SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended September 30, 2007

 

 

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period from                             to                            

 

Commission File Number 001-33166

 

Allegiant Travel Company

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada

 

20-4745737

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3301 N. Buffalo Drive, Suite B-9

 

 

Las Vegas, Nevada

 

89129

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (702) 851-7300

 

 

(Former name, former address and former fiscal year if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer
o Accelerated filer o Non-accelerated filer x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

 

The number of shares of the registrant’s common stock outstanding as of the close of business on November 13, 2007 was 20,761,206.

 

 



 

Allegiant Travel Company

 

Form 10-Q

September 30, 2007

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1. Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

·        Condensed Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006

 

 

 

 

 

 

 

·        Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006 (unaudited)

 

 

 

 

 

 

 

·        Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)

 

 

 

 

 

 

 

·        Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

ITEM 4. Controls and Procedures

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

ITEM 1. Legal Proceedings

 

 

 

 

 

 

ITEM 1A. Risk Factors

 

 

 

 

 

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

ITEM 6. Exhibits

 

 

 



 

PART 1. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

 

ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

165,808

 

$

130,273

 

Restricted cash

 

13,007

 

8,639

 

Short-term investments

 

6,904

 

5,808

 

Accounts receivable, net of allowance for doubtful accounts of $- at September 30, 2007 and December 31, 2006

 

9,986

 

5,750

 

Receivable from related parties attributable to tax distribution estimates

 

 

1,577

 

Expendable parts, supplies and fuel, net of allowance for obsolescence of $91 and $56 at September 30, 2007 and December 31, 2006 respectively

 

10,063

 

3,747

 

Prepaid expenses

 

11,075

 

8,162

 

Deferred income taxes

 

 

237

 

Other current assets

 

2,226

 

4,463

 

Total current assets

 

219,069

 

168,656

 

Property and equipment, net

 

159,215

 

131,214

 

Restricted cash, net of current portion

 

 

2,570

 

Investment in and advances to joint venture

 

2,843

 

 

Deposits and other assets

 

8,374

 

3,286

 

Total Assets

 

$

389,501

 

$

305,726

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of notes payable

 

$

10,089

 

$

9,869

 

Current maturities of capital lease obligations

 

6,122

 

4,128

 

Current maturities of notes payable to related party

 

 

891

 

Accounts payable

 

19,045

 

17,409

 

Accrued liabilities

 

7,827

 

10,248

 

Air traffic liability

 

76,738

 

45,277

 

Deferred income taxes

 

300

 

 

Total current liabilities

 

120,121

 

87,822

 

Non-current liabilities:

 

 

 

 

 

Notes payable, net of current maturities

 

29,193

 

36,737

 

Capital lease obligations, net of current maturities

 

23,668

 

21,140

 

Deferred income taxes

 

10,842

 

6,556

 

Total Liabilities

 

183,824

 

152,255

 

Stockholders’ Equity:

 

 

 

 

 

Common stock, par value $.001, 100,000,000 shares authorized, 20,738,640 shares issued and outstanding as of September 30, 2007 and 19,795,933 shares issued and outstanding as of December 31, 2006

 

21

 

20

 

Additional paid in capital

 

160,005

 

134,359

 

Accumulated other comprehensive (loss) income

 

(87

)

4

 

Retained earnings

 

45,738

 

19,088

 

Total Stockholders’ Equity

 

205,677

 

153,471

 

Total Liabilities and Stockholders’ Equity

 

$

389,501

 

$

305,726

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1



 

ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

OPERATING REVENUE:

 

 

 

 

 

 

 

 

 

Scheduled service revenue

 

$

62,274

 

$

44,220

 

$

186,127

 

$

131,729

 

Fixed fee contract revenue

 

7,359

 

8,073

 

28,240

 

27,246

 

Ancillary revenue

 

15,989

 

8,618

 

44,545

 

21,239

 

Other revenue

 

705

 

 

705

 

 

Total operating revenue

 

86,327

 

60,911

 

259,617

 

180,214

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Aircraft fuel

 

36,628

 

26,779

 

103,265

 

77,661

 

Salary and benefits

 

12,693

 

8,873

 

36,063

 

24,901

 

Station operations

 

8,186

 

6,325

 

25,019

 

18,674

 

Maintenance and repairs

 

5,933

 

6,757

 

18,152

 

14,234

 

Sales and marketing

 

3,310

 

2,202

 

9,375

 

6,955

 

Aircraft lease rentals

 

817

 

1,103

 

2,125

 

4,277

 

Depreciation and amortization

 

4,238

 

2,854

 

11,613

 

7,599

 

Other

 

4,979

 

3,127

 

16,003

 

10,730

 

Total operating expenses

 

76,784

 

58,020

 

221,615

 

165,031

 

OPERATING INCOME

 

9,543

 

2,891

 

38,002

 

15,183

 

 

 

 

 

 

 

 

 

 

 

OTHER (INCOME) EXPENSE:

 

 

 

 

 

 

 

 

 

(Gain) loss on fuel derivatives, net

 

(348

)

3,505

 

(2,252

)

2,927

 

Earnings from joint venture, net

 

(35

)

 

(297

)

 

Other expense

 

 

 

63

 

 

Interest income

 

(2,542

)

(734

)

(6,835

)

(2,043

)

Interest expense

 

1,368

 

1,369

 

4,137

 

3,970

 

Total other (income) expense

 

(1,557

)

4,140

 

(5,184

)

4,854

 

INCOME (LOSS) BEFORE INCOME TAXES

 

11,100

 

(1,249

)

43,186

 

10,329

 

PROVISION FOR INCOME TAXES

 

4,085

 

 

16,448

 

43

 

NET INCOME (LOSS)

 

$

7,015

 

$

(1,249

)

$

26,738

 

$

10,286

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

$

(0.19

)

$

1.33

 

$

1.60

 

Diluted

 

$

0.34

 

$

(0.19

)

$

1.30

 

$

0.62

 

Unaudited net income (loss) per share data (1):

 

 

 

 

 

 

 

 

 

Basic pro-forma net income (loss) per share

 

 

 

$

(0.13

)

 

 

$

1.01

 

Diluted pro-forma net income (loss) per share

 

 

 

$

(0.13

)

 

 

$

0.39

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

20,472

 

6,433

 

20,106

 

6,433

 

Diluted

 

20,783

 

6,433

 

20,491

 

16,703

 

 


(1)           Prior to its December 2006 initial public offering, the Company was organized as a limited liability company (LLC) and as such was generally not subject to income taxes, except in certain state and local jurisdictions. The pro-forma net income (loss) per share reflects income taxes as if the Company were organized as a corporation effective January 1, 2006.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2



 

ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

 

 

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

26,738

 

$

10,286

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

11,613

 

7,599

 

(Loss) gain on aircraft and other equipment disposals

 

(79

)

2

 

Provision for obsolescence of expendable parts, supplies and fuel

 

39

 

111

 

Deferred issuance cost amortization

 

 

381

 

Warrant amortization

 

 

93

 

Stock compensation expense

 

704

 

260

 

Deferred income taxes

 

4,802

 

 

Excess tax benefits from stock option exercises

 

(1,958

)

 

Changes in certain assets and liabilities:

 

 

 

 

 

Restricted cash

 

(1,798

)

(3,228

)

Accounts receivable

 

(4,236

)

828

 

Receivable from related parties

 

1,489

 

 

Expendable parts, supplies and fuel

 

(6,355

)

(1,365

)

Prepaid expenses

 

(2,913

)

808

 

Other current assets

 

2,237

 

(2,397

)

Accounts payable

 

3,594

 

663

 

Accrued liabilities

 

(2,421

)

2,637

 

Air traffic liability

 

31,461

 

7,378

 

Refundable deposits

 

 

250

 

Net cash provided by operating activities

 

62,917

 

24,306

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of short-term investments

 

(6,904

)

(35,829

)

Maturities of short-term investments

 

5,717

 

35,140

 

Purchase of property and equipment

 

(32,340

)

(20,083

)

Proceeds from sale of property and equipment

 

531

 

 

Investment in joint venture, net

 

(2,843

)

 

(Increase) decrease in lease and equipment deposits

 

(5,088

)

170

 

Net cash used by investing activities

 

(40,927

)

(20,602

)

FINANCING ACTIVITIES:

 

 

 

 

 

Distributions to members

 

 

(4,971

)

Excess tax benefits from stock option exercises

 

1,958

 

 

Proceeds from exercise of stock options

 

741

 

 

Proceeds from issuance of common stock, net

 

22,265

 

 

Principal payments on notes payable

 

(7,324

)

(5,060

)

Principal payments on related party notes payable

 

(891

)

(845

)

Principal payments on capital lease obligations

 

(3,204

)

(2,232

)

Net cash provided by (used in) by financing activities

 

13,545

 

(13,108

)

Net change in cash and cash equivalents

 

35,535

 

(9,404

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

130,273

 

21,259

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

165,808

 

$

11,855

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash payment for interest, net of capitalized interest

 

$

2,601

 

$

3,022

 

Cash payment for taxes

 

$

12,843

 

$

43

 

Note payable issued for aircraft and equipment

 

$

 

$

10,602

 

Acquisition of aircraft under capital lease

 

$

7,726

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, in thousands, except share and per share amounts)

 

Note 1 – Summary of Significant Accounting Policies

 

Basis of PresentationThe accompanying unaudited condensed consolidated financial statements include Allegiant Travel Company (“Allegiant” or the “Company”) and its wholly owned operating subsidiaries, Allegiant Air LLC, Allegiant Vacations LLC, AFH, Inc., and its 50% owned subsidiary, SFB Fueling LLC.  All intercompany balances and transactions have been eliminated.

 

On December 13, 2006, the Company completed the initial public offering of its common stock. The Company issued 5,750,000 shares at $18.00 per share resulting in net proceeds of approximately $94,500.  Prior to the completion of its initial public offering in December 2006, the Company converted from a Nevada limited liability company to a Nevada corporation. In connection with the conversion, its common shares and preferred shares were exchanged for shares of its common stock  pursuant to the terms of a merger agreement with Allegiant Travel Company, LLC. The reorganization did not affect its operations, which it continued to conduct through its operating subsidiaries.

 

These unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations, and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto included in the annual report of the Company on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission.

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

The interim results reflected in the unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for other interim periods or for the full year.

 

Note 2 – Newly Issued Accounting Pronouncements

 

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”), effective January 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.  The adoption of FIN 48 has not had a material effect on the Company’s consolidated financial position or results of operations.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, SFAS 157, which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact adoption of SFAS 157 may have on its consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities–Including an Amendment of FASB Statement No. 115.  This statement permits, but does not require, entities to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized in earnings at each subsequent reporting date.  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, and cannot be adopted early unless SFAS No. 157, Fair Value Measurements, is also adopted. The Company is currently evaluating the impact adoption of SFAS 159 may have on its consolidated financial statements.

 

4



 

Note 3 – Stock-Based Compensation

 

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based Payments, requiring the compensation cost relating to share-based payment transactions to be recognized in the statement of operations. The cost is measured at the grant date, based on the calculated fair value of the award using the Black-Scholes-Merton option pricing model, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).

 

Note 4 – Income Taxes

 

For the three and nine months ended September 30, 2007, the Company did not have any material unrecognized tax benefits and there was no material effect on the Company’s financial condition or results of operation as a result of implementing FIN 48.  The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.  There is no significant accrued interest at September 30, 2007.  No penalties were accrued at September 30, 2007.

 

The Company files its tax returns as prescribed by the laws of the jurisdictions in which it operates.  Prior to May 2004, the Company elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code wherein the taxable income or loss of the Company was included in the income tax returns of its shareholders.  In May 2004, the Company reorganized as a limited liability company and was therefore taxed as a partnership for federal income tax purposes until the reorganization into a corporation effected at the time of the Company’s initial public offering.  Under these previous structures, the Company did not pay federal income tax at the entity level on its taxable income for these periods.  Instead, the members of the limited liability company or stockholders of the Subchapter S corporation were liable for income tax on the taxable income as it affected their tax returns.  The Company was also subject to tax at the entity level in certain states in which it operates.  Deferred income taxes, to which the Company was subject under these previous structures, were not material.

 

The Company (or its predecessor entities) is no longer subject to U.S. Federal income tax examinations for years before 2004.  Various state and local tax returns remain open to examination.  The Company believes that any potential assessment resulting from such examinations would be immaterial.

 

Note 5 – Stockholders’ Equity

 

On December 13, 2006, simultaneously with the Company’s initial public offering, certain of the Company’s shareholders sold 1,750,000 shares of common stock to Par Investment Partners, L.P. (“PAR”). At that time, the Company agreed to register the shares purchased by PAR for resale. A registration statement for these shares was declared effective on April 26, 2007.

 

On May 24, 2007, the Company sold 155,714 shares in a public offering.  In conjunction with the public offering, on June 13, 2007, the underwriters exercised their overallotment option to purchase an additional 592,000 shares from the Company.  The Company received approximately $22,300 in net proceeds from the sale of these shares.

 

5



 

Note 6 – Earnings Per Share

 

The following table sets forth the computation of net income (loss) per share, on a basic and diluted basis for the periods indicated:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

7,015

 

$

(1,249

)

$

26,738

 

$

10,286

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

20,471,870

 

6,433,333

 

20,106,157

 

6,433,333

 

Weighted-average effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Redeemable convertible preferred shares

 

 

 

 

9,885,000

 

Employee stock options

 

122,784

 

 

195,082

 

274,301

 

Stock purchase warrants

 

139,157

 

 

139,823

 

110,726

 

Restricted stock

 

49,000

 

 

49,521

 

 

Adjusted weighted-average shares outstanding, diluted

 

20,782,811

 

6,433,333

 

20,490,583

 

16,703,360

 

Net income (loss) per share, basic

 

$

0.34

 

$

(0.19

)

$

1.33

 

$

1.60

 

Net income (loss) per share, diluted

 

$

0.34

 

$

(0.19

)

$

1.30

 

$

0.62

 

 

Note 7 – Long-Term Debt

 

Long-term debt, including capital lease obligations, consists of the  following:

 

 

 

As of September 30,

 

As of December 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Notes payable, secured by aircraft, interest at 8%, due at varying dates through December 2010

 

$

17,032

 

$

20,736

 

Notes payable, secured by aircraft, interest at 8.5%, due November 2011

 

14,685

 

16,332

 

Notes payable, secured by aircraft, interest at 8%, due June 2011

 

6,444

 

7,517

 

Note payable, secured by aircraft, interest at 9%, due July 2008

 

1,055

 

1,939

 

Note payable to related party, secured by various assets, interest at 8%

 

 

891

 

Other notes payable

 

66

 

82

 

Capital lease obligations

 

29,790

 

25,268

 

Total long-term debt

 

69,072

 

72,765

 

Less current maturities

 

(16,211

)

(14,888

)

Long-term debt, net of current maturities

 

$

52,861

 

$

57,877

 

 

6



 

Note 8 – Financial Instruments and Risk Management:  Airline operations are inherently dependent on energy, and are therefore impacted by changes in jet fuel prices. Aircraft fuel expense represented approximately 47.7% and 46.2% of the Company’s operating expenses for the three months ended September 30, 2007 and 2006, respectively.  For the nine months ended September 30, 2007 and 2006, aircraft fuel represented approximately 46.6% and 47.1%, respectively, of the Company’s operating expenses.  The Company endeavors to acquire jet fuel at the lowest possible cost. To manage a portion of the aircraft fuel price risk, the Company uses jet fuel and heating oil option contracts or swap agreements. The Company does not purchase or hold derivative financial instruments for trading purposes.

 

The Company’s derivatives have historically not qualified as hedges for financial reporting purposes in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Accordingly, changes in the fair value of such derivative contracts, which amounted to gains of $348 and losses of $3,505 for the three months ended September 30, 2007 and 2006, respectively, and gains of $2,252 and losses of  $2,927 for the nine months ended September 30, 2007 and 2006, respectively, were recorded as a “(Gain) loss on fuel derivatives, net” within Other income (expense) in the accompanying condensed consolidated statements of operations.  These amounts include both realized gains and losses and mark-to-market adjustments of the fair value of the derivative instruments at the end of each period.  The fair value of hedge contracts amounted to $423 and ($1,622) as of September 30, 2007 and December 31, 2006, respectively, and was recorded in “Other current assets” or “Accrued liabilities” in the accompanying condensed consolidated balance sheets.

 

As of September 30, 2007, the Company had derivative instruments on approximately 9.0% of its projected fuel consumption for the remainder of 2007.

 

Note 9 – Commitments and Contingencies

 

AFH, Inc., a wholly owned subsidiary of Allegiant Travel Company, entered into a joint venture agreement with Orlando Sanford International, Inc. (“OSI”) to handle certain fuel operations for the Orlando Sanford International Airport.  The joint venture, which began operations in January 2007, is responsible for the purchase and transport of jet fuel to a fuel farm facility owned and operated by OSI, and for the sale of jet fuel to air carriers.  In addition, AFH, Inc. is responsible for the administrative functions for the joint venture.  AFH, Inc.’s proportionate allocation of earnings from this joint venture is reported in the Company’s condensed consolidated statements of operations in Other income (expense).

 

The National Transportation Safety Board has not yet released its report on its investigation of the nose landing gear failure the Company had at the Orlando Sanford International Airport in March 2007. Although no claims relating to this event have been made against the Company to date, it could be subject to claims in the future. The Company believes any such claims would be covered by its insurance policies in effect.

 

The Company is subject to certain legal and administrative actions it considers routine to its business activities. The Company believes the ultimate outcome of any pending legal or administrative matters will not have a material adverse impact on its financial position, liquidity or results of operations.

 

Note 10 – Subsequent Events

 

In November 2007, the Company entered into an agreement for the purchase of four MD-88 aircraft with seller financing for delivery through the first quarter of 2008.  The closings are subject to customary conditions.

 

In October 2007, the Company entered into a forward purchase agreement for two MD-82 aircraft currently operated by the Company under an operating lease.  The purchases are expected to be effective in July 2008 and are subject to customary closing conditions.  In addition, the Company purchased one engine and one MD-83 aircraft during October with the purchase price paid in cash.

 

In October 2007, the Company entered into an Air Transportation Charter Agreement with a subsidiary of Harrah’s Entertainment.  The Company is to provide charter services for Harrah’s to and from Tunica, Mississippi, Gulfport/Biloxi, Mississippi, New Orleans, Louisiana, Shreveport, Lousiana, St. Louis, Missouri and Council Bluffs, Iowa.  The Company will devote two of its aircraft to the operations under the Agreement and Harrah’s will guarantee a minimum amount of flying during the two-year term of the Agreement.  Service under the Agreement will begin in January 2008.

 

7



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis presents factors that had a material effect on our results of operations during the three and nine month periods ending September 30, 2007 and 2006. Also discussed is our financial position as of September 30, 2007 and December 31, 2006. You should read this discussion in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q and our consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 31, 2006.  This discussion and analysis contains forward-looking statements. Please refer to the section below entitled “Special Note About Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

 

Overview

 

We are a leisure travel company. The focus of our business is a low-cost passenger airline marketed to leisure travelers in small cities. Our business model emphasizes low operating costs, diversified revenue sources, and the transport of passengers from small cities to world-class leisure destinations. Our route network, pricing philosophy, product offering and advertising are all intended to appeal to leisure travelers and make it attractive for them to purchase air travel and related services from us.

 

We provide service primarily to Las Vegas (Nevada), Orlando (Florida), and Tampa/St. Petersburg (Florida), three of the largest and most popular leisure destinations in the United States.  In addition, in October 2007, we began service to Phoenix-Mesa (Arizona) and will commence service in November 2007 to Ft. Lauderdale (Florida), two other popular leisure destinations in the United States.  We have positioned our business to take advantage of current lifestyle and demographic trends in the U.S. which we believe are positive drivers for the leisure travel industry. The most notable demographic shift occurring in the U.S. is the aging of the baby boomer generation as they enter their peak earning years and have more time and disposable income to spend on leisure travel. We believe a large percentage of our customers fall within the baby boomer demographic and we target these customers through the use of advertisements in more than 300 print circulations.

 

As an adjunct to our scheduled service business, we also fly charter (“fixed fee”) services, both on a long-term contract basis (primarily for Harrah’s Entertainment Inc.) and on an on-demand ad-hoc basis.

 

Our Fleet:

 

The following table sets forth the number and type of aircraft in service and operated by us at the dates indicated:

 

 

 

September 30, 2007

 

December 31, 2006

 

September 30, 2006

 

 

 

Own(a)

 

Lease

 

Total

 

Own(a)

 

Lease

 

Total

 

Own(a)

 

Lease

 

Total

 

MD82/83s

 

22

 

4

 

26

 

22

 

0

 

22

 

16

 

3

 

19

 

MD87s

 

3

 

0

 

3

 

0

 

2

 

2

 

0

 

2

 

2

 

Total

 

25

 

4

 

29

 

22

 

2

 

24

 

16

 

5

 

21

 

 


(a) Aircraft owned includes five aircraft subject to capital leases.

 

Our Markets:

 

Our scheduled service consists of limited frequency nonstop flights into world-class leisure destinations from small cities. As of September 30, 2007, we offered scheduled service from 53 small cities primarily into Las Vegas, Orlando and Tampa/St. Petersburg including seasonal service. The following shows the number of destinations and small cities served as of the dates indicated:

 

 

 

As of September 30,
2007

 

As of December 31,
2006

 

Destinations

 

3

 

3

 

Small Cities

 

53

 

47

 

 

8



 

Results of Operations

 

Comparison of three months ended September 30, 2007 to three months ended September 30, 2006

 

The table below presents our operating expenses as a percentage of operating revenue for the periods indicated:

 

 

 

Three Months Ended September 30,

 

 

 

2007

 

2006

 

Total operating revenue

 

100.0

%

100.0

%

Operating expenses:

 

 

 

 

 

Aircraft fuel

 

42.4

 

44.0

 

Salary and benefits

 

14.7

 

14.6

 

Station operations

 

9.5

 

10.4

 

Maintenance and repairs

 

6.9

 

11.1

 

Sales and marketing

 

3.8

 

3.6

 

Aircraft lease rentals

 

0.9

 

1.8

 

Depreciation and amortization

 

4.9

 

4.7

 

Other

 

5.8

 

5.1

 

Total operating expenses

 

88.9

%

95.3

%

 

We recorded total operating revenue of $86.3 million, income from operations of $9.5 million and net income of $7.0 million for third quarter of 2007. By comparison, for the same period in 2006, we recorded total operating revenue of $60.9 million, income from operations of $2.9 million and net loss of $1.2 million.

 

As of September 30, 2007, we had a fleet of 29 aircraft in service, compared with a fleet of 21 aircraft in service as of September 30, 2006. The growth of our fleet enabled a 31.0% increase in available seat miles (“ASMs”) for third quarter 2007 compared to the same period in 2006 as departures increased by 36.0% and average stage length decreased by 3.6%.

 

Substantially all of our ASM growth in the third quarter of 2007 compared to the same period of 2006 was in scheduled service which represented 89.5% of total ASMs in third quarter of 2007 compared to 86.7% in the same period of 2006.  Scheduled service ASMs increased 35.2% while other flying (including fixed fee and non-revenue) ASMs increased 4.0% .

 

Operating Revenue

 

Our operating revenue increased 41.7%, or $25.4 million, to $86.3 million in third quarter 2007 from $60.9 million in the same period of 2006. This was driven by a 41.2% increase in revenue passenger miles (“RPMs”) and a 8.1% increase in revenue per ASM (“RASM”).  In addition, we generated other revenue of $0.7 million from lease revenue related to the purchase of eight engines in the third quarter on lease to another operator.  The engines were returned to us after the end of the quarter and we currently project no further lease revenue beyond October.

 

Scheduled service revenues.    Scheduled service revenues increased 40.8%, or $18.1 million, to $62.3 million in third quarter 2007 from $44.2 million in the same period of 2006 due to a 45.6% increase in scheduled service RPMs. Yield declined 3.3% year-over-year in the third quarter of 2007 due to the dilutive effect of introductory pricing on new routes offset in part by a 6.5% shorter scheduled stage length.  During the third quarter 2007, we started four new routes to Las Vegas.  The decrease in average stage length coupled with an increase in load factor of 6.2 percentage points resulted in a 4.2% year-over-year increase in scheduled service RASM from 7.32¢ to 7.63¢.

 

Fixed fee contract revenues.    Fixed fee contract revenues were $7.4 million in third quarter 2007 compared to $8.1 million in the same period of 2006.  The decrease of 8.8% for the third quarter 2007 compared to the same period in 2006 is primarily a result of a short term contract that ended in August 2006.

 

Ancillary revenue.    Ancillary revenue increased 85.5% to $16.0 million in third quarter 2007 up from $8.6 million in the same period of 2006. The increase in ancillary revenue was due to a 56.6% increase in scheduled service passengers and a 18.5% increase in ancillary revenue per passenger from $17.99 to $21.31 due primarily to the sale of new products.

 

9



 

Operating Expenses

 

Our operating expenses increased by 32.3%, or $18.8 million, to $76.8 million in third quarter 2007 up from $58.0 million during the same period in 2006.

 

In general, our operating expenses are significantly affected by changes in our capacity, as measured by ASMs. The following table presents our unit costs, defined as operating expense per ASM (“CASM”), for the indicated periods. In addition, the table presents CASM, excluding fuel, which represents operating expenses, less aircraft fuel, divided by available seat miles. This statistic provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors and are therefore beyond our control.

 

 

 

Three Months Ended
September 30,

 

Percentage

 

 

 

2007

 

2006

 

Change

 

Aircraft fuel

 

4.01

¢

3.85

¢

4.2

%

Salary and benefits

 

1.39

 

1.27

 

9.5

 

Station operations

 

0.90

 

0.91

 

(1.1

)

Maintenance and repairs

 

0.65

 

0.97

 

(33.0

)

Sales and marketing

 

0.36

 

0.32

 

12.5

 

Aircraft lease rentals

 

0.09

 

0.16

 

(43.8

)

Depreciation and amortization

 

0.46

 

0.41

 

12.2

 

Other

 

0.55

 

0.45

 

22.2

 

Operating CASM

 

8.41

¢

8.33

¢

1.0

%

Operating CASM, excluding fuel

 

4.40

¢

4.49

¢

(2.0

)%

 

Aircraft fuel expense.    Aircraft fuel expense increased 36.8%, or $9.9 million, to $36.6 million in third quarter 2007 up from $26.8 million in the same period of 2006. This change was due to a 35.1% increase in gallons consumed and a 1.3% increase in the average cost per gallon to $2.32 per gallon during third quarter 2007 compared to $2.29 in the same period of 2006.

 

Salary and benefits expense.    Salary and benefits expense increased 43.1% to $12.7 million in third quarter 2007 up from $8.9 million in the same period of 2006. This increase is largely attributable to a 31.5% increase in full-time equivalent employees to support our system growth.  We employed 1,035 full-time equivalent employees as of September 30, 2007, compared to 787 full-time equivalent employees as of September 30, 2006.

 

Station operations expense.    Station operations expense increased 29.4%, or $1.9 million, to $8.2 million in third quarter 2007 compared to $6.3 million in the same period of 2006. The percentage increase in station operations expense lagged the 36.0% increase in departures as station expense per departure decreased by 4.8%.  Reduced station expense per departure is consistent with a reduced proportion of fixed-fee flying, as scheduled service station expense per departure is typically lower than fixed fee flying.

 

Maintenance and repairs expense.    Maintenance and repairs expense decreased by 12.2%, or $0.8 million, to $5.9 million in third quarter 2007 down from $6.8 million in the same period of 2006.  The decrease is largely attributable to having no unplanned engine overhauls during the third quarter of 2007 compared with two engine overhauls in the third quarter 2006.  In addition, there were heavy maintenance checks on five aircraft in third quarter of 2007 compared to six heavy maintenance checks in the same period of 2006.  Maintenance and repairs CASM decreased 33.0%, due to the lower expense in 2007 and the growth in ASMs.  The timing of maintenance events may cause our maintenance and repairs expense to vary significantly from period to period.

 

Sales and marketing expense.    Sales and marketing expense increased 50.3%, or $1.1 million, to $3.3 million in third quarter 2007 compared to $2.2 million in the same period of 2006. This resulted in an increase on a CASM basis of 12.5%.  This increase is primarily due to an increase in advertising and credit card discount fees associated with the 40.8% increase in scheduled service revenue in third quarter 2007 compared to the same period in 2006.

 

10



 

Aircraft lease rentals expense.    Aircraft lease rentals expense decreased by 25.9% to $0.8 million in the third quarter of 2007 down from $1.1 million in the same period of 2006 primarily due to an increase in the percentage of owned versus leased aircraft.  Of the 32 aircraft that had been delivered to us as of September 30, 2007, four aircraft are subject to operating leases, whereas five aircraft were subject to operating leases as of September 30, 2006.

 

Depreciation and amortization expense.    Depreciation and amortization expense was $4.2 million in third quarter 2007 compared to $2.9 million in the same period of 2006, an increase of 48.5% as the number of in-service aircraft owned or subject to capital lease increased from 16 as of September 30, 2006 to 25 as of September 30, 2007.

 

Other expense.    Other expense increased by 59.2% to $5.0 million in third quarter 2007 compared to $3.1 million in same period of 2006 primarily due to growth and the additional administrative requirements resulting from being a public company.

 

Other (Income) Expense

 

Other (income) expense increased from a net other expense amount of $4.1 million in third quarter 2006 to a net other income amount of $1.6 million in the same period of 2007.  This change is primarily attributable to two factors: (1) a net loss on fuel derivatives of $3.5 million in the third quarter 2006 compared to a net gain on fuel derivatives of $0.3 million in the same period of 2007 and (2) an increase in interest income from $0.7 million in third quarter 2006 to $2.5 million in the same period of 2007 as a result of increased cash balances.

 

Income Tax Expense

 

Income tax expense for the third quarter of 2007 was $4.1 million as our effective income tax rate for the period was approximately 36.8%.  Prior to our reorganization into a corporation at the time of our initial public offering on December 13, 2006, we operated as an LLC and we did not pay corporate federal income tax at the entity level and therefore, we did not incur any federal income tax for the third quarter of 2006.

 

Comparison of nine months ended September 30, 2007 to nine months ended September 30, 2006

 

The table below presents our operating expenses as a percentage of operating revenue for the periods indicated:

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

Total operating revenue

 

100.0

%

100.0

%

Operating expenses:

 

 

 

 

 

Aircraft fuel

 

39.8

 

43.1

 

Salary and benefits

 

13.9

 

13.8

 

Station operations

 

9.6

 

10.4

 

Maintenance and repairs

 

7.0

 

7.9

 

Sales and marketing

 

3.6

 

3.9

 

Aircraft lease rentals

 

0.8

 

2.4

 

Depreciation and amortization

 

4.5

 

4.2

 

Other

 

6.2

 

6.0

 

Total operating expenses

 

85.4

%

91.6

%

 

We recorded total operating revenue of $259.6 million, income from operations of $38.0 million and net income of $26.7 million for the first nine months of 2007. By comparison, for the same period in 2006, we recorded total operating revenue of $180.2 million, income from operations of $15.2 million and net income of $10.3 million.

 

As of September 30, 2007, we had a fleet of 29 aircraft in service, compared with a fleet of 21 aircraft in service as of September 30, 2006. The growth of our fleet enabled a 29.8% increase in ASMs for the first nine months of 2007 compared to the same period in 2006 as departures increased by 40.8% and average stage length decreased by 7.8%.

 

Compared to the first nine months of 2006, scheduled service ASMs increased by 33.2% in the first nine months of 2007 and other flying (including fixed fee and non-revenue) increased 10.1%.

 

11



 

Operating Revenue

 

Our operating revenue increased 44.1%, or $79.4 million, to $259.6 million in the first nine months of 2007 from $180.2 million in the same period of 2006. This was driven by a 35.6% increase in RPMs and a 10.9% increase in RASM.

 

Scheduled service revenueScheduled service revenues increased 41.3%, or $54.4 million, to $186.1 million in the first nine months of 2007 from $131.7 million in the same period of 2006 due to a 38.4% increase in scheduled service RPMs. Yield increased 2.0% from 8.88¢ for the first nine months of 2006 to 9.06¢ for the same period of 2007, due to a 10.4% shorter scheduled stage length offset by the dilutive effect of introductory pricing on new routes.  During the first nine months of 2007, we started 12 new routes to Las Vegas, six new routes to Orlando, four new routes to Tampa/St. Petersburg and two other new routes.  The decrease in average stage length coupled with an increase in load factor of 3.1 percentage points resulted in a 6.1% year-over-year increase in scheduled service RASM from 7.23¢ to 7.67¢.

 

Fixed fee contract revenueFixed fee contract revenues increased 3.7% to $28.2 million in the first nine months of 2007 up from $27.2 million for the same period of the prior year.  Fixed fee revenues increased principally because of increased flying for Harrah’s during the first nine months of 2007.

 

Ancillary revenueAncillary revenues increased 109.7% to $44.5 million in the first nine months of 2007 up from $21.2 million in the same period of 2006. The increase in ancillary revenue was due to a 54.5% increase in scheduled service passengers and a 35.7% increase in ancillary revenue per passenger from $15.08 to $20.46 due primarily to the sale of several new products.

 

Operating Expenses

 

Our operating expenses increased by 34.3%, or $56.6 million, to $221.6 million in the first nine months of 2007 up from $165.0 million during the same period in 2006.

 

The following table presents our unit costs, CASM, for the indicated periods: 

 

 

 

Nine Months Ended
September 30,

 

Percentage

 

 

 

2007

 

2006

 

Change

 

Aircraft fuel

 

3.72

¢

3.64

¢

2.2

%

Salary and benefits

 

1.30

 

1.17

 

11.1

 

Station operations

 

0.90

 

0.86

 

4.7

 

Maintenance and repairs

 

0.65

 

0.67

 

(3.0

)

Sales and marketing

 

0.34

 

0.33

 

3.0

 

Aircraft lease rentals

 

0.08

 

0.20

 

(60.0

)

Depreciation and amortization

 

0.42

 

0.36

 

16.7

 

Other

 

0.58

 

0.50

 

16.0

 

Operating CASM

 

7.99

¢

7.73

¢

3.4

%

Operating CASM, excluding fuel

 

4.27

¢

4.09

¢

4.4

%

 

Aircraft fuel expense  Aircraft fuel expense increased 33.0%, or $25.6 million, to $103.3 million in the first nine months of 2007 up from $77.7 million in the same period of 2006. This change was primarily due to a 33.3% increase in gallons consumed.  The average cost per gallon was $2.17 per gallon during the first nine months of 2007 compared to $2.18 in the same period of 2006.

 

Salary and benefits expense.    Salary and benefits expense increased 44.8% to $36.1 million in the first nine months of 2007 up from $24.9 million in the same period of 2006. This increase is largely attributable to a 31.5% increase in full-time equivalent employees to support our growth along with a wage scale increase for flight operations employees granted during the fourth quarter of 2006.  We employed 1,035 full-time equivalent employees as of September 30, 2007, compared to 787 full-time equivalent employees as of September 30, 2006.

 

Station operations expense.    Station operations expense increased 34.0%, or $6.3 million, to $25.0 million in the first nine months of 2007 compared to $18.7 million in the same period of 2006. The percentage increase in station operations expense lagged the 40.8% increase in departures as station expense per departure decreased by 4.9%.  However, the decrease in year-over-year average stage length resulted in year-over-year station operations expenses increasing by 4.7% on a CASM basis.

 

12



 

Maintenance and repairs expense.    Maintenance and repairs expense increased by 27.5%, or $3.9 million, to $18.2 million in the first nine months of 2007 up from $14.2 million in the same period of 2006.  This increase resulted from an increase in normal routine maintenance expenditures from growth of our fleet as we had one planned heavy engine overhaul performed during the first nine months of 2006 compared to two planned heavy engine overhauls performed during the same period of 2007.  Additionally, the maintenance and repairs expense for the first nine months of 2007 included a $0.3 million deductible for a gear-up landing during the first quarter at Orlando Sanford International Airport.  Maintenance and repairs CASM declined 3.0% as certain maintenance expenses were spread over a larger base of ASMs.

 

Sales and marketing expense.    Sales and marketing expense increased 34.8%, or $2.4 million, to $9.4 million in the first nine months of 2007 compared to $7.0 million in the same period of 2006. On a CASM basis, sales and marketing expense remained relatively constant from the first nine months of 2006.

 

Aircraft lease rentals expense.    Aircraft lease rentals expense decreased by 50.3% to $2.1 million in the first nine months of 2007 down from $4.3 million in the same period of 2006 primarily due to an increase in the percentage of owned versus leased aircraft.

 

Depreciation and amortization expense.    Depreciation and amortization expense was $11.6 million in the first nine months of 2007 compared to $7.6 million in the same period of 2006, an increase of 52.8% as the number of in-service aircraft owned or subject to capital leases increased from 16 as of September 30, 2006 to 25 as of September 30, 2007.

 

Other expense.    Other expense increased by 49.1% to $16.0 million in the first nine months of 2007 compared to $10.7 million in same period of 2006 primarily due to growth and the additional administrative requirements resulting from being a public company.

 

Other (Income) Expense

 

Other (income) expense increased from a net other expense amount of $4.9 million in the first nine months of 2006 to a net other income amount of $5.2 million in the same period of 2007. This change is primarily attributable to two factors: (1) a loss on fuel derivatives of $2.9 million in the first nine months of 2006 compared to a gain on fuel derivatives of $2.3 million in the same period of 2007 and (2) an increase in interest income from $2.0 million in the first nine months of 2006 to $6.8 million in the same period of 2007 as a result of increased cash balances.

 

Income Tax Expense

 

Income tax expense for the first nine months of 2007 was $16.4 million as our effective income tax rate for the period was 38.1%.  Prior to our reorganization into a corporation at the time of our initial public offering on December 13, 2006, we did not pay corporate federal income tax at the entity level and therefore, we did not incur any federal income tax for the first nine months of 2006.

 

13



 

Comparative Consolidated Operating Statistics

 

The following tables set forth our operating statistics for the three and nine months ended September 30, 2007 and 2006:

 

 

 

Three months ended September 30,

 

Percent

 

 

 

2007

 

2006

 

Change

 

 

 

 

 

 

 

 

 

Operating statistics (unaudited):

 

 

 

 

 

 

 

Total system statistics:

 

 

 

 

 

 

 

Passengers

 

805,878

 

543,028

 

48.4

 

Revenue passenger miles (RPMs) (thousands)

 

767,930

 

543,842

 

41.2

 

Available seat miles (ASMs) (thousands)

 

912,496

 

696,345

 

31.0

 

Load factor

 

84.2

%

78.1

%

6.1

pts.

Operating revenue per ASM (cents)

 

9.46

 

8.75

 

8.1

 

Operating CASM (cents)

 

8.41

 

8.33

 

1.0

 

Operating CASM, excluding fuel (cents)

 

4.40

 

4.49

 

(2.0

)

Departures

 

6,867

 

5,048

 

36.0

 

Block hours

 

15,956

 

12,231

 

30.5

 

Average stage length (miles)

 

898

 

932

 

(3.6

)

Average number of operating aircraft during period

 

28.8

 

21.0

 

37.1

 

Total aircraft in service end of period

 

29

 

21

 

38.1

 

Full-time equivalent employees at period end

 

1,035

 

787

 

31.5

 

Fuel gallons consumed (thousands)

 

15,812

 

11,705

 

35.1

 

Average fuel cost per gallon

 

$

2.32

 

$

2.29

 

1.3

 

Scheduled service statistics:

 

 

 

 

 

 

 

Passengers

 

750,170

 

479,085

 

56.6

 

Revenue passenger miles (RPMs) (thousands)

 

703,442

 

483,194

 

45.6

 

Available seat miles (ASMs) (thousands)

 

816,408

 

603,970

 

35.2

 

Load factor

 

86.2

%

80.0

%

6.2

pts.

Departures

 

6,000

 

4,153

 

44.5

 

Block hours

 

14,245

 

10,530

 

35.3

 

Yield (cents)

 

8.85

 

9.15

 

(3.3

)

Scheduled service revenue per ASM (cents)

 

7.63

 

7.32

 

4.2

 

Ancillary revenue per ASM (cents)

 

1.96

 

1.43

 

37.1

 

Total revenue per ASM (cents)

 

9.59

 

8.75

 

9.6

 

Average fare - scheduled service

 

$

83.02

 

$

92.30

 

(10.1

)

Average fare – ancillary

 

$

21.31

 

$

17.99

 

18.5

 

Average fare – total

 

$

104.33

 

$

110.29

 

(5.4

)

Average stage length (miles)

 

920

 

984

 

(6.5

)

Percent of sales through website during period

 

85.8

%

84.5

%

1.3

pts.

 

14



 

 

 

Nine months ended September 30,

 

Percent

 

 

 

2007

 

2006

 

Change

 

 

 

 

 

 

 

 

 

Operating statistics (unaudited):

 

 

 

 

 

 

 

Total system statistics:

 

 

 

 

 

 

 

Passengers

 

2,369,672

 

1,599,851

 

48.1

 

Revenue passenger miles (RPMs) (thousands)

 

2,291,995

 

1,690,603

 

35.6

 

Available seat miles (ASMs) (thousands)

 

2,773,203

 

2,136,203

 

29.8

 

Load factor

 

82.6

%

79.1

%

3.5

pts.

Operating revenue per ASM (cents)

 

9.36

 

8.44

 

10.9

 

Operating CASM (cents)

 

7.99

 

7.73

 

3.4

 

Operating CASM, excluding fuel (cents)

 

4.27

 

4.09

 

4.4

 

Departures

 

20,596

 

14,632

 

40.8

 

Block hours

 

48,886

 

37,454

 

30.5

 

Average stage length (miles)

 

909

 

986

 

(7.8

)

Average number of operating aircraft during period

 

27.0

 

20.4

 

32.4

 

Total aircraft in service end of period

 

29

 

21

 

38.1

 

Full-time equivalent employees at period end

 

1,035

 

787

 

31.5

 

Fuel gallons consumed (thousands)

 

47,523

 

35,658

 

33.3

 

Average fuel cost per gallon

 

$

2.17

 

$

2.18

 

(0.5

)

Scheduled service statistics:

 

 

 

 

 

 

 

Passengers

 

2,176,726

 

1,408,738

 

54.5

 

Revenue passenger miles (RPMs) (thousands)

 

2,053,537

 

1,483,902

 

38.4

 

Available seat miles (ASMs) (thousands)

 

2,427,024

 

1,821,817

 

33.2

 

Load factor

 

84.6

%

81.5

%

3.1

pts.

Departures

 

17,795

 

11,967

 

48.7

 

Block hours

 

42,772

 

31,776

 

34.6

 

Yield (cents)

 

9.06

 

8.88

 

2.0

 

Scheduled service revenue per ASM (cents)

 

7.66

 

7.23

 

5.9

 

Ancillary revenue per ASM (cents)

 

1.84

 

1.17

 

57.3

 

Total revenue per ASM (cents)

 

9.50

 

8.40

 

13.1

 

Average fare - scheduled service

 

$

85.51

 

$

93.50

 

(8.5

)

Average fare - ancillary

 

$

20.46

 

$

15.08

 

35.7

 

Average fare - total

 

$

105.97

 

$

108.59

 

(2.4

)

Average stage length (miles)

 

923

 

1,030

 

(10.4

)

Percent of sales through website during period

 

86.7

%

84.8

%

1.9

pts.

 

Liquidity and Capital Resources:

 

Current liquidity.  Cash and cash equivalents, restricted cash and short-term investments of $144.7 million at December 31, 2006 increased to $185.7 million at September 30, 2007.  Restricted cash represents credit card deposits, escrowed funds under our fixed fee flying contracts and cash collateral against letters of credit issued to our hotel vendors, airports and certain other parties.

 

Sources and Uses of Cash.

 

Operating Activities:  Cash flows provided by operations for the nine months ended September 30, 2007 were $62.9 million compared to $24.3 million in the same period 2006.  This increase in cash flows provided by operations in 2007 compared to 2006 is primarily the result of an increase in passenger bookings for future travel and operating income.

 

Investing Activities:  Cash flows used in investing activities for the nine months ended September 30, 2007 were $40.9 million compared to $20.6 million in the same period 2006.  During the nine months ended September 30, 2007, we had $32.3 million of purchases of property and equipment compared to $20.1 million of purchases in the same period of 2006.  The purchases in 2007 include an equipment package made up of eight engines and one airframe (which we do not intend to operate), three aircraft previously under operating leases, and aircraft parts.  In addition, aircraft lease and equipment deposits increased by $5.1 million during the nine months ended September 30, 2007, compared to the decrease of $0.1 million in the same period of 2006.

 

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Financing Activities:  Cash flows provided by financing activities for the nine months ended September 30, 2007 were $13.5 million compared to $13.1 million used in financing activities in the same period 2006.  Financing activities primarily consist of the proceeds from the public offering of our stock in second quarter 2007 and debt repayments related to aircraft financing and capital lease obligations.  As of September 30, 2007, we had secured debt financing on 12 aircraft and capital lease financing on seven aircraft compared to debt financing on 11 aircraft and capital lease financing on five aircraft as of September 30, 2006.  The seven aircraft under capital lease financing include two aircraft purchased during the third quarter that were not in revenue service as of September 30, 2007.

 

Commitments and Contractual Obligations

 

The following table discloses aggregate information about our contractual cash obligations as of September 30, 2007 and the periods in which payments are due (in thousands):

 

 

 

 

 

Less than

 

 

 

 

 

More than

 

 

 

Total

 

1 yr

 

1 to 3 yrs

 

4 to 5 yrs

 

5 yrs

 

Long-term debt obligations

 

$

46,164

 

$

3,562

 

$

26,155

 

$

16,447

 

$

 

Capital lease obligations

 

34,814

 

2,055

 

16,400

 

16,360

 

 

Operating lease obligations

 

28,762

 

2,075

 

8,214

 

6,178

 

12,295

 

Total future payments on contractual obligations

 

$

109,741

 

$

7,692

 

$

50,769

 

$

38,985

 

$

12,295

 

 


(1)          Long-term debt obligations include scheduled interest payments.

(2)          Operating lease obligations include aircraft operating leases and leases of airport station property and office space.

 

Critical Accounting Policies and Estimates

 

A description of our critical accounting policies is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006.  There has been no material change to these policies for the nine months ended September 30, 2007.

 

Recent Accounting Pronouncements

 

See related disclosure at “Item 1 – Unaudited Condensed Consolidated Financial Statements - Notes to Condensed Consolidated Financial Statements – Note 2 – Newly Issued Accounting Pronouncements.”

 

Special Note about Forward-Looking Statements

 

We have made forward-looking statements in this quarterly report on Form 10-Q, and in this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project” or similar expressions.

 

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in the forward-looking statements. Important risk factors that could cause our results to differ materially from those expressed in the forward-looking statements generally may be found in our periodic reports and registration statements filed with the Securities and Exchange Commission at www.sec.gov. These risk factors include, without limitation, increases in fuel prices, terrorist attacks, risks inherent to airlines, demand for air services to Las Vegas, Orlando, Tampa/St. Petersburg, Phoenix-Mesa and Ft. Lauderdale from the markets served by us, our ability to implement our growth strategy, our fixed obligations, our dependence on our leisure destination markets, our ability to add, renew or replace gate leases, our competitive environment, problems with our aircraft, dependence on fixed fee customers, our reliance on our automated systems, economic and other conditions in markets in which we operate, governmental regulation, increases in maintenance costs and insurance premiums and cyclical and seasonal fluctuations in our operating results.

 

Any forward-looking statements are based on information available to us today and we undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are subject to certain market risks, including commodity prices (specifically, aircraft fuel).  The adverse effects of changes in these markets could pose a potential loss as discussed below. The sensitivity analysis does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ. See the notes to our consolidated financial statements in our annual report on Form 10-K filed with the Securities and Exchange Commission for a description of our significant accounting policies and additional information.

 

Aircraft Fuel

 

Our results of operations can be significantly impacted by changes in the price and availability of aircraft fuel. Aircraft fuel expense for the three and nine months ended September 30, 2007 and 2006 exceeded 46.0%.  Increases in fuel prices or a shortage of supply could have a material effect on our operations and operating results. Based on our fuel consumption for the three and nine months ended September 30, 2007, a hypothetical ten percent increase in the average price per gallon of aircraft fuel would have increased fuel expense by approximately $3.7 million for the three months ended September 30, 2007, and by approximately $10.3 million for the nine months ended September 30, 2007.  To manage a portion of the aircraft fuel price risk, we use jet fuel and heating oil option contracts or swap agreements. As of September 30, 2007, we had hedged approximately 9% of our projected 2007 fuel requirements. As of the same date, all extant fuel hedge contracts were to settle by the end of January 2008.  The fair value of our fuel derivative contracts as of September 30, 2007 was $0.4 million. We measure the fair value of the derivative instruments based on either quoted market prices or values provided by the counterparty. Changes in the value of the related commodity derivative instrument  may change by more or less than this amount based upon further fluctuations in futures prices. Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. However, we do not expect the counterparties to fail to meet their obligations.

 

Interest Rates

 

We have market risk associated with changing interest rates due to the short-term nature of our invested cash, which totaled $165.8 million, and short term investments of $6.9 million at September 30, 2007. We invest available cash in certificates of deposit, investment grade commercial paper, and other highly rated financial instruments. Because of the short-term nature of these investments, the returns earned closely parallel short-term floating interest rates. A hypothetical 100 basis point change in interest rates in the three months ended September 30, 2007 would have affected interest income from cash and investments by $0.2 million, while there would have been no significant impact for the same period in 2006.  For the nine months ended September 30, 2007 and 2006, a hypothetical 100 basis point change would have affected interest income from cash and investments by $0.7 million and $0.2 million, respectively.

 

Our long term debt consists of fixed rate notes payable and capital lease arrangements. A hypothetical 100 basis point change in market interest rates as of September 30, 2007, would not have a material effect on the fair value of our fixed rate debt instruments. Also, a hypothetical 100 basis point change in market rates would not impact our earnings or cash flow associated with our fixed-rate debt.

 

Item 4. Controls and Procedures.

 

(a) Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, under the supervision and with the participation of our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), we evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”). Based on this evaluation, our management, including our CEO and CFO, has concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information we are required to disclose is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.   Based upon this evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

17



 

(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during our quarter ending September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The National Transportation Safety Board has not yet released its report on its investigation of the nose landing gear failure we had at the Orlando Sanford International Airport in March 2007. Although no claims relating to this event have been made against us to date, we could be subject to claims in the future. We believe any such claims would be covered by our insurance policies in effect.

 

We are subject to certain legal and administrative actions we consider routine to our business activities. We believe the ultimate outcome of any pending legal or administrative matters will not have a material adverse impact on our financial position, liquidity or results of operations.

 

Item 1A.  Risk Factors

 

We have evaluated our risk factors and determined that, other than as set forth below, there have been no changes to our risk factors set forth in Part I, Item 1A in the Form 10-K since we filed our Annual Report on Form 10-K on April 2, 2007.

 

The addition of our two newly announced leisure destinations may not be successful.

 

We have recently announced service from a number of small cities to Phoenix-Mesa and Fort Lauderdale.  As we do not have historical data on the performance of these markets as our leisure destinations, we may not be able to profitably operate these routes.

 

In Phoenix, we serve the Phoenix-Mesa Gateway Airport, which is not the principal airport in the Phoenix market.  A refusal by passengers to view the Phoenix-Mesa Gateway Airport as a reasonable alternative to the Phoenix Sky Harbor International Airport, the main airport serving the Phoenix area, could harm our business and prospects in this market.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

On December 13, 2006, we consummated the initial public offering of our common stock, $0.001 par value.  The shares of common stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement (Registration No. 333-134145) that was declared effective by the Securities and Exchange Commission on December 8, 2006.  The estimated aggregate net proceeds to us from the offering were approximately $94.5 million after deducting underwriting discounts and commissions paid to the underwriters and other expenses incurred in connection with the offering.

 

Approximately $0.9 million of the proceeds have been applied to the repayment of debt owed to our chief executive officer and chairman of the board. No other portion of the proceeds from the offering was paid, directly or indirectly, to any of our officers or directors or any of their associates, or to any persons owning ten percent or more of our outstanding common stock or to any of our affiliates. We have invested the remaining net proceeds in short-term, investment-grade, interest bearing instruments, pending their use to fund working capital and capital expenditures, including capital expenditures related to the purchase of aircraft.  As of September 30, 2007, we have used $32.3 million of the proceeds of our initial public offering for capital expenditures.

 

Item 6.

 

Exhibits

 

 

 

3 .1

 

Articles of Incorporation (1)

3 .2

 

Bylaws of the Company

31.1

 

Rule 13a - 14(a) / 15d - 14(a) Certification of Principal Executive Officer

31.2

 

Rule 13a - 14(a) / 15d - 14(a) Certification of Principal Financial Officer

32.

 

Section 1350 Certifications

 


(1)      Incorporated by reference to Exhibit filed with Registration Statement #333-134145 filed by the Company with the Commission on July 6, 2006.

 

18



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

ALLEGIANT TRAVEL COMPANY

 

 

 

 

 

 

Date: November 13, 2007

 

By:

/s/ Andrew C. Levy

 

 

 

Andrew Levy

 

 

Principal Financial Officer

 

19