitalize interest at our weighted average interest rate on long-term debt or, where applicable, the interest rate related to specific borrowings.

 

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Interest Income and Other. Interest income and other includes interest income on our cash and cash equivalent balances, as well as activity not classified in any other area of the consolidated statements of operations.

Trends and Uncertainties Affecting Our Business

We believe our operating and business performance is driven by various factors that typically affect airlines and their markets, including trends which affect the broader travel industry, as well as trends which affect the specific markets and customer base that we target. The following key factors may affect our future performance:

Competition. The airline industry is highly competitive. The principal competitive factors in the airline industry are the fare and total price, flight schedules, number of routes served from a city, frequent flyer programs, product and passenger amenities, customer service, fleet type and reputation. The airline industry is particularly susceptible to price discounting as, once a flight is scheduled, airlines incur only nominal incremental costs to provide service to passengers occupying otherwise unsold seats. Price competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, target promotions and frequent flyer initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to maximize RASM. The prevalence of discount fares can be particularly acute when a competitor has excess capacity that it is under financial pressure to sell. A key element of our competitive strategy is to maintain very low unit costs in order to permit us to compete successfully in price-sensitive markets. In addition, some of the legacy network carriers match low-cost carrier and ULCC pricing on portions of their network. We believe that fare discounts have and will continue to stimulate demand for Frontier due to our Low Fares Done Right strategy.

Our Low Fares Done Right strategy is underpinned by our low-cost structure, and we have significantly reduced our cost base over the past five years by increasing aircraft utilization, transitioning to larger and more fuel efficient aircraft, maximizing seat density, renegotiating our distribution agreements, realigning our network, replacing our call center, enhancing our website, boosting employee productivity and contracting with leading specialists to provide us with select operating and other services. As a result of these and other initiatives, prior to the impact of the COVID-19 pandemic, our unit operating costs, as measured by our CASM (excluding fuel), declined 30% from 7.89¢ for the year ended December 31, 2013 to 5.55¢ for the year ended December 31, 2019, and our Adjusted CASM (excluding fuel) declined 31% from 7.89¢ for the year ended December 31, 2013 to 5.44¢ for the year ended December 31, 2019. For a reconciliation of CASM to Adjusted CASM (excluding fuel), see “—Results of Operations.”

During 2019, we had the lowest Total Adjusted CASM in the U.S. Due to the impact of the COVID-19 pandemic, for the nine months ended September 30, 2020, our CASM was 9.19¢ and our Adjusted CASM was 10.21¢. The increase in CASM versus the levels achieved during 2019 was driven by the decrease in capacity as measured by available seat miles (ASMs) due to the impact of the COVID-19 pandemic combined with the fixed nature of aircraft rent net of the impact of any related lease deferrals achieved to manage liquidity. For a discussion and reconciliation of CASM to Adjusted CASM, please see “Glossary of Airline Terms” and “—Results of Operations.”

Our cost structure has allowed us to achieve strong results from operations relative to the rest of the industry during periods of competitive pricing and price discounts and has helped our ability to manage through the COVID-19 pandemic. While we have already completed the substantial majority of strategic initiatives to reduce our unit operating costs, we believe that we are well positioned to maintain our low unit operating costs relative to our competitors through on-going strategic initiatives, including continuing our cost optimization efforts and further realizing economies of scale. To the extent that we are unable to maintain our low-cost structure, our ability to compete effectively may be impaired, even if demand does return to pre-pandemic levels. In addition, if our competitors engage in fare wars or similar behavior, our financial performance could be adversely impacted.

 

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Aircraft Fuel. Fuel expense represents the single largest operating expense for most airlines, including ours. Jet fuel prices and availability are subject to market fluctuations, refining capacity, periods of market surplus and shortage and demand for heating oil, gasoline and other petroleum products, as well as meteorological, economic and political factors and events occurring throughout the world, which we can neither control nor accurately predict. The future cost and availability of jet fuel cannot be predicted with any degree of certainty.

We hedge our exposure to jet fuel prices using call options and collar structures, although we may utilize other instruments such as swaps on jet fuel or highly correlated commodities and fixed forward price contracts, or FFPs, which allow us to lock in the price of jet fuel for specific quantities and at specified locations in future periods.

Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than call options in that we could end up in a liability position when the collar structure or swap agreement settles. Our fuel hedging policy considers many factors, including our assessment of market conditions for fuel, competitor hedging activity, our access to the capital necessary to purchase coverage and support margin requirements, the pricing of hedges and other derivative products in the market and applicable regulatory policies. As of September 30, 2020, we had hedges in place for approximately 96% of estimated fuel consumption for the remainder of 2020.

Volatility. The air transportation business is volatile and highly affected by economic cycles and trends. Global pandemics and related health scares, consumer confidence and discretionary spending, fear of terrorism or war, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, changes in governmental regulations on taxes and fees, weather and other factors have resulted in significant fluctuations in revenue and results of operations in the past.

Seasonality. Our results of operations for any interim period are not necessarily indicative of those for the entire year because the air transportation business and our route network are subject to seasonal fluctuations. We generally expect demand to be greater in the calendar second and third quarters compared to the rest of the year. While we are reducing our concentration in Denver to decrease the impact of seasonality in our business, 37% of our flights during the 12 months ended September 30, 2020 had Denver International Airport as either their origin or destination.

Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements, or CBAs. Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act, or RLA. Under the RLA, CBAs generally contain “amendable dates” rather than expiration dates and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board, or NMB. This process continues until either the parties have reached agreement on a new CBA or the parties have been released to “self-help” by the NMB. In most circumstances, the RLA prohibits strikes. However, after release by the NMB, carriers and unions are free to engage in self-help measures such as lockouts and strikes. From June until November 2018, we experienced disruption to our flight operations during our labor negotiations with ALPA, which materially impacted on our business and results of operations for the period.

We have seven union-represented employee groups comprising approximately 88% of our employees as of September 30, 2020. Our pilots are represented by the Air Line Pilots Association, or ALPA; our flight attendants are represented by the Association of Flight Attendants, or AFA-CWA; our aircraft technicians, aircraft appearance agents, material specialists and maintenance control employees are all represented by the International Brotherhood of Teamsters, or IBT; and our dispatchers are represented by the Transport Workers Union, or TWU. Conflicts between airlines and their unions can lead to work stoppages. During the fourth quarter of 2016, a new five-year collective bargaining agreement was reached with the dispatchers. In February 2017 and March 2017, the aircraft technicians and material specialists contracts were ratified to include new

 

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amendable dates of February 2022 and March 2022, respectively. In October 2018, new five-year collective bargaining agreements were reached with the aircraft appearance agents and maintenance controllers. In March 2016 and July 2015, our collective bargaining agreements with our pilots, represented by ALPA, and our flight attendants, represented by AFA, respectively, became amendable. In December 2018, we and the pilots, represented by ALPA, reached a tentative agreement, which was approved by the pilots and became effective in January 2019. The agreement has a term of five years and includes a significant increase in the annual compensation for the pilots as well as a one-time ratification incentive payment to our pilots of $75 million plus payroll related taxes. The one-time ratification incentive and related taxes were recognized as an expense in the fourth quarter of 2018 as the obligation committed to as part of the tentative agreement was probable as of December 31, 2018 and was substantially paid during the first quarter of 2019. In March 2019, a new five-year collective bargaining agreement was reached with our aircraft technicians.

We reached a tentative agreement with the union representing our flight attendants, AFA-CWA, in March 2019, which was ratified by the flight attendants and became effective in May 2019. The new agreement provides for a one-time ratification incentive payment to our flight attendants of $15 million, plus payroll-related taxes. The one-time ratification incentive and related taxes was recognized as an expense in the first quarter of 2019 as the obligation committed to as part of the tentative agreement was probable as of March 31, 2019. The one-time ratification incentive was substantially paid during the second quarter of 2019.

During 2019, we entered into an agreement with the flight attendants which outlined terms of an early out program offered to flight attendants meeting certain employment status and seniority requirements, payable to participating flight attendants throughout the fourth quarter of 2019, 2020 and 2021. The $5 million to be paid under the program, including related payroll taxes, is reflected within salaries, wages and benefits in the condensed consolidated statements of operations for the year ended December 31, 2019. During the nine months ended September 30, 2020, $2 million was paid to participating flight attendants, and the remaining $3 million to be paid under the program is accrued for within other current liabilities in the condensed consolidated balance sheet as of September 30, 2020.

During September 2020, and in anticipation of the lapse of the provisions set forth in the PSP under the CARES Act as described below, we reached agreement with the labor unions for our pilots and flight attendants to provide for voluntary paid leave of absence programs. Under the arrangements, the pilots and flight attendants were granted paid leave of absence periods of either one, three or six-month time frames. In exchange for accepting voluntary leave of absence, the pilots and flight attendants receive minimum monthly pay and continue to accrue benefits with no requirement to work. We can require pilots and flight attendants to return to service and forego any remaining leave of absence if demand increases. These temporary programs will help to defray our employee costs during the downturn caused by the pandemic, but also allow us to scale operations back up quickly as demand returns. As employees covered under such paid voluntary programs are still considered active employees, the costs of such programs are recognized as period expenses.

Maintenance Materials and Repairs. The amount of total maintenance costs and related depreciation of heavy maintenance expense is subject to variables such as estimated usage, government regulations, the size, age and makeup of the fleet in future periods and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify future maintenance-related expenses for any significant period of time.

As of September 30, 2020, the average age of our aircraft was approximately four years and we have taken delivery of 85 new aircraft since the start of 2015. All of the aircraft in our fleet are financed with operating leases, the last of which is scheduled to expire by the end of 2032. As of September 30, 2020, there were no leases schedules to expire for the remainder of 2020 and the operating leases for seven aircraft in our fleet were scheduled to expire during 2021. In certain circumstances, such operating leases may be extended. We currently have an obligation to purchase 158 aircraft by the end of 2028 (based on our aircraft order book with Airbus that was amended in December 2020). We expect that these new aircraft will require less maintenance when they are

 

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first placed in service (sometimes called a “maintenance holiday”) because the aircraft will benefit from manufacturer warranties and also will be able to operate for a significant period of time, generally measured in years, before the most expensive scheduled maintenance obligations, known as heavy maintenance, are required. Once these maintenance holidays expire, these aircraft will require more maintenance as they age and our maintenance and repair expenses for each of our aircraft will be incurred at approximately the same intervals. When these more significant maintenance activities occur, this will result in out-of-service periods during which our aircraft are dedicated to maintenance activities and unavailable to generate revenue.

We account for heavy maintenance events under the deferral method. Accordingly, heavy maintenance is depreciated over the shorter of either the remaining lease term or the period until the next estimated heavy maintenance event. As a result, maintenance events occurring closer to the end of the lease term will generally have shorter depreciation periods than those occurring earlier in the lease term. This will create higher depreciation expense specific to any aircraft related to heavy maintenance during the final years of the lease as compared to earlier periods. Please see “—Critical Accounting Estimates—Aircraft Maintenance.”

Maintenance Reserve Obligations. The terms of certain of our aircraft lease agreements require us to post deposits for future maintenance, also known as maintenance reserves, to the lessor in advance of and as collateral for the performance of heavy maintenance events, resulting in us recording significant prepaid deposits on our consolidated balance sheet. As a result, for leases requiring maintenance reserves, the cash costs of scheduled heavy maintenance events are paid in advance of the recognition of the maintenance event in our results of operations.

Please see “—Critical Accounting Estimates—Aircraft Maintenance.”

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. In doing so, we make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below. For a detailed discussion

of our significant accounting policies, please refer to “Notes to Consolidated Financial Statements - 1. Summary of Significant Accounting Policies.”

Frequent Flyer Program

Our Frontier Miles (formerly EarlyReturns) frequent flyer program provides frequent flyer travel awards to program members based on accumulated mileage credits. Mileage credits are accumulated as a result of travel, purchases using the co-branded credit card and purchases from other participating partners.

The contract to sell mileage credits under the co-branded credit card partnership has multiple performance obligations. The agreement provides for joint marketing and we account for this agreement consistently with the accounting method that allocates the consideration received to the individual products and services delivered.

Total consideration is allocated to each performance obligation, which generally consists of (i) mileage credits to be awarded, (ii) brand licensing and (iii) access to member lists and advertising and marketing efforts based on each relative standalone selling price and are recognized over time as mileage credits are delivered. We determined the best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) equivalent ticket value (“ETV”) for the award travel obligation, (3) licensing of brand and access to member lists

 

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and (4) advertising and marketing efforts. We defer the amount for mileage credits under the co-branded credit card partnership as part of the frequent flyer liability on the balance sheet and recognize loyalty travel awards in passenger revenue as the mileage credits are used for travel. Revenue allocated to the remaining performance obligations, primarily marketing components, is recorded in other revenue as miles are delivered. We estimate breakage (mileage credits not utilized) based on statistical models derived from historical redemption patterns. Breakage assumptions, including the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits, the impact of COVID, or the estimated fair value of mileage credits expected to be redeemed, could have an impact on revenues in the year in which the change occurs and in future years.

Aircraft Maintenance

Under our aircraft operating lease agreements and FAA regulations, we are obligated to perform all required maintenance activities on our fleet, including component repairs, scheduled air frame checks and major engine restoration events. We account for heavy maintenance and major overhauls under the deferral method, whereby the cost of heavy maintenance and major overhauls is deferred and recorded as a component of property and equipment, net and depreciated over the lesser of the remaining lease term or the period until the next scheduled heavy maintenance event.

Maintenance Reserves

Certain of our aircraft and spare engine lease agreements provide that we pay maintenance reserves to aircraft lessors to be held as collateral in advance of our required performance of heavy maintenance events. Maintenance reserve payments are reflected as aircraft maintenance deposits in the accompanying balance sheets.

We make certain assumptions at the inception of the lease and at each balance sheet date to determine the recoverability of maintenance deposits, including estimated time between the maintenance events, the cost of such maintenance events, the date the aircraft is due to be returned to the lessor and the number of flight hours and cycles the aircraft is estimated to be utilized before it is returned to the lessor.

Certain of our lease agreements also provide that some or all of the maintenance reserves held by the lessor at the expiration of the lease are nonrefundable to us and will be retained by the lessor. Consequently, we have determined that any usage-based maintenance reserve payments after the last major maintenance event are not substantively related to the maintenance of the leased asset and, therefore, are accounted for as supplemental rent.

Leased Aircraft Return Costs

Our aircraft lease agreements often require us to return aircraft airframes and engines to the lessor in a certain condition or pay an amount to the lessor based on the airframe and engine’s actual return condition. Lease return costs are recognized beginning when it is probable that such costs will be incurred and they can be estimated. When costs become both probable and estimable, they are accrued as a component of supplemental rent, through the remaining lease term. When determining the need to accrue lease return costs, there are various factors which need to be considered such as the contractual terms of the lease agreement, current condition of the aircraft, the age of the aircraft at lease expiration, projected number of hours run on the engine at the time of return, and the number of projected cycles run on the airframe at the time of return, among others.

Results of Operations

Nine months ended September 30, 2020 Compared to Nine months ended September 30, 2019

Our capacity, as measured by ASMs, decreased by 38% during the nine months ended September 30, 2020, as compared to the corresponding prior year period, due to the COVID-19 pandemic. As a result, our total

 

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operating revenue decreased by $870 million, or 47%, during the nine months ended September 30, 2020 as compared to the corresponding prior year period, and our total revenue per available seat mile decreased by 14% from 9.01¢ to 7.76¢ over the same period. Fuel expense was 40% lower during the nine months ended September 30, 2020 as compared to the corresponding prior year period, as fuel consumption decreased 42% due to the lower capacity partly offset by a 4% increase in the fuel cost per gallon due to a $52 million charge during the nine months ended September 30, 2020 resulting from the de-designation of certain derivative contracts due to the estimated future fuel consumption for gallons subjected to fuel hedges no longer deemed probable due to the decline in customer demand from the impact of the COVID-19 pandemic and the subsequent mark to market adjustments. Our CASM (excluding fuel) increased from 5.56¢ to 6.97¢ from the nine months ended September 30, 2019 to the nine months ended September 30, 2020 driven by lower aircraft utilization and the fixed nature of aircraft rent coupled with more aircraft and related crew costs, noting that as part of our participation in the PSP there were no involuntary furloughs or pay and benefit reductions through September 30, 2020, partly offset by the benefit from the CARES Act credits from our payroll support program and employee retention credits along with the benefit from lease deferrals agreed to with our vendors to manage our liquidity. Our Adjusted CASM (excluding fuel), which excludes the impact of the CARES Act credits, increased from 5.52¢ to 8.40¢.

We generated a net loss of $98 million during the nine months ended September 30, 2020 as compared to net income of $195 million during the nine months ended September 30, 2019, as a result of the significant reduction in demand caused by the COVID-19 pandemic. Our results for the nine months ended September 30, 2019 and September 30, 2020 include certain charges that increased our operating expenses by $10 million and decreased our operating expenses by $128 million, respectively. Our results for the nine months ended September 30, 2019 include operating expenses of $18 million relating to the one-time contract ratification incentive and payroll related taxes and certain other compensation and benefits-associated with the new collective bargaining agreement with our flight attendants that was ratified in May 2019 and $5 million associated with an early out program, partly offset by a $13 million reduction in operating expenses associated with the mark to market of our pilot phantom equity obligation. Our results for the nine months ended September 30, 2020 include $188 million related to CARES Act grant credits and employee retention credits partly offset by $52 million in expenses resulting from the de-designation of certain derivative contracts due to the estimated future fuel consumption for gallons subjected to fuel hedges no longer deemed probable due to the decline in demand from the impact of the COVID-19 pandemic and the subsequent mark to market adjustments and $7 million relating to a one-time write-off of deferred registration statement costs due to the uncertainty in the capital markets caused by the pandemic. Excluding these credits and charges, our adjusted net loss was $168 million for the nine months ended September 30, 2020 as compared to adjusted net income of $203 million for the comparable prior year period.

 

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Operating Revenues

 

     Nine
Months Ended
September 30,
             
     2019     2020           Change              

Operating revenues ($ in millions):

  

Passenger

   $ 1,807     $ 950     $ (857     (47 )% 

Other

     46       33       (13     (28 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

   $ 1,853     $ 983     $ (870     (47 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating statistics:

        

Available seat miles (ASMs) (millions)

     20,560       12,675       (7,885     (38 )% 

Revenue passenger miles (millions)

     17,797       8,647       (9,150     (51 )% 

Average stage length (statute miles)

     1,055       1,010       (45     (4 )% 

Load factor (%)

     86.6     68.2     (18 ) pts      N/A  

Total revenue per available seat mile (RASM) (¢)

     9.01       7.76       (1.25     (14 )% 

Total revenue per passenger ($)

   $ 110.86     $ 117.44     $ 6.58       6

Passengers (thousands)

     16,713       8,373       (8,340     (50 )% 

Total operating revenue decreased $870 million, or 47%, during the nine months ended September 30, 2020 as compared to the corresponding prior year period due to the impact of the COVID-19 pandemic, including a 38% decline in ASMs and an 18 point reduction in our load factor to 68.2%. These impacts contributed to the 14% decrease in RASM to 7.76¢. Our fare passenger revenues decreased by 51% and our non-fare passenger revenues decreased by 44% for the nine months ended September 30, 2020 as compared to the corresponding prior year period. For further discussion of passenger and other revenue, see Note 1 and Note 2 to our consolidated financial statements.

Operating Expenses

 

     Nine Months Ended
September 30,
                Cost per ASM        
     2019     2020     Change     2019     2020     Change  

Operating expenses ($ in millions):

  

Aircraft fuel

   $ 468     $ 281     $ (187     (40 )%      2.28 ¢      2.22 ¢      (3 )% 

Salaries, wages and benefits

     373       406       33       9     1.81 ¢      3.20 ¢      77

Aircraft rent

     270       266       (4     (1 )%      1.31 ¢      2.10 ¢      60

Station operations

     252       182       (70     (28 )%      1.23 ¢      1.44 ¢      17

Sales and marketing

     96       62       (34     (35 )%      0.47 ¢      0.49 ¢      5

Maintenance materials and repairs

     60       59       (1     (2 )%      0.29 ¢      0.47 ¢      60

Depreciation and amortization

     35       23       (12     (34 )%      0.17 ¢      0.18 ¢      7

CARES Act credits

     —         (188     (188     N/A       —   ¢      (1.48 )¢      N/A  

Other operating expenses

     58       73       15       26     0.28 ¢      0.58 ¢      104
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ 1,612     $ 1,164     $ (448     (28 )%      7.84 ¢      9.18 ¢      17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating statistics:

 

Available seat miles (ASMs) (millions)

     20,560       12,675       (7,885     (38 )%       

Average stage length (statute miles)

     1,055       1,010       (45     (4 )%       

Departures

     100,802       65,536       (35,266     (35 )%       

CASM (excluding fuel)

     5.56 ¢      6.97 ¢      1.41 ¢      25      

Adjusted CASM (excluding fuel)

     5.52 ¢      8.40 ¢      2.88 ¢      52      

Fuel cost per gallon

   $ 2.21     $ 2.29     $ 0.08       4      

Fuel gallons consumed (thousands)

     211,774       122,506       (89,268     (42 )%       

 

 

 

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Reconciliation of CASM to Adjusted CASM (excluding fuel):

 

     Nine Months Ended September 30,  
     2019     2020  
   (in millions)     Per ASM     (in millions)     Per ASM  

CASM

       7.84         9.19  

Aircraft fuel

   $ (468     (2.28   $ (281     (2.22
    

 

 

     

 

 

 

CASM (excluding fuel)

       5.56         6.97  

Pilot phantom equity(a)

     13       0.07       —         —    

Collective bargaining contract ratification(b)

     (18     (0.09     —         —    

Flight attendant early out program(c)

     (5     (0.02     —         —    

CARES Act - grant amortization and employee credits(d)

     —         —         188       1.48  

Write-off of deferred registration statement costs due to significant market uncertainty(e)

     —         —         (7     (0.05
    

 

 

     

 

 

 

Adjusted CASM (excluding fuel)

       5.52         8.40  
    

 

 

     

 

 

 

 

(a)

Represents the impact of the change in value of phantom equity units pursuant to the Pilot Phantom Equity Plan. See “Executive Compensation—Equity Compensation Plans—Pilot Phantom Equity Plan.”

(b)

Represents $15 million of costs related to a one-time contract ratification incentive, plus payroll-related taxes and certain other compensation and benefits-related accruals earned through March 31, 2019 and committed to by us as part of a tentative agreement with the union representing our flight attendants that was reached in March 2019 for a contract that was ratified and became effective in May 2019.

(c)

Represents expenses associated with an early out program agreed to in 2019 with our flight attendants, payable throughout 2019, 2020 and 2021.

(d)

Represents the recognition of the $178 million grant received from the U.S. government for payroll support from April 2020 through September 2020 as part of the Payroll Support Program (“PSP”) under the CARES Act net of $1 million of deferred financing costs along with $11 million of employee retention credits we qualified for under the CARES Act.

(e)

Represents the write-off of our deferred registration statement costs during the second quarter of 2020 due to the impact of the COVID-19 pandemic and the resulting uncertainty on our ability to access the capital markets.

Aircraft Fuel. Aircraft fuel expense decreased by $187 million, or 40%, during the nine months ended September 30, 2020, as compared to the corresponding prior year period. The decrease was primarily due to the 42% decrease in fuel gallons consumed partly offset by a 4% increase in our fuel costs per gallon due to $52 million of expenses during the nine months ended September 30, 2020 resulting from the de-designation of certain derivative contracts due to the estimated consumption for gallons subjected to fuel hedges no longer deemed probable due to the decline in demand from the impact of the COVID-19 pandemic and the subsequent mark to market adjustments.

Salaries, Wages and Benefits. Salaries, wages and benefits expense increased by $33 million, or 9%, during the nine months ended September 30, 2020, as compared to the corresponding prior year period driven primarily by the growth in our crew base to support our increased fleet size and the impact of the pilot and flight attendant contracts ratified in 2019 and higher stock compensation expense, partly offset by employee participation in voluntary leave of absence programs. As part of our participation in the PSP under the CARES Act, we have not involuntarily terminated any employees during the period from enactment of the CARES Act to September 30, 2020 and are prohibited from doing so until March 31, 2021 as part of our participation under the PSP2.

Aircraft Rent. Aircraft rent expense decreased by $4 million, or 1%, during the nine months ended September 30, 2020, primarily due to the favorable impact of lease deferrals negotiated with our vendors to manage liquidity during the COVID-19 pandemic offset by an increase of our fleet by nine aircraft. Our fleet is comprised of 58 A320neos, 19 A320ceos, 21 A321ceos, and 4 A319ceos.

Station Operations. Station operations expense decreased by $70 million or 28% during the nine months ended September 30, 2020, as compared to the corresponding prior year period, due to a 35% decrease in

 

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departures as a result of the COVID-19 pandemic and the impact of lease deferrals negotiated with certain airports to manage liquidity during the COVID-19 pandemic.

Sales and Marketing. Sales and marketing expense decreased by $34 million, or 35%, during the nine months ended September 30, 2020, as compared to the corresponding prior year period due to lower credit card fees resulting from the 47% reduction in revenue, lower distribution fees due to a focus on our internal distribution channels and lower revenues, and lower paid media advertising to manage liquidity during the pandemic. The following table presents our distribution channel mix:

 

     Nine Months Ended
September 30,
       
Distribution Channel      2019         2020       Change  

Our website, mobile app and other direct channels

     73     76     3 pt 

Third-party channels

     27     24     (3 )pt 

Maintenance Materials and Repairs. Maintenance materials and repair costs remained relatively flat, decreasing $1 million, or 2%, during the nine months ended September 30, 2020, as compared to the corresponding prior year period.

Depreciation and Amortization. Depreciation and amortization expense decreased by $12 million, or 34%, during the nine months ended September 30, 2020, as compared to the corresponding prior year period. The decrease was primarily due to reduced heavy maintenance activity as a result of the decrease of capacity and the replacement of older aircraft in our fleet with new aircraft, which do not require as much heavy maintenance early in their life cycles.

CARES Act Credits. The $188 million of CARES Act Credits relates to both (i) the recognition of the $177 million payroll support grant received from the U.S. government for payroll support for the period from April 2020 through September 30, 2020 as part of the Payroll Support Program under the Cares Act, which is net of $1 million in deferred financing costs associated with the program, and (ii) $11 million in Employee Retention Credits we qualified for under the CARES Act. The PSP and PSP2 funding contains certain conditions that must be met, including, among other things, no involuntary furloughs or pay and benefit reductions to March 31, 2021 and the requirement to recall employees involuntarily terminated or furloughed after September 30, 2020.

Other Operating Expenses. Other operating expenses increased by $15 million, or 26%, during the nine months ended September 30, 2020, as compared to the prior year period. The increase was driven primarily by a $37 million decrease in the gains from sale-leaseback transactions as we took five fewer deliveries during the nine months ended September 30, 2020 as compared to the prior year period as we came to an agreement with Airbus to defer four deliveries into 2021 partly offset by a $19 million decrease in travel expenses relating to less crew accommodations resulting from the decrease in flight activity due to the COVID-19 pandemic.

Other Income (Expense). Other income decreased by $10 million, or 83%, from $12 million during the nine months ended September 30, 2019 to $2 million during the nine months ended September 30, 2020 due primarily to $8 million of lower interest income from a lower average cash balance and lower interest rates.

Income Taxes. Our effective tax rate reflected a 45.3% income tax benefit during the nine months ended September 30, 2020, as compared to 22.9% of income tax expense during the corresponding prior year period. The increase in the effective tax rate was driven by our ability under the CARES Act to carry the current year net operating losses back five years and obtain the benefit of a 14% higher federal rate on the losses generated, which was favorably impacted by the current year tax deduction for $111 million of payments made in March 2020 to substantially settle our pilot phantom equity obligation.

 

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Year ended December 31, 2019 Compared to Year ended December 31, 2018

Our capacity, as measured by ASMs, increased by 14% during the year ended December 31, 2019, as compared to the prior year, as a result of our continued shift toward larger and more fuel-efficient aircraft in our fleet, with an increase in the average number of aircraft in service from 76 during the year ended December 31, 2018 to 88 during the year ended December 31, 2019. We increased our total revenue by $352 million, or 16%, during the year ended December 31, 2019 as compared to the prior year, with our total revenue per available seat mile increasing from 8.75¢ to 8.92¢. Fuel costs increased by $51 million, or 9%, during the year ended December 31, 2019, as compared to the prior year primarily due to a 10% increase in fuel gallons consumed, which was less than our 14% increase in ASMs, due to the benefit of our newer and more fuel-efficient aircraft. Our CASM (excluding fuel) decreased from 5.99¢ to 5.55¢ and our Adjusted CASM (excluding fuel) of 5.44¢ from the year ended December 31, 2019, was in line with the 5.44¢ from the comparable prior year period.

We generated net income of $251 million during the year ended December 31, 2019 as compared to $80 million for the year ended December 31, 2018. Our results for the years ended December 31, 2018 and 2019 include $22 million and $5 million, respectively, in non-cash compensation expense related to the increased value of our pilot phantom equity obligation. In addition, during the year ended December 31, 2018, we incurred $88 million of costs related to a one-time contract ratification incentive and payroll-related taxes, plus certain other compensation and benefits-related accruals earned through December 31, 2018 and committed to by us as part of a tentative agreement with ALPA that was reached in December 2018 and was ratified by the pilots in January 2019. We incurred $22 million of contract ratification costs primarily related to the new collective bargaining agreement ratified with our flight attendants during the year ended December 31, 2019. In addition, we completed the sale-leaseback of our six owned aircraft in December 2018, which enabled us to accelerate the elimination of the A319ceo aircraft in our fleet to ultimately replace them with larger, more efficient A320neo family aircraft, resulting in a loss of $25 million for the year ended December 31, 2018. Our adjusted net income was $183 million and $276 million for the year ended December 31, 2018 and 2019, respectively.

Operating Revenues

 

     Year Ended
December 31,
          Change              
     2018     2019        

Operating revenues ($ in millions):

        

Passenger

   $ 2,102     $ 2,445     $ 343       16

Other

     54       63       9       17
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

   $ 2,156     $ 2,508     $ 352       16

Operating statistics:

        

Available seat miles (ASMs) (millions)

     24,629       28,120       3,491       14

Revenue passenger miles (RPMs) (millions)

     20,920       24,203       3,283       16

Average stage length (statute miles)

     1,052       1,051       (1     —  

Load factor (%)

     84.9     86.1     (12 ) pts      N/

Total revenue per available seat mile (RASM) (¢)

     8.75       8.92       0.17       2

Total revenue per passenger ($)

   $ 108.65       109.91     $ 1.26       1

Passengers (thousands)

     19,843       22,823       2,980       15

Total revenue increased $352 million, or 16%, for the year ended December 31, 2019 as compared to the prior year. This increase was due to a $343 million, or 16%, increase in passenger revenue and a $9 million, or 17%, increase in other revenue for the year ended December 31, 2019 as compared to the prior year. Total revenue per available seat mile increased 2% as a result of revenue growth slightly exceeding capacity growth. Our fare passenger revenues increased by 11% and our non-fare passenger revenues increased by 18% during the period.

 

 

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Operating Expenses

 

     December 31,                 Cost per ASM        
     2018     2019     Change     2018     2019     Change  

Operating expenses ($ in millions):

              

Aircraft fuel

   $ 589     $ 640     $ 51       9     2.39 ¢      2.28 ¢      (5 )% 

Salaries, wages and benefits

     441       529       88       20     1.79 ¢      1.88 ¢      5

Aircraft rent

     277       368     $ 91       33     1.12 ¢      1.31 ¢      16

Station operations

     323       336       13       4     1.31 ¢      1.19 ¢      (9 )% 

Sales and marketing

     110       130     $ 20       18     0.45 ¢      0.46 ¢      4

Maintenance materials and repairs

     75       86       11       15     0.30 ¢      0.31 ¢      —  

Depreciation and amortization

     78       46     $ (32     (41 )%      0.32 ¢      0.16 ¢      (48 )% 

Other operating expenses

     171       64       (107     (63 )%      0.69 ¢      0.23 ¢      (67 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ 2,064     $ 2,199     $ 135       7     8.38 ¢      7.82 ¢      (7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating statistics:

              

Available seat miles (ASMs) (millions)

     24,629       28,120       3,491       14      

Average stage length (statute miles)

     1,052       1,051       (1     —        

Departures

     122,784       138,570       15,786       13      

CASM (excluding fuel)

     5.99 ¢      5.55 ¢      (0.44     (7 )%       

Adjusted CASM (excluding fuel)

     5.44 ¢      5.44 ¢      —   ¢      —        

Fuel cost per gallon

   $ 2.25     $ 2.22     $ (0.03     (1 )%       

Fuel gallons consumed (thousands)

     261,179       288,510       27,331       10      

Reconciliation of CASM to Adjusted CASM (excluding fuel):

 

     2018     2019  
     (in millions)     Per ASM     (in millions)     Per ASM  

CASM

       8.38         7.82  

Aircraft fuel

   $ (589     (2.39   $ (640     (2.27
        

 

 

 

CASM (excluding fuel)

       5.99         5.55  

Pilot phantom equity(a)

     (22     (0.09     (5     (0.02

Collective bargaining contract ratification(b)

     (88     (0.36     (22     (0.07

Flight attendant early out program(c)

     —         —         (5     (0.02

Loss on sale of aircraft(d)

     (25     (0.10    
    

 

 

     

 

 

 

Adjusted CASM (excluding fuel)

       5.44         5.44  
    

 

 

     

 

 

 

 

(a)

Represents the impact of the change in value of phantom equity units pursuant to the Pilot Phantom Equity Plan. See “Executive Compensation—Equity Compensation Plans—Pilot Phantom Equity Plan.”

(b)

Represents costs related to a one-time contract ratification incentive plus payroll-related taxes and certain other compensation and benefits-related accruals committed to by us as part of (i) a tentative agreement with the union representing our pilots that was reached in December 2018 and was ratified by the pilots in January 2019 and (ii) a tentative agreement with the union representing our flight attendants that was reached in March 2019 and ratified in May 2019.

(c)

Represents amounts expected to be paid under the terms of an early out program with our flight attendants meeting certain employment status and seniority requirements, payable throughout 2019, 2020 and 2021.

(d)

Represents losses incurred on the sale of our six owned aircraft in December 2018, which enabled us to accelerate a critical part of our fleet plan by shortening our time with certain of our older less fuel-efficient aircraft. The loss was measured as the excess of the net book value of the aircraft over the sale price at the date of sale and was recognized within other operating expenses on the consolidated statements of operations. All aircraft were held for use through the date of sale. See “Business—Fleet Plan.”