Frontier Airlines 2006 Annual Report Download - page 72

• Impairments to Long-Lived Assets. We record impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to
reflect our best estimate of future market and operating conditions. Our estimates of fair value represent our best estimate
based on industry trends and reference to market rates and transactions. We review, at least annually, the estimated useful
lives and salvage values for our owned aircraft and spare parts.
• Aircraft Maintenance and Repair. We follow a method of expensing aircraft maintenance and repair costs. However,
maintenance and repairs for engines and airframe components under power-by-the-hour contracts, such as engines, avionics,
APUs, wheels and brakes, are accrued for as the aircraft are operated; therefore, amounts are expensed based upon actual
hours or cycles flown.
• Warrants. Warrants issued to non-employees are accounted for under SFAS No. 123(R), Share-Based Payments, and
EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services, at fair value on the measurement date. Fair value for warrants issued to Delta, for which a
measurement date has occurred, have been determined based upon the estimated fair value of the equity instrument issued
rather than the consideration received because we believe it is more reliably measured. Various option pricing models are
available; however, we have used a model that allows continuous compounding of dividends which begins three years after
the grant date and the dilutive effects of our initial public offering and the follow-on offerings in 2005. Option pricing models
require estimates of dividend yield, a risk free rate commensurate with the warrant term, stock volatility and the expected life
of the warrant. Each of these variables has been determined based upon relevant industry market data, our strategic business
plan and consultation with appropriate professionals experienced in valuing similar equity instruments.
• Income Taxes. The Company has generated significant net operating losses (“NOLs”) for federal income tax purposes
primarily from accelerated depreciation on owned aircraft. In July 2005, Wexford Capital LLC’s ownership percentage of the
Company was reduced to less than 50% as a result of a follow-on offering of our common stock. As a result of this decrease
in ownership, the utilization of NOLs generated prior to July 2005 are subject to an annual limitation under Internal Revenue
Code Section 382 (“IRC 382”). The annual limitation is based upon the enterprise value of the Company on the IRC 382
ownership change date multiplied by the applicable long-term tax exempt rate. If the utilization of pre July 2005 NOLs
becomes uncertain in future years, we will be required to record a valuation allowance for the NOLs not expected to be
utilized.
• Intangible Commuter Slots. The Company acquired commuter slots during 2005 at the New York-LaGuardia and Ronald
Reagan Washington National airports from US Airways. The licensing agreement with the Company and US Airways for
the LaGuardia commuter slots expired on December 31, 2006, but we maintain a security interest in the LaGuardia slots if
US Airways fails to perform under the current licensing agreement. The estimated useful lives of these commuter slots were
determined based upon the period of time cash flows are expected to be generated by the commuter slots and by researching
the estimated useful lives of commuter slots or similar intangibles by other airlines. In addition, an estimated residual value
was determined using estimates of the expected fair value of the commuter slots at the end of the expected useful life. The
residual value will be assessed annually for impairment. The estimated useful lives are also reviewed annually.
• Reportable Segments. The Company’s only reportable segment is scheduled transportation of passengers and air freight under
code-share agreements. In addition, the Company has charter service, aircraft leasing and commuter slot licensing fee
revenues. These activities aggregated represent less than 10% of consolidated revenues, operating income and assets. If these
activities become more significant in future years, additional reportable segments would need to be disclosed.
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Source: REPUBLIC AIRWAYS HOLDINGS INC, 10-K, March 15, 2007 Powered by Morningstar® Document Research℠