Frontier Airlines 2005 Annual Report Download - page 74

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have been and are subject to market risks, including commodity price risk (such as, to a limited extent, aircraft fuel
prices) and interest rate risk.
Interest Rates
Our earnings are affected by changes in interest rates due to the amounts of variable rate debt and the amount of cash and
securities held. The interest rate applicable to variable rate debt may rise and increase the amount of interest expense. At December
31, 2005, 0.2% of our total long-term debt was variable rate debt, compared to 0.4% at December 31, 2004. For illustrative purposes
only, we have estimated the impact of market risk using a hypothetical increase in interest rates of one percentage point for both our
variable rate long-term debt and cash and securities. Based on this hypothetical assumption, we would have incurred an additional
$35,000 in interest expense for the year ended December 31, 2005. As a result of this hypothetical assumption, we believe we could
fund interest rate increases on our variable rate long-term debt with the increased amounts of interest income. We do not believe we
have significant exposure to the changing interest rates on our fixed-rate, long-term debt instruments, which represented 99.8% of our
total long-term debt at December 31, 2005, and 99.6% of our total long-term debt at December 31, 2004.
We currently intend to finance the acquisition of aircraft through the manufacturer, third-party leases or long-term
borrowings. Changes in interest rates may impact the actual cost to us to acquire these aircraft. To the extent we place these aircraft in
service under our code-share agreements with American, US Airways, Delta and United, our reimbursement rates will be adjusted
higher or lower to reflect any changes in our aircraft rental rates.
Beginning in April 2004, in anticipation of financing the purchase of regional jet aircraft on firm order with the manufacturer,
we entered into fourteen treasury lock agreements with notional amounts totaling $373.5 million and a weighted average interest rate
of 4.47% with expiration dates through June 2005. Management designated the treasury lock agreements as cash flow hedges of
forecasted transactions. The treasury lock agreements were settled at each respective settlement date, which were the purchase dates of
the respective aircraft. We settled ten agreements during 2005 and the net amount paid was $4.5 million. Amounts paid or received on
the settlement date are reclassified to interest expense over the term of the respective aircraft debt. We reclassified $262,000 to interest
expense during the year ended December 31, 2005. As of December 31, 2005, all of the treasury locks had been settled.
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Source: REPUBLIC AIRWAYS HOLDINGS INC, 10-K, February 27, 2006 Powered by Morningstar® Document Research℠