Spirit Airlines 2013 Annual Report Download - page 40

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Aircraft Fuel. Fuel costs represent the single largest operating expense for most airlines, including ours. Fuel costs have
been subject to wide price fluctuations in recent years. Fuel availability and pricing are also subject to 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.
We source a significant portion of our fuel from refining resources located in the southeast United States, particularly facilities
adjacent to the Gulf of Mexico. Gulf Coast fuel is subject to volatility and supply disruptions, particularly in hurricane season
when refinery shutdowns have occurred in recent years, or when the threat of weather-related disruptions has caused Gulf
Coast fuel prices to spike above other regional sources. Both jet fuel swaps and jet fuel options are used at times to protect the
refining price risk between the price of crude oil and the price of refined jet fuel, and to manage the risk of increasing fuel
prices. Historically, we have protected approximately 70% of our forecasted fuel requirements during peak hurricane season
(August through October) using jet fuel swaps. Our fuel hedging practices are dependent upon many factors, including our
assessment of market conditions for fuel, our access to the capital necessary to support margin requirements, the pricing of
hedges and other derivative products in the market, our overall appetite for risk and applicable regulatory policies. As of
December 31, 2013, we had no derivative contracts outstanding. As of December 31, 2013, we purchased all of our aircraft fuel
under a single fuel service contract. The cost and future availability of jet fuel cannot be predicted with any degree of certainty.
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 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 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 strikes and lockouts.
We have three union-represented employee groups comprising approximately 59% of our employees at December 31,
2013. Our pilots are represented by the Airline Pilots Association, International or ALPA, our flight attendants are represented
by the Association of Flight Attendants, or AFA-CWA, and our flight dispatchers are represented by the Transport Workers
Union of America, or TWU. Conflicts between airlines and their unions can lead to work slowdowns or stoppages. In June
2010, we experienced a five-day strike by our pilots, which caused us to shut down our flight operations. The strike ended as a
result of our reaching a tentative agreement under a Return to Work Agreement and a full flight schedule was resumed on
June 18, 2010. On August 1, 2010, we entered into a five-year collective bargaining agreement with our pilots. In August 2013,
we entered into a five-year agreement with our flight dispatchers. In December 2013, with the help of the NMB, we reached a
tentative agreement for a five-year contract with our flight attendants. The tentative agreement was subject to ratification by the
flight attendant membership. On February 7, 2014, we were notified that the flight attendants voted to not ratify the tentative
agreement. We will continue to work together with the AFA and the NMB with a goal of reaching a mutually beneficial
agreement. We believe the five-year term of our CBAs is valuable in providing stability to our labor costs and provide us with
competitive labor costs compared to other U.S.-based low-cost carriers. If we are unable to reach agreement with any of our
unionized work groups in current or future negotiations regarding the terms of their CBAs, we may be subject to work
interruptions or stoppages, such as the strike by our pilots in June 2010. A strike or other significant labor dispute with our
unionized employees is likely to adversely affect our ability to conduct business.
Maintenance Expense. Maintenance expense grew through 2013, 2012 and 2011 mainly as a result of the increasing age
(approximately 5.1 years on average at December 31, 2013) and size of our fleet. As the fleet ages, we expect that maintenance
costs will increase in absolute terms. The amount of total maintenance costs and related amortization of heavy maintenance
(included in depreciation and amortization expense) is subject to many variables such as future utilization rates, average stage
length, the size 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 expenses for any significant period of time. However, we
believe, based on our scheduled maintenance events, maintenance expense and maintenance-related amortization expense in
2014 will be approximately $113 million. In addition, we expect to capitalize $40 million of costs for heavy maintenance
during 2014.
As a result of a significant portion of our fleet being acquired over a relatively short period of time, significant
maintenance scheduled on each of our planes will occur at roughly the same time, meaning we will incur our most expensive
scheduled maintenance obligations across our current fleet around the same time. These more significant maintenance activities
will result in out-of-service periods during which our aircraft will be dedicated to maintenance activities and unavailable to fly
revenue service. In addition, management expects that the final heavy maintenance events will be amortized over the remaining
lease term rather than until the next estimated heavy maintenance event, because we account for heavy maintenance under the
deferral method. This will result in significantly higher depreciation and amortization expense related to heavy maintenance in