Spirit Airlines 2012 Annual Report Download - page 14

related infrastructure 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 our collective bargaining agreements. We cannot guarantee we will be able to maintain a
cost advantage over our competitors. If our cost structure increases and we are no longer able to maintain a cost advantage over our competitors, it could have a material
adverse effect on our business, results of operations and financial condition.
The airline industry is heavily impacted by the price and availability of aircraft fuel. Continued volatility in fuel costs or significant disruptions in the supply of
fuel, including hurricanes and other events affecting the Gulf Coast in particular, could materially adversely affect our business, results of operations, and
financial condition.
Aircraft fuel costs represent our single largest operating cost, accounting for 41.2% , 41.9% , and 34.8% of our total operating expenses for 2012 , 2011 and 2010 ,
respectively. As such, our operating results are significantly affected by changes in the availability and the cost of aircraft fuel, especially aircraft fuel refined in the U.S.
Gulf Coast region, on which we are highly dependent. Both the cost and the availability of aircraft fuel are subject to many meteorological, economic, and political factors
and events occurring throughout the world, which we can neither control nor accurately predict. For example, a major hurricane making landfall along the Gulf Coast could
cause disruption to oil production, refinery operations, and pipeline capacity in that region, possibly resulting in significant increases in the price of aircraft fuel and
diminished availability of aircraft fuel supplies. Any disruption to oil production, refinery operations, or pipeline capacity in the Gulf Coast region could have a
disproportionate impact on our operating results compared to other airlines that have more diversified fuel sources.
Aircraft fuel prices have been subject to high volatility, fluctuating substantially over the past several years. Due to the large proportion of aircraft fuel costs in our
total operating cost base, even a relatively small increase in the price of aircraft fuel can have a significant negative impact on our operating costs and on our business,
results of operations and financial condition.
Our fuel hedging strategy may not reduce our fuel costs.
We enter into fuel derivative contracts in order to mitigate the risk to our business from future volatility in fuel prices. As of December 31, 2012 , we had fuel hedges
using U.S. Gulf Coast jet fuel collars in place for approximately 5% of our 2013 anticipated fuel consumption. Additionally, during peak hurricane season (August through
October), we may enter into jet fuel swaps to protect the refining price risk between the price of crude oil and the price of refined jet fuel. There can be no assurance that we
will be able to enter into fuel hedge contracts in the future. Our liquidity and general level of capital resources impacts our ability to hedge our fuel requirements. Even if we
are able to hedge portions of our future fuel requirements, we cannot guarantee that our hedge contracts will provide sufficient protection against increased fuel costs or that
our counterparties will be able to perform under our hedge contracts, such as in the case of a counterparty’s insolvency. Furthermore, our ability to react to the cost of fuel,
absent hedging, is limited because we set the price of tickets in advance of incurring fuel costs. Our ability to pass on any significant increases in aircraft fuel costs through
fare increases could also be limited. Finally, it is currently unknown what impact the Dodd-Frank Wall Street Reform and Consumer Protection Act will have on collateral
and margin requirements for fuel hedging, which could significantly impair our ability to hedge our fuel costs. As of December 31, 2012 , the fair value of our fuel
derivative contracts was an asset of $0.3 million . In the event of a reduction in fuel prices compared to our hedged position, our hedged positions could counteract the cost
benefit of lower fuel prices and could require us to post additional cash margin collateral. Please see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Trends and Uncertainties Affecting Our Business—Aircraft Fuel.”
Restrictions on or increased taxes applicable to charges for ancillary products and services paid by airline passengers and burdensome consumer protection
regulations or laws could harm our business, results of operations, and financial condition.
During 2012 , 2011 and 2010 , we generated non-ticket revenues of $535.6 million , $381.5 million and $243.3 million , respectively. Our non-ticket revenues are
generated from charges for, among other things, baggage, bookings through our distribution channels, advance seat selection, itinerary changes and loyalty programs. In
April 2011, the DOT published a broad set of final rules relating to, among other things, how airlines handle interactions with passengers through advertising, the
reservations process, at the airport and on board the aircraft. The final rules require airlines to publish a full fare for a flight, including mandatory taxes and fees, and to
enhance disclosure of the cost of optional products and services, including baggage charges. The rules restrict airlines from increasing ticket prices post-
purchase (other than
increases resulting from changes in government-imposed fees or taxes) or increase significantly the amount and scope of compensation payable to passengers involuntarily
denied boarding due to oversales. The final rules also extend the applicability of tarmac delay reporting and penalties to include international flights and provide that
reservations made more than one week prior to flight date may be held at the quoted fare without payment, or cancelled without penalty, for 24 hours. All of these new rules
became effective by January 24, 2012. If we are not able to remain in compliance with these rules, the DOT may subject us to fines or other enforcement action, including
requirements to modify our passenger reservations system, which could have a material adverse
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