Frontier Airlines 2004 Annual Report Download - page 40

Results of Operations
2004 Compared to 2003
Operating revenue in 2004 increased by 28.4%, or $119.6 million, to $540.7 million compared to $421.1 million in 2003. The increase was due to the 28 additional regional jets added
to revenue service in 2004. Twenty regional jets were added for United, including 11 Embraer 170 regional jets, five were added for Delta, one was added for US Airways and two were added
for spares and charters and are not currently assigned to any of our code - share partners. In February 2003, we and America West mutually agreed to terminate our code - share agreement and
we concurrently allocated the aircraft previously designated for America West to Delta. The transition of these aircraft was completed during the second quarter of 2003. We recorded a
breakage fee of $6.0 million from America West in the second quarter of 2003 as a result of this transaction.
Total operating expenses increased by 28.2%, or $96.7 million, to $440.0 million in 2004 compared to $343.3 million in 2003 due to the increase in flight operations. Total operating and
interest expenses increased by 28.1%, or $102.8 million, to $468.1 million for 2004 compared to $365.4 million during 2003. The unit cost on total operating and interest expenses, excluding
fuel charges, decreased 4.1% to 8.0 ¢ per available seat mile for 2004 compared to 8.4 ¢ for 2003 due primarily to the increase in capacity (as measured by ASMs) associated with the additional
regional jets. Factors relating to the change in operating expenses are discussed below.
Wages and benefits increased by 32.4%, or $24.7 million, to $101.2 million for 2004 compared to $76.4 million for 2003 due to a 27.2% increase in full time equivalent employees to
support the increased regional jet operations and an increase in the costs of providing employee benefits. The cost per available seat mile increased to 2.3 ¢ in 2004 compared to 2.2 ¢ for 2003.
Aircraft fuel expense increased 48.4%, or $36.8 million, to $112.8 million for 2004 compared to $76.0 million for 2003 due to a 31.9% increase in fuel consumption and a 12.5%
increase in average fuel prices. The average price per gallon was 93 ¢ in 2004 and 83 ¢ in 2003. The fixed - fee agreements with US Airways and United provide for a direct reimbursement of fuel
costs for regional jet operations. The fixed - fee agreements with American and Delta protect us from future fluctuations in fuel prices, as any difference between the actual cost and assumed cost
included in the fixed fees is paid to or reimbursed by American and Delta. The unit cost increased to 2.5 ¢ in 2004 compared to 2.2 ¢ in 2003 due to the increase in average fuel prices.
Landing fees increased by 25.0%, or $4.0 million, to $20.2 million in 2004 compared to $16.1 million in 2003. The increase is due to a 29.5% increase in departures, offset by a decline
in the average landing fee rate charged by airports. Our fixed - fee agreements with US Airways, United and Delta provide for a direct reimbursement of landing fees. Any difference between the
actual cost and assumed cost included in the fixed - fees paid by American is paid to or reimbursed by American. The unit cost remained unchanged at 0.5 ¢.
Aircraft and engine rent increased by 12.0%, or $7.1 million, to $66.5 million in 2004 compared to $59.3 million in 2003 due to the addition of four leased regional jets in 2004 and the
full year effect of four regional jets leased in 2003. The unit cost decrease of 12.3% to 1.5 ¢ for 2004 compared to 1.7 ¢ for 2003 is attributable to the increase in capacity from the regional jet
operations and because we lease financed only four of the 28 aircraft added to the aircraft fleet in 2004.
Maintenance and repair expenses increased by 28.8%, or $12.2 million, to $54.3 million in 2004 compared to $42.2 million for 2003 due the increase in flying of the regional jets, an
increase in the number of heavy airframe inspections and an increase in aircraft not covered under the manufacturer ’ s warranty. The unit cost remained unchanged at 1.2 ¢.
Insurance and taxes increased 3.4%, or $0.4 million, to $12.1 million in 2004 compared to $11.7 million in 2003. The increase in operations and an increase in aircraft property taxes
were mostly offset by a decline in insurance rates during 2004. The unit cost remained unchanged at 0.3 ¢.
Depreciation and amortization increased 44.8%, or $10.5 million, to $33.9 million in 2004 compared to $23.4 million in 2003 due to depreciation on 24 aircraft purchased in 2004,
including 11 Embraer 170 regional jets. The cost per available seat mile increased to 0.8 ¢ in 2004 compared to 0.7 ¢ in 2003.
During 2003, an additional charge for impairment loss and accrued aircraft return costs of $10.2 million was recorded. This charge consisted of $0.8 million to reflect a further
deterioration of the market value for Saab turboprop aircraft held for sale, a provision for the estimated liability of $6.7 million to the lessor of the Saab 340 aircraft for future rent payments on 18
aircraft and an additional provision of $3.0 million for contractual maintenance obligations to a third party. These amounts were offset by $0.3 million for a reduction in the provision for aircraft
return costs.
Other expenses increased 39.8%, or $11.1 million, to $39.1 million in 2004 from $28.0 million in 2003, due to an increase in bad debt reserves (primarily attributable to obligations
owed to us by US Airways), increased pilot training costs, and higher crew - related and administrative expenses to support the growing regional jet operations. The unit cost increased to 0.9 ¢ in
2004 compared to 0.8¢ in 2003.
Interest expense increased 27.5% or $6.1 million, to $28.1 million in 2004 from $22.1 million in 2003 primarily due to interest on debt related to the purchase of additional aircraft since
the beginning of 2003. The weighted average interest rate was unchanged at 5.1% The unit cost remained unchanged at 0.6 ¢.
We incurred income tax expense of $28.7 million during 2004, compared to $22.3 million in 2003. The effective tax rates for 2004 and 2003 were 39.1% and 39.6%, respectively,
which were higher than the statutory rate due to state income taxes and non - deductible meals and entertainment expense, primarily for our flight crews.
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