UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File No. 001-35186
Spirit Airlines, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2800 Executive Way
Miramar, Florida
(Address of principal executive offices)
38-1747023
(I.R.S. Employer
Identification No.)
33025
(Zip Code)
(954) 447-7920
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Voting Common Stock, $0.0001 par value
Non-Voting Common Stock, $0.0001 par value
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $2.1 billion computed by reference to the last
sale price of the common stock on the NASDAQ Global Select Market on June 28, 2013, the last trading day of the registrant’s most recently completed second
fiscal quarter. Shares held by each executive officer, director and by certain persons that own 10 percent or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of each registrant's classes of common stock outstanding as of the close of business on February 7, 2014:
Class
Number of Shares
Common Stock, $0.0001 par value per share
72,670,673
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the registrant's 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this
Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the registrant's fiscal year ended December 31, 2013.
TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . .
Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14. Principal Accountant Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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__________________________________________________
ITEM 1.
BUSINESS
Overview
PART I
Spirit Airlines is an ultra low-cost, low-fare airline based in Miramar, Florida that offers affordable travel to price-
conscious customers. Our all-Airbus fleet currently operates more than 250 daily flights to over 50 destinations in the United
States, Caribbean and Latin America. We completed an initial public offering during the second quarter of 2011, and our stock
trades on the NASDAQ Global Select Stock Market under the symbol "SAVE".
Our ultra low-cost carrier, or ULCC, business model allows us to compete principally through offering low base fares and
charging separately for select optional services, thereby allowing customers the freedom to save by choosing only the extras
they value. We have unbundled components of our air travel service that have traditionally been included in base fares, such as
baggage and advance seat selection, and offer them as optional, ancillary services (which we record in our financial statements
as non-ticket revenue) as part of a strategy to enable our passengers to identify, select and pay only for the services they want to
use.
Our History and Corporate Information
We were founded in 1964 as Clippert Trucking Company, a Michigan corporation. We began air charter operations in
1990 and renamed ourselves Spirit Airlines, Inc. in 1992. In 1994, we reincorporated in Delaware, and in 1999 we relocated
our headquarters to Miramar, Florida.
Our mailing address and executive offices are located at 2800 Executive Way, Miramar, Florida 33025, and our telephone
number at that address is (954) 447-7920. We are subject to the information and periodic reporting requirements of the
Securities Exchange Act of 1934, or Exchange Act, and, in accordance therewith, file periodic reports, proxy statements and
other information with the Securities and Exchange Commission or SEC. Such periodic reports, proxy statements and other
information are available for inspection and copying at the SEC's Public Reference Room at 100 F Street, NE., Washington,
DC 20549 or may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at http://
www.sec.gov that contains reports, proxy statements and other information regarding issuers that file electronically with the
SEC. We also post on the Investor Relations page of our website, www.spirit.com, a link to our filings with the SEC, our
Corporate Governance Guidelines and Code of Business Conduct and Ethics, which applies to all directors and all our
employees, and the charters of our Audit, Compensation, Finance and Nominating and Corporate Governance committees. Our
filings with the SEC are posted as soon as reasonably practical after they are filed electronically with the SEC. Please note that
information contained on our website is not incorporated by reference in, or considered to be a part of, this report. You can also
obtain copies of these documents free of charge by writing to us at: Corporate Secretary, Spirit Airlines, Inc., 2800 Executive
Way, Miramar, Florida 33025.
Our Business Model
Our ULCC business model provides customers very low base fares with a range of optional services, allowing customers
the freedom to choose only the extras they value. The success of our model is driven by our low cost structure, which permits
us to offer very low base fares while maintaining one of the highest profit margins in the industry.
We are focused on price-sensitive travelers who pay for their own travel, and our business model is designed to deliver
what we believe our customers want: low fares. We aggressively use low fares to stimulate air travel demand in order to
increase passenger volume, load factors and non-ticket revenue on the flights we operate. Higher passenger volumes and load
factors help us sell more ancillary products and services, which in turn allows us to reduce the base fare we offer even further,
stimulating additional demand. We strive to be recognized by our customers and potential customers as the low-fare leader in
the markets we serve.
We compete based on total price. We believe other airlines have used an all-inclusive price concept to effectively raise
total prices to consumers, rather than lowering fares by unbundling each product or service. For example, carriers that tout
“free bags” have included the cost of checking bags in the total ticket price, not allowing passengers to see how much they
would save if they did not check luggage. We believe that we and our customers benefit when we allow our customers to know
the total price of their travel by breaking out the cost of additional, optional products or services. Before they pay, our
customers are easily able to compare the total cost of flying with us versus flying with another airline.
We allow our customers to see all available options and their prices prior to purchasing a ticket, and this full transparency
illustrates that our total prices are lower, on average, than our competitors, even when options are included.
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Our Strengths
We believe we compete successfully in the airline industry by leveraging the following demonstrated business strengths:
Ultra-Low Cost Structure. Our unit operating costs are among the lowest of all airlines operating in the Americas. We
believe this cost advantage helps protect our market position and enables us to offer some of the lowest base fares in our
markets, sustain among the highest operating margins in our industry and support continued growth. Our operating costs per
available seat mile (CASM) of 9.90 cents in 2013, were significantly lower than those of the major domestic network carriers,
American Airlines, Delta Air Lines, United Air Lines and US Airways and among the lowest of the domestic low-cost carriers,
including JetBlue Airways and Southwest Airlines. We achieve these low unit operating costs in large part due to:
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high aircraft utilization;
high-density seating configurations on our aircraft;
our simple operations;
no hub-and-spoke inefficiencies;
highly productive workforce;
opportunistic outsourcing of operating functions;
operating a modern single fleet type of Airbus A320-family aircraft with common flight crews across the fleet;
reduced sales, marketing and distribution costs through direct-to-consumer marketing;
efficient flight scheduling, including minimal ground times between flights; and
a company-wide business culture that is keenly focused on driving costs lower.
Innovative Revenue Generation. We execute our innovative, unbundled pricing strategy to produce significant non-ticket
revenue generation, which allows us to stimulate passenger demand for our product by lowering base fares and enabling
passengers to identify, select and pay for the products and services they want to use. Our unbundled strategy has enabled us to
grow average non-ticket revenue per passenger flight segment from approximately $5 in 2006 to $54 in 2013 by:
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charging for checked and carry-on baggage;
passing through all distribution-related expenses;
charging for premium seats and advance seat selection;
enforcing ticketing policies, including service charges for changes and cancellations;
generating subscription revenue from our $9 Fare Club ultra low-fare subscription service;
deriving brand-based revenues from proprietary services, such as our FREE SPIRIT affinity credit card program;
offering third-party travel products (travel packages), such as hotel rooms, ground transportation (rental and hotel
shuttle products) and attractions (show or theme park tickets) packaged with air travel;
selling third-party travel insurance through our website;
selling in-flight products and onboard advertising.
Resilient Business Model and Customer Base. By focusing on price-sensitive travelers, we have maintained relatively
stable unit revenue and profitability during volatile economic periods because we are not highly dependent on premium-fare
business traffic. We believe our growing customer base is more resilient than the customer bases of most other airlines because
our low fares and unbundled service offering appeal to price-sensitive passengers. For example, in 2009, when premium-fare
business traffic dried up due to the economic recession, our operating revenue per available seat mile (RASM) declined 1.9%,
compared to an average U.S. airline industry decline of over 9%.
Well Positioned for Growth. We have developed a substantial network of destinations in profitable U.S. domestic niche
markets, targeted growth markets in the Caribbean and Latin America and high-volume routes flown by price-sensitive
travelers. In the United States, we also have grown into large markets that, due to higher fares, have priced out those more
price-sensitive travelers. Our strategy to balance growth in large domestic markets, niche markets and opportunities in the
Caribbean and Latin America gives us a significant number of growth opportunities.
Experienced International Operator. We believe we have substantial experience in foreign local aviation, security and
customs regulations, local ground operations and flight crew training required for successful international and overwater flight
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operations. All of our aircraft are certified for overwater operations. We believe we compete favorably against other low-cost
carriers because we have been conducting international flight operations since 2003 and have developed substantial experience
in complying with the various regulations and business practices in the international markets we serve.
Financial Strength Achieved with Focus on Cost Discipline. We believe our ULCC business model has delivered strong
financial results in difficult economic times. We have generated these results by:
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keeping a consistent focus on maintaining low unit operating costs;
ensuring our sourcing arrangements with key third parties are continually benchmarked against the best industry
standards;
• maintaining a simple operation that focuses on delivering transportation; and
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generating and maintaining an adequate level of liquidity to insulate against volatility in key cost inputs, such as fuel,
and in passenger demand that may occur as a result of changing general economic conditions.
Route Network
As of December 31, 2013, our route network included 130 markets served by 56 airports throughout North America,
Central America, South America and the Caribbean.
Below is a route map of our current network, which includes seasonal routes and routes announced as of February 12,
2014 for which service has not yet started:
6
Our network expansion targets underserved and/or overpriced markets. We utilize a rigorous process to identify
growth opportunities to deploy new aircraft where we believe they will be profitable. To monitor the profitability of each route,
we analyze weekly and monthly profitability reports as well as near term forecasting.
Competition
The airline industry is highly competitive. The principal competitive factors in the airline industry are fare pricing, total
price, flight schedules, aircraft type, passenger amenities, number of routes served from a city, customer service, safety record
and reputation, code-sharing relationships and frequent flier programs and redemption opportunities. Our competitors and
potential competitors include traditional network airlines, low-cost carriers, and regional airlines. We typically compete in
markets served by traditional network airlines and other low-cost carriers, and, to a lesser extent, regional airlines.
Our single largest overlap, at approximately 61% of our markets as of January 3, 2014, is with American Airlines. Our
principal competitors on domestic routes are American Airlines (including US Airways which merged with American in
December 2013 but currently continues to operate as a separate carrier), Southwest Airlines, United Airlines and Delta Airlines.
Our principal competitors for service from South Florida to our markets in the Caribbean and Latin America are American
Airlines through its hub in Miami and JetBlue Airways through its operations in Fort Lauderdale. Our principal competitive
advantages are our low base fares and our focus on the price-sensitive traveler who pays his or her own travel costs. These low
base fares are facilitated by our low unit operating costs, which in 2013 were among the lowest in the industry. We believe our
low costs coupled with our non-ticket revenues allow us to price our fares at levels where we can be profitable while our
primary competitors cannot.
The airline industry is particularly susceptible to price discounting because, once a flight is scheduled, airlines incur only
nominal incremental costs to provide service to passengers occupying otherwise unsold seats. The expenses of a scheduled
aircraft flight do not vary significantly with the number of passengers carried and, as a result, a relatively small change in the
number of passengers or in pricing could have a disproportionate effect on an airline’s operating and financial results. Price
competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, target
promotions and frequent flier initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during
normally slower travel periods to generate cash flow and to maximize RASM. The prevalence of discount fares can be
particularly acute when a competitor has excess capacity that it is under financial pressure to sell. A key element to our
competitive strategy is to maintain very low unit costs in order to permit us to compete successfully in price-sensitive markets.
Seasonality
Our business is subject to significant seasonal fluctuations. We generally expect demand to be greater in the second and
third quarters compared to the rest of the year. The air transportation business is also volatile and highly affected by economic
cycles and trends.
Distribution
The majority of our tickets are sold through direct channels including online via www.spirit.com, our call center and the
ticket counter with spirit.com being the primary channel. We also partner with a number of third parties to distribute our tickets,
including online and traditional travel agents and electronic global distribution systems.
Customers
We believe our customers are primarily leisure travelers who make their purchase decision based on price. By focusing on
lowering our cost structure, we can successfully sell tickets at low fares while maintaining a strong profit margin.
Customer Service
We are committed to taking care of our customers. We believe focus on customer service in every aspect of our
operations including personnel, flight equipment, in-flight and ancillary amenities, on-time performance, flight completion
ratios, and baggage handling will strengthen customer loyalty and attract new customers. We proactively aim to improve our
operations to ensure further improvement in customer service.
In response to customer and other demands, we recently modified our online booking process to allow our customers to
see all available options and their prices prior to purchasing a ticket, and have initiated a campaign that illustrates our total
prices are lower, on average, than our competitors, even when options are included.
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Fleet
We fly only Airbus A320 family aircraft, which provides us significant operational and cost advantages compared to
airlines that operate multiple aircraft types. By operating a single aircraft type, we avoid the incremental costs of training crews
across multiple types. Flight crews are entirely interchangeable across all of our aircraft, and maintenance, spare parts
inventories and other operational support remains highly simplified compared to those of more complex fleets. Due to this
commonality among Airbus single-aisle aircraft, we can retain the benefits of a fleet comprised of a single type of aircraft while
still having the flexibility to match the capacity and range of the aircraft to the demands of each route.
As of December 31, 2013, we had a fleet of 54 Airbus single-aisle aircraft, consisting of 29 A319s, 23 A320s and 2
A321s and the average age of the fleet was 5.1 years. All of our existing aircraft were financed under operating leases with
expirations between 2016 and 2025.
As of December 31, 2013, firm aircraft orders consisted of 112 A320 family aircraft (37 of the existing A320 aircraft
model, 45 A320neos, 25 of the existing A321 model and 5 A321neos) with Airbus and 5 direct operating leases for A320neos
with a third-party lessor. As of December 31, 2013, spare engine orders consisted of six V2500 SelectOne engines with IAE
and nine PurePower PW 1100G-JM engines with Pratt & Whitney. Aircraft are scheduled for delivery from 2014 through 2021
and spare engines are scheduled for delivery from 2014 through 2024. The firm aircraft orders provide for capacity growth as
well as the flexibility to replace all or some of the 54 aircraft in our present fleet. We may elect to supplement these deliveries
by additional acquisitions from the manufacturer or in the open market if demand conditions merit.
Consistent with our ULCC business model, each of our aircraft is configured with a high density seating configuration,
which helps us maintain a lower unit cost and pass savings to our customers. Our A319s accommodate 145 passengers
(compared to 114 or 128 on United, 124 on US Airways and 128 on American Airlines), our A320s accommodate 178
passengers (compared to 138 or 150 on United, 150 on US Airways and 150 on JetBlue) and our A321s accommodate 218
passengers (compared to 183 or 187 on US Airways, 102 on American Airlines and 159 or 190 on JetBlue).
Maintenance and Repairs
We have an FAA mandated and approved maintenance program, which is administered by our technical services
department. Our maintenance technicians undergo extensive initial and ongoing training to ensure the safety of our aircraft.
Aircraft maintenance and repair consists of routine and non-routine maintenance, and work performed is divided into
three general categories: line maintenance, heavy maintenance and component service. Line maintenance consists of routine
daily and weekly scheduled maintenance checks on our aircraft, including pre-flight, daily, weekly and overnight checks, and
any diagnostics and routine repairs and any unscheduled items on an as needed basis. Line maintenance events are currently
serviced by in-house mechanics supplemented by contract labor and are primarily completed at airports we currently serve.
Heavy airframe maintenance checks consist of a series of more complex tasks that can take from one to four weeks to
accomplish and typically are required approximately every 20 months. Heavy engine maintenance is performed approximately
every four to six years and includes a more complex scope of work. Due to our relatively small fleet size and projected fleet
growth, we believe outsourcing all of our heavy maintenance activity, such as engine servicing, major part repair and
component service repairs is more economical. Outsourcing eliminates the substantial initial capital requirements inherent in
heavy aircraft maintenance. We have entered into a long-term flight hour agreement for our current fleet with IAE for our
engine overhaul services and Lufthansa Technik on an hour-by-hour basis for component services. We outsource our heavy
airframe maintenance to FAA-qualified maintenance providers.
Our recent maintenance expenses have been lower than what we expect to incur in the future because of the relatively
young age of our aircraft fleet. Our maintenance costs are expected to increase as the scope of repairs increases with the
increasing age of our fleet. As our aircraft age, scheduled scope of work and frequency of unscheduled maintenance events is
likely to increase like any mature fleet. Our aircraft utilization rate could decrease with the increase in aircraft maintenance.
Employees
Our business is labor intensive, with labor costs representing approximately 19.1%, 19.1% and 19.6% of our total
operating costs for 2013, 2012 and 2011, respectively. As of December 31, 2013, we had 869 pilots, 1,248 flight attendants, 25
flight dispatchers, 346 mechanics, 791 airport agents/other and 340 employees in administrative roles for a total of 3,619
employees. Approximately 59% of our employees were represented by labor unions under three different collective-bargaining
agreements. On an average full-time equivalent basis, for the full year 2013, we had 3,224 employees, compared to 2,767 in
2012.
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FAA regulations require pilots to have commercial licenses with specific ratings for the aircraft to be flown, and to be
medically certified as physically fit to fly. FAA and medical certifications are subject to periodic renewal requirements
including recurrent training and recent flying experience. Mechanics, quality-control inspectors and flight dispatchers must be
certificated and qualified for specific aircraft. Flight attendants must have initial and periodic competency training and
qualification. Training programs are subject to approval and monitoring by the FAA. Management personnel directly involved
in the supervision of flight operations, training, maintenance and aircraft inspection must also meet experience standards
prescribed by FAA regulations. All safety-sensitive employees are subject to pre-employment, random and post-accident drug
testing.
The Railway Labor Act, or RLA, governs our relations with labor organizations. Under the RLA, the collective
bargaining agreements generally do not expire, but instead become amendable as of a stated date. If either party wishes to
modify the terms of any such agreement, they must notify the other party in the manner agreed to by the parties. Under the
RLA, after receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may
request the National Mediation Board, or NMB, to appoint a federal mediator. The RLA prescribes no set timetable for the
direct negotiation and mediation process. It is not unusual for those processes to last for many months, and even for a few
years. If no agreement is reached in mediation, the NMB in its discretion may declare at some time that an impasse exists, and
if an impasse is declared, the NMB proffers binding arbitration to the parties. Either party may decline to submit to arbitration.
If arbitration is rejected by either party, a 30-day “cooling off” period commences. During that period (or after), a Presidential
Emergency Board, or PEB, may be established, which examines the parties’ positions and recommends a solution. The PEB
process lasts for 30 days and is followed by another “cooling off” period of 30 days. At the end of a “cooling off” period, unless
an agreement is reached or action is taken by Congress, the labor organization and the airline each may resort to “self-help,”
including, for the labor organization, a strike or other labor action, and for the airline, the imposition of any or all of its
proposed amendments and the hiring of new employees to replace any striking workers. Congress and the President have the
authority to prevent “self-help” by enacting legislation that, among other things, imposes a settlement on the parties. The table
below sets forth our employee groups and status of the collective bargaining agreements.
Employee Groups
Pilots
Flight Attendants
Dispatchers
Representative
Air Line Pilots Association, International (ALPA)
Association of Flight Attendants (AFA-CWA)
Transport Workers Union (TWU)
Amendable Date
August 2015
August 2007
August 2018
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-CWA and the NMB with a goal of reaching a mutually beneficial agreement.
We focus on hiring highly productive employees and, where feasible, designing systems and processes around
automation and outsourcing in order to maintain our low cost base.
Safety and Security
We are committed to the safety and security of our passengers and employees. We strive to comply with or exceed health
and safety regulation standards. In pursuing these goals, we maintain an active aviation safety program and all of our personnel
are expected to participate in the program and take an active role in the identification, reduction and elimination of hazards.
Our ongoing focus on safety relies on training our employees to proper standards and providing them with the tools and
equipment they require so they can perform their job functions in a safe and efficient manner. Safety in the workplace targets
several areas of our operation including: flight operations, maintenance, in-flight, dispatch and station operations. The
Transportation Security Administration, or TSA, is charged with aviation security for both airlines and airports. We maintain
active, open lines of communication with the TSA at all of our locations to ensure proper standards for security of our
personnel, customers, equipment and facilities are exercised throughout the operation.
Insurance
We maintain insurance policies we believe are customary in the airline industry and as required by the DOT. The policies
principally provide liability coverage for public and passenger injury; damage to property; loss of or damage to flight
equipment; fire and extended coverage; directors’ and officers’ liability; advertiser and media liability; cyber risk liability;
fiduciary; and workers’ compensation and employer’s liability. We have obtained third-party war risk (terrorism) insurance
through a special program administered by the FAA. Should the government discontinue this coverage, obtaining comparable
9
coverage from commercial underwriters could result in a change in premiums and more restrictive terms, if it is available at all.
Although we currently believe our insurance coverage is adequate, there can be no assurance that the amount of such coverage
will not be changed or that we will not be forced to bear substantial losses from accidents.
Management Information Systems
We have continued our commitment to technology improvements to support our ongoing operations and initiatives.
During 2013, we completed the integration of a new SAP Enterprise Resource Planning application, which replaced our general
ledger, accounts payable, accounts receivable, cash management and fixed asset systems. The conversion was designed to
improve our key business processes by implementing an integrated tool to increase efficiency, consistency, data accuracy and
cost effectiveness.
Foreign Ownership
Under DOT regulations and federal law, we must be controlled by U.S. citizens. In order to qualify, at least 75% of our
stock must be voted by U.S. citizens, and our president and at least two-thirds of our board of directors and senior management
must be U.S. citizens.
We believe we are currently in compliance with such foreign ownership rules.
Government Regulation
Operational Regulation
The airline industry is heavily regulated, especially by the federal government. Two of the primary regulatory authorities
overseeing air transportation in the United States are the DOT and the FAA. The DOT has jurisdiction over economic issues
affecting air transportation, such as competition, route authorizations, advertising and sales practices, baggage liability and
disabled passenger transportation, among other areas, several of which were included in rules that became effective in 2011 and
2012 relating to, among other things, how airlines handle interactions with passengers through advertising, the reservation
process, at the airport and on board the aircraft. The DOT has extended the effective date for certain of these rules. Additional
consumer and disabled passenger rules may be proposed in 2014. See “Risk Factors—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.”
The DOT has authority to issue certificates of public convenience and necessity required for airlines to provide air
transportation. We hold a DOT certificate of public convenience and necessity authorizing us to engage in scheduled air
transportation of passengers, property and mail within the United States, its territories and possessions and between the United
States and all countries that maintain a liberal aviation trade relationship with the United States (known as “open skies”
countries). We also hold DOT certificates to engage in air transportation to certain other countries with more restrictive aviation
policies.
The FAA is responsible for regulating and overseeing matters relating to air carrier flight operations, including airline
operating certificates, aircraft certification and maintenance and other matters affecting air safety. The FAA requires each
commercial airline to obtain and hold an FAA air carrier certificate. This certificate, in combination with operations
specifications issued to the airline by the FAA, authorizes the airline to operate at specific airports using aircraft approved by
the FAA. As of December 31, 2013, we had FAA airworthiness certificates for all of our aircraft, we had obtained the necessary
FAA authority to fly to all of the cities we currently serve, and all of our aircraft had been certified for overwater operations.
The FAA recently issued its final regulations governing pilot rest periods and work hours for all airlines certificated under Part
121 of the Federal Aviation Regulations. The rule, known as FAR 117 and which became effective on January 4, 2014, impacts
the required amount and timing of rest periods for pilots between work assignments, and modifies duty and rest requirements
based on the time of day, number of scheduled segments, flight types, time zones and other factors. In addition, this will lead to
increased pilot costs as we will be required to hire more pilots as a result of FAR 117. We believe we hold all necessary
operating and airworthiness authorizations, certificates and licenses and are operating in compliance with applicable DOT and
FAA regulations, interpretations and policies.
International Regulation
All international service is subject to the regulatory requirements of the foreign government involved. We currently
operate international service to Aruba, the Bahamas, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala,
Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Peru and St. Maarten, as well as Puerto Rico and the U.S. Virgin
Islands. If we decide to increase our routes to additional international destinations, we will be required to obtain necessary
10
authority from the DOT and the applicable foreign government. We are also required to comply with overfly regulations in
countries that lay along our routes but which we do not serve.
International service is also subject to Customs and Border Protection, or CBP, immigration and agriculture requirements
and the requirements of equivalent foreign governmental agencies. Like other airlines flying international routes, from time to
time we may be subject to civil fines and penalties imposed by CBP if unmanifested or illegal cargo, such as illegal narcotics, is
found on our aircraft. These fines and penalties, which in the case of narcotics are based upon the retail value of the seizure,
may be substantial. We have implemented a comprehensive security program at our airports to reduce the risk of illegal cargo
being placed on our aircraft, and we seek to cooperate actively with CBP and other U.S. and foreign law enforcement agencies
in investigating incidents or attempts to introduce illegal cargo.
Security Regulation
The TSA was created in 2001 with the responsibility and authority to oversee the implementation, and ensure the
adequacy, of security measures at airports and other transportation facilities. Funding for passenger security is provided in part
by a per enplanement ticket tax (passenger security fee) of $2.50 per passenger flight segment, subject to a $5 per one-way trip
cap. Effective July 1, 2014, the security fee will be set at a flat rate of $5.60 each way. The TSA was granted authority to
impose additional fees on air carriers if necessary to cover additional federal aviation security costs. Pursuant to its authority,
the TSA may revise the way it assesses this fee, which could result in increased costs for passengers and us. We cannot forecast
what additional security and safety requirements may be imposed in the future or the costs or revenue impact that would be
associated with complying with such requirements. The TSA also assesses an Aviation Security Infrastructure Fee, or ASIF, on
each airline. Our ASIF fee is approximately $1.6 million per year.
Environmental Regulation
We are subject to various federal, state and local laws and regulations relating to the protection of the environment and
affecting matters such as aircraft engine emissions, aircraft noise emissions and the discharge or disposal of materials and
chemicals, which laws and regulations are administered by numerous state and federal agencies. The Environmental Protection
Agency, or EPA, regulates operations, including air carrier operations, which affect the quality of air in the United States. We
believe the aircraft in our fleet meet all emission standards issued by the EPA. Concern about climate change and greenhouse
gases may result in additional regulation or taxation of aircraft emissions in the United States and abroad.
Federal law recognizes the right of airport operators with special noise problems to implement local noise abatement
procedures so long as those procedures do not interfere unreasonably with interstate and foreign commerce and the national air
transportation system. These restrictions can include limiting nighttime operations, directing specific aircraft operational
procedures during takeoff and initial climb, and limiting the overall number of flights at an airport.
Other Regulations
We are subject to certain provisions of the Communications Act of 1934, as amended, and are required to obtain an
aeronautical radio license from the Federal Communications Commission, or FCC. To the extent we are subject to FCC
requirements, we will take all necessary steps to comply with those requirements. We are also subject to state and local laws
and regulations at locations where we operate and the regulations of various local authorities that operate the airports we serve.
Future Regulations
The U.S. and foreign governments may consider and adopt new laws, regulations, interpretations and policies regarding a
wide variety of matters that could directly or indirectly affect our results of operations. We cannot predict what laws,
regulations, interpretations and policies might be considered in the future, nor can we judge what impact, if any, the
implementation of any of these proposals or changes might have on our business.
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ITEM 1A.
RISK FACTORS
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking
statements may include words such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,”
“potential” and similar expressions indicating future results or expectations, as they relate to our company, our business and
our management, are intended to identify forward-looking statements. Forward-looking statements should not be read as a
guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such
performance or results will be achieved, if at all. Forward-looking statements are based on information available at the time
those statements are made and/or management's good faith belief as of that time with respect to future events, and are subject
to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or
suggested by the forward-looking statements. Therefore, actual results may differ materially from what is expressed in or
indicated by our forward-looking statements or from historical experience or our present expectations. Known material risk
factors that could cause these differences are set forth below under "Risk Factors." Additional risks or uncertainties (i) that are
not currently known to us, (ii) that we currently deem to be immaterial, or (iii) that could apply to any company, could also
materially adversely affect our business, financial condition, or future results. You should carefully consider the risks described
below and the other information in this report. If any of the following risks materialize, our business could be materially
harmed, and our financial condition and results of operations could be materially and adversely affected. References in this
report to “Spirit,” “we,” “us,” “our,” or the “Company” shall mean Spirit Airlines, Inc., unless the context indicates
otherwise.
We operate in an extremely competitive industry.
Risks Related to Our Industry
We face significant competition with respect to routes, fares and services. Within the airline industry, we compete with
traditional network airlines, other low-cost airlines and regional airlines on many of our routes. Competition in most of the
destinations we presently serve is intense, due to the large number of carriers in those markets. Furthermore, other airlines may
begin service or increase existing service on routes where we currently face no or little competition. Substantially all of our
competitors are larger and have significantly greater financial and other resources than we do.
The airline industry is particularly susceptible to price discounting because once a flight is scheduled, airlines incur only
nominal additional costs to provide service to passengers occupying otherwise unsold seats. Increased fare or other price
competition could adversely affect our operations. Moreover, many other airlines have begun to unbundle services by charging
separately for services such as baggage and advance seat selection. This unbundling and other cost reducing measures could
enable competitor airlines to reduce fares on routes that we serve.
In addition, airlines increase or decrease capacity in markets based on perceived profitability. Decisions by our
competitors that increase overall industry capacity, or capacity dedicated to a particular domestic or foreign region, market or
route, could have a material adverse impact on our business. If a traditional network airline were to successfully develop a low-
cost structure or if we were to experience increased competition from other low-cost carriers, our business could be materially
adversely affected.
All of the domestic traditional network airlines have on one or more occasions initiated bankruptcy proceedings in
attempts to restructure their debt and other obligations and reduce their operating costs. On November 29, 2011, AMR
Corporation and substantially all of its subsidiaries, including American Airlines, Inc., filed a petition for relief under Chapter
11 of the U.S. Bankruptcy Code. In December 2013, AMR Corporation and US Airways Group, Inc. completed a merger and
formally became American Airlines Group Inc. We presently compete with American Airlines (including US Airways, which
merged with American in December 2013 but continues to operate as a separate carrier) in a majority of our markets. We
cannot predict the extent to which this merger will result in a more effective competitor with us.
Our growth and the success of our ULCC business model could stimulate competition in our markets through our
competitors’ development of their own ULCC strategies or new market entrants. Any such competitor may have greater
financial resources and access to cheaper sources of capital than we do, which could enable them to operate their business with
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a lower cost structure than we can. If these competitors adopt and successfully execute a ULCC business model, we could be
materially adversely affected.
There has been significant consolidation within the airline industry including, for example, the combinations of American
Airlines and US Airways, Delta Air Lines and Northwest Airlines, United Airlines and Continental Airlines and Southwest
Airlines and AirTran Airways. In the future, there may be additional consolidation in our industry. Any business combination
could significantly alter industry conditions and competition within the airline industry and could cause fares of our
competitors to be reduced.
The extremely competitive nature of the airline industry could prevent us from attaining the level of passenger traffic or
maintaining the level of fares or revenues related to ancillary services required to sustain profitable operations in new and
existing markets and could impede our growth strategy, which could harm our operating results. Due to our relatively small
size, we are susceptible to a fare war or other competitive activities in one or more of the markets we serve, which could have a
material adverse effect on our business, results of operations and financial condition.
Our low cost structure is one of our primary competitive advantages, and many factors could affect our ability to
control our costs.
Our low cost structure is one of our primary competitive advantages. However, we have limited control over many of our
costs. For example, we have limited control over the price and availability of aircraft fuel, aviation insurance, airport and
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 40.2%, 41.2% and 41.9% of our total
operating expenses for 2013, 2012 and 2011, 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 derivative activity may not reduce our fuel costs.
From time to time, we enter into fuel derivative contracts in order to mitigate the risk to our business from future
volatility in fuel prices. Our derivatives generally consist of United States Gulf Coast jet fuel swaps (jet fuel swaps) and United
States Gulf Coast jet fuel options (jet fuel options). Both jet fuel swaps and jet fuel options are used at times to protect the
refining risk between the price of crude oil and the price of refined jet fuel, and to manage the risk of increasing fuel prices. As
of December 31, 2013, we had no outstanding fuel derivative contracts. 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. 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.”
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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 2013, 2012 and 2011, we generated non-ticket revenues of $668.4 million, $535.6 million and $381.5 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 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 effect on our
business. The U.S. Congress and Federal administrative agencies have investigated the increasingly common airline industry
practice of unbundling the pricing of certain products and services. If new taxes are imposed on non-ticket revenues, or if
other laws or regulations are adopted that make unbundling of airline products and services impermissible, or more
cumbersome or expensive, our business, results of operations and financial condition could be harmed. Congressional and other
government scrutiny may also change industry practice or public willingness to pay for ancillary services. See also “—We are
subject to extensive regulation by the Federal Aviation Administration, the Department of Transportation and other U.S. and
foreign governmental agencies, compliance with which could cause us to incur increased costs and adversely affect our
business and financial results.”
The airline industry is particularly sensitive to changes in economic conditions. Continued adverse economic conditions
or a reoccurrence of such conditions would negatively impact our business, results of operations and financial condition.
Our business and the airline industry in general are affected by many changing economic conditions beyond our control,
including, among others:
•
•
•
•
•
changes and volatility in general economic conditions, including the severity and duration of any downturn in the U.S.
or global economy and financial markets;
changes in consumer preferences, perceptions, spending patterns or demographic trends, including any increased
preference for higher-fare carriers offering higher amenity levels, and reduced preferences for low-fare carriers
offering more basic transportation, during better economic times;
higher levels of unemployment and varying levels of disposable or discretionary income;
depressed housing and stock market prices; and
lower levels of actual or perceived consumer confidence.
These factors can adversely affect, and from time to time have adversely affected, our results of operations, our ability to
obtain financing on acceptable terms and our liquidity. Unfavorable general economic conditions, such as higher
unemployment rates, a constrained credit market, housing-related pressures and increased focus on reducing business operating
costs can reduce spending for price-sensitive leisure and business travel. For many travelers, in particular the price-sensitive
travelers we serve, air transportation is a discretionary purchase that they may reduce or eliminate from their spending in
difficult economic times. The overall decrease in demand for air transportation in the United States in 2008 and 2009 resulting
from record high fuel prices and the economic recession required us to take significant steps to reduce our capacity, which
reduced our revenues. Unfavorable economic conditions could also affect our ability to raise prices to counteract increased fuel,
labor or other costs, resulting in a material adverse effect on our business, results of operations and financial condition.
The airline industry faces ongoing security concerns and related cost burdens, further threatened or actual terrorist
attacks or other hostilities that could significantly harm our industry and our business.
The terrorist attacks of September 11, 2001 and their aftermath negatively affected the airline industry. The primary
effects experienced by the airline industry included:
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•
•
•
•
•
substantial loss of revenue and flight disruption costs caused by the grounding of all commercial air traffic in or
headed to the United States by the Federal Aviation Administration, or FAA, for three days after the terrorist attacks;
increased security and insurance costs;
increased concerns about future terrorist attacks;
airport shutdowns and flight cancellations and delays due to security breaches and perceived safety threats; and
significantly reduced passenger traffic and yields due to the subsequent dramatic drop in demand for air travel.
Since September 11, 2001, the Department of Homeland Security and the Transportation Security Administration, or
TSA, have implemented numerous security measures that restrict airline operations and increase costs, and are likely to
implement additional measures in the future. For example, following the widely publicized attempt of an alleged terrorist to
detonate plastic explosives hidden underneath his clothes on a Northwest Airlines flight on Christmas Day in 2009, passengers
became subject to enhanced random screening, which may include pat-downs, explosive detection testing or body scans.
Enhanced passenger screening, increased regulation governing carry-on baggage and other similar restrictions on passenger
travel may further increase passenger inconvenience and reduce the demand for air travel. In addition, increased or enhanced
security measures have tended to result in higher governmental fees imposed on airlines, resulting in higher operating costs for
airlines, which we may not be able to pass on to consumers in the form of higher prices. Any future terrorist attacks or
attempted attacks, even if not made directly on the airline industry, or the fear of such attacks or other hostilities (including
elevated national threat warnings or selective cancellation or redirection of flights due to terror threats) would likely have a
material adverse effect on our business, results of operations and financial condition and on the airline industry in general.
Airlines are often affected by factors beyond their control including: air traffic congestion at airports; air traffic control
inefficiencies; adverse weather conditions, such as hurricanes or blizzards; increased security measures; new travel
related taxes or the outbreak of disease, any of which could harm our business, operating results and financial
condition.
Like other airlines, our business is affected by factors beyond our control, including air traffic congestion at airports, air
traffic control inefficiencies, adverse weather conditions, increased security measures, new travel related taxes and the outbreak
of disease. Factors that cause flight delays frustrate passengers and increase costs, which in turn could adversely affect
profitability. The federal government singularly controls all U.S. airspace, and airlines are completely dependent on the FAA to
operate that airspace in a safe, efficient and affordable manner. The air traffic control system, which is operated by the FAA,
faces challenges in managing the growing demand for U.S. air travel. U.S. and foreign air-traffic controllers often rely on
outdated technologies that routinely overwhelm the system and compel airlines to fly inefficient, indirect routes resulting in
delays. Adverse weather conditions and natural disasters, such as hurricanes affecting southern Florida and the Caribbean as
well as other areas of the eastern United States (such as Hurricane Sandy in October 2012), winter snowstorms or the January
2010 earthquakes in Port-au-Prince, Haiti, can cause flight cancellations or significant delays. Cancellations or delays due to
adverse weather conditions or natural disasters, air traffic control problems or inefficiencies, breaches in security or other
factors could harm our business, results of operations and financial condition. Similarly, outbreaks of pandemic or contagious
diseases, such as avian flu, severe acute respiratory syndrome (SARS) and H1N1 (swine) flu, could result in significant
decreases in passenger traffic and the imposition of government restrictions in service and could have a material adverse impact
on the airline industry. Increased travel taxes, such as those provided in the Travel Promotion Act, enacted March 10, 2010,
which charges visitors from certain countries a $10 fee every two years to travel into the United States to subsidize certain
travel promotion efforts, could also result in decreases in passenger traffic. Any general reduction in airline passenger traffic
could have a material adverse effect on our business, results of operations and financial condition.
Restrictions on or litigation regarding third-party membership discount programs could harm our business, operating
results and financial condition.
We generate a relatively small but growing portion of our revenue from order referral fees, revenue share and other fees
paid to us by third-party merchants for customer click-throughs, distribution of third-party promotional materials and referrals
arising from products and services of the third-party merchants that we offer to our customers on our website. Some of these
third-party referral-based offers are for memberships in discount programs or similar promotions made to customers who have
purchased products from us, and for which we receive a payment from the third-party merchants for every customer that
accepts the promotion. Certain of these third-party membership discount programs have been the subject of consumer
complaints, litigation and regulatory actions alleging that the enrollment and billing practices involved in the programs violate
various consumer protection laws or are otherwise deceptive. Any private or governmental claim or action that may be brought
against us in the future relating to these third-party membership programs could result in our being obligated to pay damages or
incurring legal fees in defending claims. These damages and fees could be disproportionate to the revenues we generate
15
through these relationships. In addition, customer dissatisfaction or a significant reduction in or termination of the third-party
membership discount offers on our website as a result of these claims could have a negative impact on our brand, and have a
material adverse effect on our business, results of operations and financial condition.
We face competition from air travel substitutes.
In addition to airline competition from traditional network airlines, other low-cost airlines and regional airlines, we also
face competition from air travel substitutes. On our domestic routes, we face competition from some other transportation
alternatives, such as bus, train or automobile. In addition, technology advancements may limit the demand for air travel. For
example, video teleconferencing and other methods of electronic communication may reduce the need for in-person
communication and add a new dimension of competition to the industry as travelers seek lower-cost substitutes for air travel. If
we are unable to adjust rapidly in the event the basis of competition in our markets changes, it could have a material adverse
effect on our business, results of operations and financial condition.
Risks Related to Our Business
Increased labor costs, union disputes, employee strikes and other labor-related disruption may adversely affect our
business, results of operations and financial conditions.
Our business is labor intensive, with labor costs representing approximately 19.1%, 19.1% and 19.6% of our total
operating costs for 2013, 2012 and 2011, respectively. As of December 31, 2013, approximately 59% of our workforce was
represented by labor unions and thereby covered by collective bargaining agreements. We cannot assure you that our labor
costs going forward will remain competitive because in the future our labor agreements may be amended or become amendable
and new agreements could have terms with higher labor costs; one or more of our competitors may significantly reduce their
labor costs, thereby reducing or eliminating our comparative advantages as to one or more of such competitors; or our labor
costs may increase in connection with our growth. We may also become subject to additional collective bargaining agreements
in the future as non-unionized workers may unionize.
Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act, or the RLA.
Under the RLA, collective bargaining agreements 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 National Mediation Board, or the NMB. This
process continues until either the parties have reached agreement on a new collective bargaining agreement, 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 lockouts and strikes.
Our flight operations were shut down due to a strike by our pilots beginning on June 12, 2010 and lasting until we and the
union representing our pilots reached a tentative agreement for a new contract. Under a Return to Work Agreement, we began
to resume flights on June 17, 2010 and resumed our full flight schedule on June 18, 2010. On August 1, 2010, we and the
pilots’ union executed a five-year collective bargaining agreement. This shutdown had a material adverse effect on our results
of operations for 2010.
We entered into a five-year agreement with our flight dispatchers in August 2013. 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 not to
ratify the tentative agreement. We will continue to work together with the AFA-CWA and the NMB with a goal of reaching a
mutually beneficial agreement. If we are unable to reach agreement with any of our unionized work groups in current or future
negotiations regarding the terms of their collective bargaining agreements, we may be subject to work interruptions or
stoppages. Any such action or other labor dispute with unionized employees could disrupt our operations, reduce our
profitability, or interfere with the ability of our management to focus on executing our business strategies.
We have a significant amount of aircraft-related fixed obligations that could impair our liquidity and thereby harm our
business, results of operations and financial condition.
The airline business is capital intensive and, as a result, many airline companies are highly leveraged. All of our aircraft
are leased, and in 2013 and 2012 we paid the lessors rent of $166.3 million and $140.8 million, respectively, and maintenance
deposits net of reimbursements of $24.1 million and $31.6 million, respectively. As of December 31, 2013, we had future
operating lease obligations of approximately $1.4 billion. In addition, we have significant obligations for aircraft and spare
engines that that we have ordered from Airbus, International Aero Engines AG, or IAE, and Pratt and Whitney for delivery over
the next several years. Our ability to pay the fixed costs associated with our contractual obligations will depend on our
operating performance, cash flow and our ability to secure adequate financing, which will in turn depend on, among other
16
things, the success of our current business strategy, whether fuel prices continue at current price levels and/or further increase
or decrease, further weakening or improving in the U.S. economy, as well as general economic and political conditions and
other factors that are, to some extent, beyond our control. The amount of our aircraft related fixed obligations could have a
material adverse effect on our business, results of operations and financial condition and could:
•
•
•
require a substantial portion of cash flow from operations for operating lease and maintenance deposit payments,
thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general
corporate purposes;
limit our ability to make required pre-delivery deposit payment, or PDPs, including those payable to our aircraft and
engine manufacturers for our aircraft and spare engines on order;
limit our ability to obtain additional financing to support our expansion plans and for working capital and other
purposes on acceptable terms or at all;
• make it more difficult for us to pay our other obligations as they become due during adverse general economic and
market industry conditions because any related decrease in revenues could cause us to not have sufficient cash flows
from operations to make our scheduled payments;
•
•
reduce our flexibility in planning for, or reacting to, changes in our business and the airline industry and, consequently,
place us at a competitive disadvantage to our competitors with less fixed payment obligations; and
cause us to lose access to one or more aircraft and forfeit our rent deposits if we are unable to make our required
aircraft lease rental payments and our lessors exercise their remedies under the lease agreement including cross default
provisions in certain of our leases.
A failure to pay our operating lease and other fixed cost obligations or a breach of our contractual obligations could result
in a variety of adverse consequences, including the exercise of remedies by our creditors and lessors. In such a situation, it is
unlikely that we would be able to cure our breach, fulfill our obligations, make required lease payments or otherwise cover our
fixed costs, which would have a material adverse effect on our business, results of operations and financial condition.
We are highly dependent upon our cash balances and operating cash flows.
As of December 31, 2013, we had access to lines of credit from four counterparties to our jet fuel derivatives and our
purchase credit card issuer aggregating $53.1 million. These credit facilities are not adequate to finance our operations, and we
will continue to be dependent on our operating cash flows and cash balances to fund our operations and to make scheduled
payments on our aircraft related fixed obligations. Although our credit card processors currently do not have a right to hold
back credit card receipts to cover repayment to customers, if we fail to maintain certain liquidity and other financial covenants,
their rights to holdback would be reinstated, which would result in a reduction of unrestricted cash that could be material. In
addition, we are required by some of our aircraft lessors to fund reserves in cash in advance for scheduled maintenance, and a
portion of our cash is therefore unavailable until after we have completed the scheduled maintenance in accordance with the
terms of the operating leases. Based on the age of our fleet and our growth strategy, these maintenance deposits will increase
over the next few years before we receive any significant reimbursement for completed maintenance. If we fail to generate
sufficient funds from operations to meet our operating cash requirements or do not obtain a line of credit, other borrowing
facility or equity financing, we could default on our operating lease and fixed obligations. Our inability to meet our obligations
as they become due would have a material adverse effect on our business, results of operations and financial condition.
A deterioration in worldwide economic conditions may adversely affect our business, operating results, financial
condition, liquidity and ability to obtain financing or access capital markets.
The general worldwide economy has in the past experienced downturns due to the effects of the European debt crisis,
unfavorable U.S. economic conditions and slowing growth in certain Asian economies, including general credit market crises,
collateral effects on the finance and banking industries, concerns about inflation, slower economic activity, decreased consumer
confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. The airline
industry is particularly sensitive to changes in economic conditions, which affect customer travel patterns and related revenues.
A weak economy could reduce our bookings, and a reduction in discretionary spending could also decrease amounts our
customers are willing to pay. Unfavorable economic conditions can also impact the ability of airlines to raise fares to help
offset increased fuel, labor and other costs. We cannot accurately predict the effect or duration of any economic slowdown or
the timing or strength of a subsequent economic recovery.
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In addition, we have significant obligations for aircraft and spare engines that we have ordered from Airbus. IAE and
Pratt and Whitney over the next several years, and we will need to finance these purchases. We may not have sufficient
liquidity or creditworthiness to fund the purchase of aircraft and engines, including payment of PDPs, or for other working
capital. Factors that affect our ability to raise financing or access the capital markets include market conditions in the airline
industry, economic conditions, the perceived residual value of aircraft and related assets, the level and volatility of our earnings,
our relative competitive position in the markets in which we operate, our ability to retain key personnel, our operating cash
flows and legal and regulatory developments. Regardless of our creditworthiness, at times the market for aircraft purchase or
lease financing has been very constrained due to such factors as the general state of the capital markets and the financial
position of the major providers of commercial aircraft financing.
Our liquidity and general level of capital resources impact our ability to hedge our fuel requirements.
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, 2013, we had no outstanding fuel derivative contracts. While we intend to hedge a portion of our future fuel
requirements, there can be no assurance that, at any given time, we will be able to enter into fuel hedge contracts. In the past,
we have not had and in the future we may not have sufficient creditworthiness or liquidity to post the collateral necessary 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 any particular level of 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 knowing our fuel costs at the
time the tickets are flown. Our ability to pass on any significant increases in aircraft fuel costs through fare increases could also
be limited.
We rely on maintaining a high daily aircraft utilization rate to implement our low cost structure, which makes us
especially vulnerable to flight delays or cancellations or aircraft unavailability.
We maintain a high daily aircraft utilization rate. Our average daily aircraft utilization was 12.7 hours, 12.8 hours and
12.7 hours for 2013, 2012 and 2011, respectively. Aircraft utilization is the average amount of time per day that our aircraft
spend carrying passengers. Our revenue per aircraft can be increased by high daily aircraft utilization, which is achieved in part
by reducing turnaround times at airports so we can fly more hours on average in a day. Aircraft utilization is reduced by delays
and cancellations from various factors, many of which are beyond our control, including air traffic congestion at airports or
other air traffic control problems, adverse weather conditions, increased security measures or breaches in security, international
or domestic conflicts, terrorist activity, or other changes in business conditions. A significant portion of our operations are
concentrated in markets such as South Florida, the Caribbean, Latin America and the Northeast and northern Midwest regions
of the United States, which are particularly vulnerable to weather, airport traffic constraints and other delays. In addition,
pulling aircraft out of service for unscheduled and scheduled maintenance, which will increase as our fleet ages, may materially
reduce our average fleet utilization and require that we seek short-term substitute capacity at increased costs. Due to the
relatively small size of our fleet and high daily aircraft utilization rate, the unavailability of one or more aircraft and resulting
reduced capacity could have a material adverse effect on our business, results of operations and financial condition.
Our maintenance costs will increase as our fleet ages, and we will periodically incur substantial maintenance costs due
to the maintenance schedules of our aircraft fleet.
As of December 31, 2013, the average age of our aircraft was approximately 5.1 years. Our relatively new aircraft require
less maintenance now than they will in the future. Our fleet will require more maintenance as it ages and our maintenance and
repair expenses for each of our aircraft will be incurred at approximately the same intervals. We expect 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 the last few years of the leases as compared to the costs
in earlier periods. Moreover, because our current fleet was acquired over a relatively short period, significant maintenance that
is scheduled on each of these planes is occuring at roughly the same time, meaning we will incur our most expensive scheduled
maintenance obligations, known as heavy maintenance, across our present fleet around the same time. These more significant
maintenance activities result in out-of-service periods during which our aircraft are dedicated to maintenance activities and
unavailable to fly revenue service. In addition, the terms of some of our lease agreements require us to pay supplemental rent,
also known as maintenance reserves, to the lessor in advance of the performance of major maintenance, resulting in our
recording significant prepaid deposits on our balance sheet. We expect scheduled and unscheduled aircraft maintenance
expenses to increase as a percentage of our revenue over the next several years. Any significant increase in maintenance and
repair expenses would have a material adverse effect on our business, results of operations and financial condition. Please see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and
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Estimates—Aircraft Maintenance, Materials and Repair Costs and Heavy Maintenance Amortization” and “—Maintenance
Reserves.”
Our lack of marketing alliances could harm our business.
Many airlines, including the domestic traditional network airlines (American, Delta and United) have marketing alliances
with other airlines, under which they market and advertise their status as marketing alliance partners. These alliances, such as
OneWorld, SkyTeam and Star Alliance, generally provide for code-sharing, frequent flier program reciprocity, coordinated
scheduling of flights to permit convenient connections and other joint marketing activities. Such arrangements permit an airline
to market flights operated by other alliance members as its own. This increases the destinations, connections and frequencies
offered by the airline and provides an opportunity to increase traffic on that airline’s segment of flights connecting with alliance
partners. We currently do not have any alliances with U.S. or foreign airlines. Our lack of marketing alliances puts us at a
competitive disadvantage to traditional network carriers who are able to attract passengers through more widespread alliances,
particularly on international routes, and that disadvantage may result in a material adverse effect on our passenger traffic,
business, results of operations and financial condition.
We are subject to extensive and increasing regulation by the Federal Aviation Administration, the Department of
Transportation and other U.S. and foreign governmental agencies, compliance with which could cause us to incur
increased costs and adversely affect our business and financial results.
Airlines are subject to extensive and increasing regulatory and legal compliance requirements, both domestically and
internationally, that involve significant costs. In the last several years, Congress has passed laws, and the DOT, FAA and TSA
have issued regulations, relating to the operation of airlines that have required significant expenditures. We expect to continue
to incur expenses in connection with complying with government regulations. Additional laws, regulations, taxes and increased
airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or
reduce the demand for air travel. If adopted, these measures could have the effect of raising ticket prices, reducing revenue and
increasing costs. For example, the DOT finalized rules in April 2010 requiring new procedures for customer handling during
long onboard tarmac delays, as well as additional reporting requirements for airlines that could increase the cost of airline
operations or reduce revenues. The DOT has been aggressively investigating alleged violations of these rules. A second set of
DOT final rules, which became effective in August 2011 and January 2012, addresses, among other things, concerns about how
airlines handle interactions with passengers through advertising, the reservations process, at the airport and on board the
aircraft, including requirements for disclosure of base fares plus a set of regulatorily dictated options and limits on cancellations
and service charges for changes and cancellations. Additional consumer and disabled passenger rules may be proposed in 2014.
In addition, the FAA recently issued its final regulations governing pilot rest periods and work hours for all airlines certificated
under Part 121 of the Federal Aviation Regulations. The rule known as FAR 117 and which became effective January 4, 2014,
impacts the required amount and timing of rest periods for pilots between work assignments and modifies duty and rest
requirements based on the time of day, number of scheduled segments, flight types, time zones and other factors. Compliance
with these rules may increase our costs, while failure to remain in full compliance with these rules may subject us to fines or
other enforcement action.
We cannot assure you that compliance with these rules will not have a material adverse effect on our business.
In August 2010, the Airline Baggage Transparency and Accountability Act was introduced in the United States Senate.
This legislation, if enacted, would increase disclosure regarding fees for airline ticket sales, impose federal taxes on charges for
carry-on and checked baggage, authorize the DOT's Aviation Consumer Protection Division to oversee lost and stolen baggage
claims, and require data collection and the public release of collected data concerning airline handling of lost, damaged and
stolen luggage. In early 2011, the United States Senate passed an amendment to the FAA reauthorization bill that, if enacted,
would impose federal taxes at a rate of 7.5% on charges for carry-on baggage. If the Airline Baggage Transparency and
Accountability Act, the Senate amendment to the FAA reauthorization bill or similar legislation were to be enacted, it is
uncertain what effect it would have on our results of operations and financial condition.
We cannot assure you that these and other laws or regulations enacted in the future will not harm our business. In
addition, the TSA mandates the federalization of certain airport security procedures and imposes additional security
requirements on airports and airlines, most of which are funded by a per ticket tax on passengers and a tax on airlines. In July
2014, the TSA will implement an increased passenger security fee at a flat rate of $5.60. The ticket tax increase could
negatively impact our financial results.
Our ability to operate as an airline is dependent on our maintaining certifications issued to us by the DOT and the
FAA. The FAA has the authority to issue mandatory orders relating to, among other things, the grounding of aircraft, inspection
of aircraft, installation of new safety-related items and removal and replacement of aircraft parts that have failed or may fail in
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the future. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, our aircraft, for any
reason, could negatively affect our business and financial results. Federal law requires that air carriers operating large aircraft
be continuously “fit, willing and able” to provide the services for which they are licensed. Our “fitness” is monitored by the
DOT, which considers factors such as unfair or deceptive competition, advertising, baggage liability and disabled passenger
transportation. While the DOT has seldom revoked a carrier's certification for lack of fitness, such an occurrence would render
it impossible for us to continue operating as an airline. The DOT may also institute investigations or administrative proceedings
against airlines for violations of regulations.
International routes are regulated by treaties and related agreements between the United States and foreign
governments. Our ability to operate international routes is subject to change because the applicable arrangements between the
United States and foreign governments may be amended from time to time. Our access to new international markets may be
limited by our ability to obtain the necessary certificates to fly the international routes. In addition, our operations in foreign
countries are subject to regulation by foreign governments and our business may be affected by changes in law and future
actions taken by such governments, including granting or withdrawal of government approvals and restrictions on competitive
practices. We are subject to numerous foreign regulations based on the large number of countries outside the United States
where we currently provide service. If we are not able to comply with this complex regulatory regime, our business could be
significantly harmed. Please see “Business — Government Regulation.”
We may not be able to implement our growth strategy.
Our growth strategy includes acquiring additional aircraft, increasing the frequency of flights and size of aircraft used in
markets we currently serve, and expanding the number of markets we serve where our low cost structure would likely be
successful. Effectively implementing our growth strategy is critical for our business to achieve economies of scale and to
sustain or increase our profitability. We face numerous challenges in implementing our growth strategy, including our ability to:
• maintain profitability;
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obtain financing to acquire new aircraft;
access airports located in our targeted geographic markets where we can operate routes in a manner that is consistent
with our cost strategy;
gain access to international routes; and
access sufficient gates and other services at airports we currently serve or may seek to serve.
Our growth is dependent upon our ability to maintain a safe and secure operation and requires additional personnel,
equipment and facilities. An inability to hire and retain personnel, timely secure the required equipment and facilities in a cost-
effective manner, efficiently operate our expanded facilities or obtain the necessary regulatory approvals may adversely affect
our ability to achieve our growth strategy, which could harm our business. In addition, expansion to new markets may have
other risks due to factors specific to those markets. We may be unable to foresee all of the existing risks upon entering certain
new markets or respond adequately to these risks, and our growth strategy and our business may suffer as a result. In addition,
our competitors may reduce their fares and/or offer special promotions following our entry into a new market. We cannot assure
you that we will be able to profitably expand our existing markets or establish new markets.
Some of our target growth markets in the Caribbean and Latin America include countries with less developed economies
that may be vulnerable to unstable economic and political conditions, such as significant fluctuations in gross domestic product,
interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private
assets and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by
us and the resulting instability may adversely affect our ability to implement our growth strategy.
In 2008, in response to record high fuel prices and rapidly deteriorating economic conditions, we modified our growth
plans by terminating our leases for seven aircraft. We incurred significant expenses relating to our lease terminations, and have
incurred additional expenses to acquire new aircraft in place of those under the terminated leases as we expanded our network.
We may in the future determine to reduce further our future growth plans from previously announced levels, which may impact
our business strategy and future profitability.
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We rely heavily on technology and automated systems to operate our business and any failure of these technologies or
systems or failure by their operators could harm our business.
We are highly dependent on technology and automated systems to operate our business and achieve low operating costs.
These technologies and systems include our computerized airline reservation system, flight operations system, financial
planning, management and accounting system, telecommunications systems, website, maintenance systems and check-in
kiosks. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high
volume of traffic, maintain secure information and deliver flight information. Substantially all of our tickets are issued to
passengers as electronic tickets. We depend on our reservation system, which is hosted and maintained under a long-term
contract by a third-party service provider, to be able to issue, track and accept these electronic tickets. If our reservation system
fails or experiences interruptions, and we are unable to book seats for any period of time, we could lose a significant amount of
revenue as customers book seats on competing airlines. We have experienced short duration reservation system outages from
time to time and may experience similar outages in the future. For example, in November 2010, we experienced a significant
service outage with our third-party reservation service provider on the day before Thanksgiving, one of the industry’s busiest
travel days and in August 2013, we experienced another 13 hour outage that affected our sales and customer service response
times. We also rely on third-party service providers of our other automated systems for technical support, system maintenance
and software upgrades. If our automated systems are not functioning or if the current providers were to fail to adequately
provide technical support or timely software upgrades for any one of our key existing systems, we could experience service
disruptions, which could harm our business and result in the loss of important data, increase our expenses and decrease our
revenues. In the event that one or more of our primary technology or systems’ vendors goes into bankruptcy, ceases operations
or fails to perform as promised, replacement services may not be readily available on a timely basis, at competitive rates or at
all and any transition time to a new system may be significant.
In addition, our automated systems cannot be completely protected against events that are beyond our control, including
natural disasters, computer viruses or telecommunications failures. Substantial or sustained system failures could cause service
delays or failures and result in our customers purchasing tickets from other airlines. We have implemented security measures
and change control procedures and have disaster recovery plans; however, we cannot assure you that these measures are
adequate to prevent disruptions. Disruption in, changes to or a breach of, these systems could result in a disruption to our
business and the loss of important data. Any of the foregoing could result in a material adverse effect on our business, results of
operations and financial condition.
We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.
Our business employs systems and websites that allow for the secure storage and transmission of proprietary or
confidential information regarding our customers, employees, suppliers and others, including personal identification
information, credit card data and other confidential information. Security breaches could expose us to a risk of loss or misuse of
this information, litigation and potential liability. Although we take steps to secure our management information systems, and
although multiple auditors review and approve the security configurations and management processes of these systems,
including our computer systems, intranet and internet sites, email and other telecommunications and data networks, the security
measures we have implemented may not be effective, and our systems may be vulnerable to theft, loss, damage and interruption
from a number of potential sources and events, including unauthorized access or security breaches, natural or man-made
disasters, cyber attacks, computer viruses, power loss, or other disruptive events. We may not have the resources or technical
sophistication to anticipate or prevent rapidly evolving types of cyber attacks. Attacks may be targeted at us, our customers and
suppliers, or others who have entrusted us with information. In addition, attacks not targeted at us, but targeted solely at
suppliers, may cause disruption to our computer systems or a breach of the data that we maintain on customers, employees,
suppliers and others.
Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and
protection technologies, train employees and engage third-party experts and consultants, or costs incurred in connection with
the notifications to employees, suppliers or the general public as part of our notification obligations to the various governments
that govern our business. Advances in computer capabilities, new technological discoveries, or other developments may result
in the breach or compromise of technology used by us to protect transaction or other data. In addition, data and security
breaches can also occur as a result of non-technical issues, including breaches by us or by persons with whom we have
commercial relationships that result in the unauthorized release of personal or confidential information. Our reputation, brand
and financial condition could be adversely affected if, as a result of a significant cyber event or other security issues: our
operations are disrupted or shut down; our confidential, proprietary information is stolen or disclosed; we incur costs or are
required to pay fines in connection with stolen customer, employee or other confidential information; we must dedicate
significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other
costs.
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Our processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental
regulation.
In the processing of our customer transactions, we receive, process, transmit and store a large volume of identifiable
personal data, including financial data such as credit card information. This data is increasingly subject to legislation and
regulation, typically intended to protect the privacy of personal data that is collected, processed and transmitted. More
generally, we rely on consumer confidence in the security of our system, including our website on which we sell the majority of
our tickets. Our business, results of operations and financial condition could be adversely affected if we are unable to comply
with existing privacy obligations or legislation or regulations are expanded to require changes in our business practices.
We may not be able to maintain or grow our non-ticket revenues.
Our business strategy includes expanding our portfolio of ancillary products and services. There can be no assurance that
passengers will pay for additional ancillary products and services or that passengers will continue to choose to pay for the
ancillary products and services we currently offer. Further, regulatory initiatives could adversely affect ancillary revenue
opportunities. Failure to maintain our non-ticket revenues would have a material adverse effect on our results of operations and
financial condition. Furthermore, if we are unable to maintain and grow our non-ticket revenues, we may not be able to execute
our strategy to continue to lower base fares in order to stimulate demand for air travel. Please see “—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.”
Our inability to expand or operate reliably or efficiently out of our key airports where we maintain a large presence
could have a material adverse effect on our business, results of operations and financial condition.
We are highly dependent on markets served from airports where we maintain a large presence. Our results of operations
may be affected by actions taken by governmental or other agencies or authorities having jurisdiction over our operations at
airports, including, but not limited to:
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increases in airport rates and charges;
limitations on take-off and landing slots, airport gate capacity or other use of airport facilities;
termination of our airport use agreements, some of which can be terminated by airport authorities with little notice to
us;
increases in airport capacity that could facilitate increased competition;
international travel regulations such as customs and immigration;
increases in taxes;
changes in the law that affect the services that can be offered by airlines in particular markets and at particular
airports;
restrictions on competitive practices;
the adoption of statutes or regulations that impact customer service standards, including security standards; and
the adoption of more restrictive locally-imposed noise regulations or curfews.
In general, any changes in airport operations could have a material adverse effect on our business, results of operations
and financial condition.
We rely on third-party service providers to perform functions integral to our operations.
We have entered into agreements with third-party service providers to furnish certain facilities and services required for
our operations, including ground handling, catering, passenger handling, engineering, maintenance, refueling, reservations and
airport facilities as well as administrative and support services. We are likely to enter into similar service agreements in new
markets we decide to enter, and there can be no assurance that we will be able to obtain the necessary services at acceptable
rates.
Although we seek to monitor the performance of third parties that provide us with our reservation system, ground
handling, catering, passenger handling, engineering, maintenance services, refueling and airport facilities, the efficiency,
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timeliness and quality of contract performance by third-party service providers are often beyond our control, and any failure by
our service providers to perform their contracts may have an adverse impact on our business and operations. For example, in
2008, our call center provider went bankrupt. Though we were able to quickly switch to an alternative vendor, we experienced
a significant business disruption during the transition period and a similar disruption could occur in the future if we changed
call center providers or if an existing provider ceased to be able to serve us. We expect to be dependent on such third-party
arrangements for the foreseeable future.
We rely on third-party distribution channels to distribute a portion of our airline tickets.
We rely on third-party distribution channels, including those provided by or through global distribution systems, or GDSs,
conventional travel agents and online travel agents, or OTAs, to distribute a portion of our airline tickets, and we expect in the
future to rely on these channels to an increasing extent to collect ancillary revenues. These distribution channels are more
expensive and at present have less functionality in respect of ancillary revenues than those we operate ourselves, such as our
call centers and our website. Certain of these distribution channels also effectively restrict the manner in which we distribute
our products generally. To remain competitive, we will need to successfully manage our distribution costs and rights, and
improve the functionality of third-party distribution channels, while maintaining an industry-competitive cost structure.
Negotiations with key GDSs and OTAs designed to manage our costs, increase our distribution flexibility, and improve
functionality could be contentious, could result in diminished or less favorable distribution of our tickets, and may not provide
the functionality we require to maximize ancillary revenues. Any inability to manage our third-party distribution costs, rights
and functionality at a competitive level or any material diminishment in the distribution of our tickets could have a material
adverse effect on our competitive position and our results of operations. Moreover, our ability to compete in the markets we
serve may be threatened by changes in technology or other factors that may make our existing third-party sales channels
impractical, uncompetitive, or obsolete.
We rely on a single service provider to manage our fuel supply.
As of December 31, 2013, we had a single fuel service contract with World Fuel Services Corporation to manage the
sourcing and contracting of our fuel supply. A failure by this provider to fulfill its obligations could have a material adverse
effect on our business, results of operations and financial condition.
Our reputation and business could be adversely affected in the event of an emergency, accident or similar incident
involving our aircraft.
We are exposed to potential significant losses in the event that any of our aircraft is subject to an emergency, accident,
terrorist incident or other similar incident, and significant costs related to passenger claims, repairs or replacement of a
damaged aircraft and its temporary or permanent loss from service. There can be no assurance that we will not be affected by
such events or that the amount of our insurance coverage will be adequate in the event such circumstances arise and any such
event could cause a substantial increase in our insurance premiums. Please see “—Increases in insurance costs or significant
reductions in coverage could have a material adverse effect on our business, financial condition and results of operations.” In
addition, any future aircraft emergency, accident or similar incident, even if fully covered by insurance or even if it does not
involve our airline, may create a public perception that our airline or the equipment we fly is less safe or reliable than other
transportation alternatives, or could cause us to perform time consuming and costly inspections on our aircraft or engines which
could have a material adverse effect on our business, results of operations and financial condition.
Negative publicity regarding our customer service could have a material adverse effect on our business.
In the past we have experienced a relatively high number of customer complaints related to, among other things, our
customer service and reservations and ticketing systems. In particular, we generally experience a higher volume of complaints
when we make changes to our unbundling policies, such as charging for baggage. In addition, in 2009, we entered into a
consent order with the DOT for our procedures for bumping passengers from oversold flights and our handling of lost or
damaged baggage. Under the consent order, we were assessed a civil penalty of $375,000, of which we were required to pay
$215,000 based on an agreement with the DOT and our not having similar violations in the year after the date of the consent
order. Our reputation and business could be materially adversely affected if we fail to meet customers’ expectations with
respect to customer service or if we are perceived by our customers to provide poor customer service.
We depend on a limited number of suppliers for our aircraft and engines.
One of the elements of our business strategy is to save costs by operating a single-family aircraft fleet - currently Airbus
A320-family, single-aisle aircraft, powered by engines manufactured by IAE. If Airbus, IAE, or Pratt and Whitney becomes
unable to perform its contractual obligations, or if we are unable to acquire or lease aircraft or engines from other owners,
operators or lessors on acceptable terms, we would have to find other suppliers for a similar type of aircraft or engine. If we
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have to lease or purchase aircraft from another supplier, we would lose the significant benefits we derive from our current
single fleet composition. We may also incur substantial transition costs, including costs associated with retraining our
employees, replacing our manuals and adapting our facilities and maintenance programs. Our operations could also be harmed
by the failure or inability of aircraft, engine and parts suppliers to provide sufficient spare parts or related support services on a
timely basis. Our business would be significantly harmed if a design defect or mechanical problem with any of the types of
aircraft or components that we operate were discovered that would ground any of our aircraft while the defect or problem was
corrected, assuming it could be corrected at all. The use of our aircraft could be suspended or restricted by regulatory
authorities in the event of any actual or perceived mechanical or design problems. Our business would also be significantly
harmed if the public began to avoid flying with us due to an adverse perception of the types of aircraft that we operate
stemming from safety concerns or other problems, whether real or perceived, or in the event of an accident involving those
types of aircraft or components. Carriers that operate a more diversified fleet are better positioned than we are to manage such
events.
Reduction in demand for air transportation, or governmental reduction or limitation of operating capacity, in the South
Florida, Caribbean, Latin American or domestic U.S. markets could harm our business, results of operations and
financial condition.
A significant portion of our operations are conducted to and from the South Florida, Caribbean, Latin American or
domestic U.S. markets. Our business, results of operations and financial condition could be harmed if we lost our authority to
fly to these markets, by any circumstances causing a reduction in demand for air transportation, or by governmental reduction
or limitation of operating capacity, in these markets, such as adverse changes in local economic or political conditions, negative
public perception of these destinations, unfavorable weather conditions, or terrorist related activities. Furthermore, our business
could be harmed if jurisdictions that currently limit competition allow additional airlines to compete on routes we serve. Many
of the countries we serve are experiencing either economic slowdowns or recessions, which may translate into a weakening of
demand and could harm our business, results of operations and financial condition.
Increases in insurance costs or significant reductions in coverage could have a material adverse effect on our business,
financial condition and results of operations.
We carry insurance for public liability, passenger liability, property damage and all-risk coverage for damage to our
aircraft. As a result of the September 11, 2001 terrorist attacks, aviation insurers significantly reduced the amount of insurance
coverage available to commercial air carriers for liability to persons other than employees or passengers for claims resulting
from acts of terrorism, war or similar events (war risk insurance). Accordingly, our insurance costs increased significantly and
our ability to continue to obtain certain types of insurance remains uncertain. While the price of commercial insurance has
declined since the period immediately after the terrorist attacks, in the event commercial insurance carriers further reduce the
amount of insurance coverage available to us, or significantly increase its cost, we would be adversely affected. We currently
maintain commercial airline insurance with several underwriters. However, there can be no assurance that the amount of such
coverage will not be changed, or that we will not bear substantial losses from accidents. We could incur substantial claims
resulting from an accident in excess of related insurance coverage that could have a material adverse effect on our results of
operations and financial condition.
We have obtained third-party war risk insurance, which insures against some risks of terrorism, through a special
program administered by the FAA, resulting in lower premiums than if we had obtained this insurance in the commercial
insurance market. If the special program administered by the FAA is not continued, or if the government discontinues this
coverage for any reason, obtaining comparable coverage from commercial underwriters may result in higher premiums and
more restrictive terms, if it is available at all. Our business, results of operations and financial condition could be materially
adversely affected if we are unable to obtain adequate war risk insurance. The FAA war risk hull and liability insurance policy
is effective from October 1, 2013 through September 30, 2014.
Failure to comply with applicable environmental regulations could have a material adverse effect on our business,
results of operations and financial condition.
We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the
protection of the environment, including those relating to emissions to the air, discharges to surface and subsurface waters, safe
drinking water and the management of hazardous substances, oils and waste materials. Compliance with all environmental laws
and regulations can require significant expenditures and any future regulatory developments in the United States and abroad
could adversely affect operations and increase operating costs in the airline industry. For example, climate change legislation
was previously introduced in Congress and such legislation could be re-introduced in the future by Congress and state
legislatures, and could contain provisions affecting the aviation industry, compliance with which could result in the creation of
substantial additional costs to us. Similarly, the Environmental Protection Agency issued a rule that regulates larger emitters of
24
greenhouse gases. Future operations and financial results may vary as a result of such regulations. Compliance with these
regulations and new or existing regulations that may be applicable to us in the future could increase our cost base and could
have a material adverse effect on our business, results of operations and financial condition.
Governmental authorities in several U.S. and foreign cities are also considering or have already implemented aircraft
noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take-offs and landings. We
have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if
locally-imposed regulations become more restrictive or widespread.
If we are unable to attract and retain qualified personnel or fail to maintain our company culture, our business, results
of operations and financial condition could be harmed.
Our business is labor intensive. We require large numbers of pilots, flight attendants, maintenance technicians and other
personnel. The airline industry has from time to time experienced a shortage of qualified personnel, particularly with respect to
pilots and maintenance technicians. In addition, as is common with most of our competitors, we have faced considerable
turnover of our employees. We may be required to increase wages and/or benefits in order to attract and retain qualified
personnel. If we are unable to hire, train and retain qualified employees, our business could be harmed and we may be unable to
implement our growth plans.
In addition, as we hire more people and grow, we believe it may be increasingly challenging to continue to hire people
who will maintain our company culture. Our company culture, which we believe is one of our competitive strengths, is
important to providing high-quality customer service and having a productive, accountable workforce that helps keep our costs
low. As we continue to grow, we may be unable to identify, hire or retain enough people who meet the above criteria, including
those in management or other key positions. Our company culture could otherwise be adversely affected by our growing
operations and geographic diversity. If we fail to maintain the strength of our company culture, our competitive ability and our
business, results of operations and financial condition could be harmed.
Our business, results of operations and financial condition could be materially adversely affected if we lose the services
of our key personnel.
Our success depends to a significant extent upon the efforts and abilities of our senior management team and key
financial and operating personnel. In particular, we depend on the services of our senior management team, including Ben
Baldanza, our President and Chief Executive Officer. Competition for highly qualified personnel is intense, and the loss of any
executive officer, senior manager, or other key employee without adequate replacement or the inability to attract new qualified
personnel could have a material adverse effect on our business, results of operations and financial condition. We do not
maintain key-man life insurance on our management team.
The requirements of being a public company may strain our resources, divert management’s attention and affect our
ability to attract and retain qualified board members.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private
company, including costs associated with public company reporting requirements. We also have incurred and will incur costs
associated with the Sarbanes-Oxley Act of 2002, as amended, the Dodd-Frank Wall Street Reform and Consumer Protection
Act and related rules implemented or to be implemented by the SEC and the NASDAQ Stock Market. The expenses incurred
by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules
and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and
costly. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance,
including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult
for us to attract and retain qualified persons to serve on our board of directors, our board committees, or as our executive
officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company,
we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil
litigation.
We are required to assess our internal control over financial reporting on an annual basis, and any future adverse
findings from such assessment could result in a loss of investor confidence in our financial reports, significant expenses
to remediate any internal control deficiencies, and ultimately have an adverse effect on the market price of our common
stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, our management is required to report on, and
our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting.
25
The rules governing the standards that must be met for management to assess our internal control over financial reporting are
complex and require significant documentation, testing and possible remediation. Annually, we perform activities that include
reviewing, documenting and testing our internal control over financial reporting. During the performance of these activities, we
may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment
of our internal control over financial reporting. In connection with the attestation process by our independent registered public
accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and
receiving a favorable attestation. In addition, if we fail to maintain the adequacy of our internal control over financial reporting
we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in
accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer
material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause
investors to lose confidence in our reported financial information. This could harm our operating results and lead to a decline in
our stock price. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or
misuse of corporate assets and subject us to potential delisting from the NASDAQ Global Select Market, regulatory
investigations, civil or criminal sanctions and class action litigation.
The market price of our common stock may be volatile, which could cause the value of an investment in our stock to
decline.
The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond
our control, including:
•
•
announcements concerning our competitors, the airline industry or the economy in general;
strategic actions by us or our competitors, such as acquisitions or restructurings;
• media reports and publications about the safety of our aircraft or the aircraft type we operate;
•
•
•
•
•
•
•
•
new regulatory pronouncements and changes in regulatory guidelines;
changes in the price of aircraft fuel;
announcements concerning the availability of the type of aircraft we use;
general and industry-specific economic conditions;
changes in financial estimates or recommendations by securities analysts or failure to meet analysts’ performance
expectations;
sales of our common stock or other actions by investors with significant shareholdings;
trading strategies related to changes in fuel or oil prices; and
general market, political and economic conditions.
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating
performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our
common stock.
In the past, stockholders have sometimes instituted securities class action litigation against companies following periods
of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert
management’s attention and resources and harm our business or results of operations.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports
about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or
unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage
of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock
price and trading volume to decline.
26
Our anti-takeover provisions may delay or prevent a change of control, which could adversely affect the price of our
common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may
make it difficult to remove our board of directors and management and may discourage or delay “change of control”
transactions, which could adversely affect the price of our common stock. These provisions include, among others:
•
•
•
•
•
our board of directors is divided into three classes, with each class serving for a staggered three-year term, which
prevents stockholders from electing an entirely new board of directors at an annual meeting;
actions to be taken by our stockholders may only be effected at an annual or special meeting of our stockholders and
not by written consent;
special meetings of our stockholders can be called only by the Chairman of the Board or by our corporate secretary at
the direction of our board of directors;
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of
directors and propose matters to be brought before an annual meeting of our stockholders may discourage or deter a
potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise
attempting to obtain control of our company; and
our board of directors may, without stockholder approval, issue series of preferred stock, or rights to acquire preferred
stock, that could dilute the interest of, or impair the voting power of, holders of our common stock or could also be
used as a method of discouraging, delaying or preventing a change of control.
Our corporate charter and bylaws include provisions limiting voting by non-U.S. citizens and specifying an exclusive
forum for stockholder disputes.
To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our amended and restated
certificate of incorporation and amended and restated bylaws restrict voting of shares of our common stock by non-U.S.
citizens. The restrictions imposed by federal law currently require that no more than 25% of our stock be voted, directly or
indirectly, by persons who are not U.S. citizens, and that our president and at least two-thirds of the members of our board of
directors and senior management be U.S. citizens. Our amended and restated bylaws provide that the failure of non-U.S.
citizens to register their shares on a separate stock record, which we refer to as the “foreign stock record,” would result in a
suspension of their voting rights in the event that the aggregate foreign ownership of the outstanding common stock exceeds the
foreign ownership restrictions imposed by federal law.
Our amended and restated bylaws further provide that no shares of our common stock will be registered on the foreign
stock record if the amount so registered would exceed the foreign ownership restrictions imposed by federal law. If it is
determined that the amount registered in the foreign stock record exceeds the foreign ownership restrictions imposed by federal
law, shares will be removed from the foreign stock record in reverse chronological order based on the date of registration
therein, until the number of shares registered therein does not exceed the foreign ownership restrictions imposed by federal law.
As of December 31, 2013, we believe we were in compliance with the foreign ownership rules.
As of December 31, 2013, there are no shares of non-voting common stock outstanding. When shares of non-voting
common stock are outstanding, the holders of such stock may convert such shares, on a share-for-share basis, in the order
reflected on our foreign stock record as shares of common stock are sold or otherwise transferred by non-U.S. citizens to U.S.
citizens.
Our amended and restated certificate of incorporation also specifies that the Court of Chancery of the State of Delaware
shall be the exclusive forum for substantially all disputes between us and our stockholders.
We do not intend to pay cash dividends for the foreseeable future.
We have never declared or paid cash dividends on our common stock. We currently intend to retain our future earnings, if
any, to finance the further development and expansion of our business and do not intend to pay cash dividends in the
foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend
on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing
instruments, business prospects and such other factors as our board of directors deems relevant.
27
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Aircraft
We operated a total of 54 aircraft, all of which are under operating leases, as of December 31, 2013.
The following table details information on the 54 aircraft in our fleet as of December 31, 2013:
Aircraft Type
A319
A320
A321
Seats
145
178
218
Average Age (years)
Number of Aircraft
6.8
1.8
8.4
5.1
29
23
2
54
During 2013, we converted ten Airbus A320 orders to Airbus A321 orders and converted five Airbus A321 orders to
Airbus A321neo orders. As of December 31, 2013, our aircraft orders, consisted of 112 A320 family aircraft with Airbus (37 of
the existing A320 aircraft model, 45 A320neos, 25 of the existing A321 model and 5 A321neos) and 5 direct operating leases
for A320neos with a third-party lessor. As of December 31, 2013, our future fleet plan, net of contractual lease returns, is
illustrated in the table below.
Aircraft Type
2014
2015
2016
2017
2018
2019
2020
2021
A319
A320
A320 NEO
A321
A321 NEO
Total Aircraft
29
34
—
2
—
65
29
45
1
4
—
79
26
50
5
12
—
93
22
58
5
20
—
105
17
58
11
25
—
111
16
58
19
25
5
123
9
58
32
25
5
129
5
58
50
25
5
143
* Actual fleet count may differ depending on future fleet decisions, including actual lease retirements.
We also have six spare engine orders for V2500 SelectOne engines with IAE and nine spare engine orders for PurePower
PW 1100G-JM engines with Pratt & Whitney. Spare engines are scheduled for delivery from 2014 through 2024.
Ground Facilities
We lease all of our facilities at each of the airports we serve. Our leases for terminal passenger service facilities, which
include ticket counter and gate space, operations support areas and baggage service offices, generally have a term ranging from
month-to-month to 20 years, and contain provisions for periodic adjustments of lease rates. We also are responsible for
maintenance, insurance and other facility-related expenses and services. We also have entered into use agreements at the
airports we serve that provide for the non-exclusive use of runways, taxiways and other airfield facilities. Landing fees paid
under these agreements are based on the number of landings and weight of the aircraft.
As of December 31, 2013, Ft. Lauderdale/Hollywood International Airport (FLL) remained our single largest airport
served, with over 17% of our capacity operating to or from FLL during 2013. We operate primarily out of Terminal 4, the
international terminal. We currently use up to nine gates at Terminal 4 and Terminal 3. We have preferential access to six of the
Terminal 4 gates, preferential access to one of the Terminal 3 gates, common use access to the remaining two Terminal 4 gates,
and common use access to other Terminal 3 gates. FLL is in the middle of a concourse replacement and expansion project,
which would expand the number of gates at Terminal 4 to 14. Other airports through which we conduct significant operations
include Dallas-Fort Worth International Airport (DFW), McCarran International Airport (LAS) serving Las Vegas, Chicago
O'Hare International Airport (ORD), Detroit Metropolitan Wayne County Airport (DTW), LaGuardia Airport (LGA) serving
New York City and Orlando International Airport (MCO).
28
Our largest maintenance facility is currently located in a leased facility at FLL under a lease that expires in January 2015.
We also conduct additional maintenance operations in leased facilities in Detroit, Michigan; Chicago, Illinois; Atlantic City,
New Jersey; Dallas, Texas; and Las Vegas, Nevada.
Our principal executive offices and headquarters are located in a leased facility at 2800 Executive Way, Miramar, Florida
33025, consisting of approximately 56,000 square feet. The lease for this facility expires in January 2025. We have executed an
agreement to lease the facility located at 2844 Corporate Way, Miramar, Florida 33025, consisting of approximately 15,000
square feet. We expect to take possession of this facility in February 2014 to expand our principal executive offices and
headquarters. The lease for this facility expires in January 2025. We also have a training center located in a leased facility at
1050 Lee Wagener Boulevard, Fort Lauderdale, Florida 33315, consisting of approximately 12,000 square feet, under a lease
that expires in January 2015.
ITEM 3.
LEGAL PROCEEDINGS
We are subject to commercial litigation claims and to administrative and regulatory proceedings and reviews that may
be asserted or maintained from time to time. We believe the ultimate outcome of pending lawsuits, proceedings and reviews
will not, individually or in the aggregate, have a material adverse effect on our financial position, liquidity, or results of
operations.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
29
PART II
ITEM 5.
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
Market Price of our common stock
Our common stock is listed and traded on the NASDAQ Global Select Market under the symbol "SAVE." The following
table shows, for the periods indicated, the high and low per share sales prices for our common stock on the NASDAQ Global
Select Market.
High
Low
Fiscal year ending December 31, 2012
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20.70
24.75
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.13
Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.00
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13.90
17.41
15.85
15.64
Fiscal year ending December 31, 2013
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26.87
33.75
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36.83
Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47.62
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17.40
24.30
29.65
32.50
As of February 7, 2014, there were approximately 28 holders of record of our common stock. Because many of our
shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of
stockholders represented by the beneficial holders.
The information under the caption “Equity Compensation Plan Information” in our 2014 Proxy Statement is incorporated
herein by reference.
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock. Any
future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors
and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital
requirements, business prospects and other factors our board of directors may deem relevant.
30
Our Repurchases of Equity Securities
The following table reflects our repurchases of our common stock during the fourth quarter of 2013. All stock
repurchases during this period were made from employees who received restricted stock grants. All stock repurchases were
made at the election of each employee pursuant to an offer to repurchase by us. In each case, the shares repurchased constituted
the portion of vested shares necessary to satisfy minimum withholding tax requirements.
ISSUER PURCHASES OF EQUITY SECURITIES
Total
Number
of Shares
Purchased
Average
Price Paid
per Share
—
763
—
763
$
$
N/A
44.50
N/A
44.50
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under Plans or
Programs.
—
—
—
—
—
—
—
—
Period
October 1-31, 2013 . . . . . . . . . . .
November 1-30, 2013 . . . . . . . . .
December 1-31, 2013 . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
During the first three quarters of 2013, we repurchased and retired 103,484 shares for a total of $2.3 million. All stock
repurchases were made at the election of each employee pursuant to an offer to repurchase by us. In each case, the shares
repurchased constituted the portion of vested shares necessary to satisfy withholding tax requirements. We did not make any
open market stock repurchases during 2013.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on our common stock with the cumulative total
return on the NASDAQ Composite Index and the NYSE ARCA Airline Index for the period beginning on May 26, 2011 (the
date our common stock was first traded) and ending on the last day of 2013. The graph assumes an investment of $100 in our
stock and the two indices, respectively, on May 26, 2011, and further assumes the reinvestment of all dividends. The May 26,
2011 stock price used for our stock is the initial public offering price. Stock price performance, presented for the period from
May 26, 2011 to December 31, 2013, is not necessarily indicative of future results.
31
5/26/2011
12/31/2011
12/31/2012
12/31/2013
Spirit . . . . . . . . . . . . . . . . . . . . . . . . .
NYSE ARCA Airline Index . . . . . . .
NASDAQ Composite Index . . . . . . .
$
$
$
100.00
100.00
100.00
$
$
$
130.00
75.49
94.23
$
$
$
147.75
103.90
110.91
$
$
$
378.42
164.39
155.15
32
ITEM 6.
SELECTED FINANCIAL DATA
You should read the following selected historical financial and operating data below in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, related notes and other
financial information included in this annual report. The selected financial data in this section are not intended to replace the
financial statements and are qualified in their entirety by the financial statements and related notes included in this annual
report.
We derived the selected statements of operations data for the years ended December 31, 2013, 2012 and 2011 and the
balance sheet data as of December 31, 2013 and 2012 from our audited financial statements included in this annual report. We
derived the selected statements of operations data for the years ended December 31, 2010 and 2009 and the balance sheet data
as of December 31, 2011, 2010 and 2009 from our audited financial statements not included in this annual report. Our historical
results are not necessarily indicative of the results to be expected in the future.
Year Ended December 31,
2013
2012
2011
2010 (1)
2009
(in thousands except share and per share data)
$
986,018
$
782,792
$
689,650
$
537,969
$
536,181
668,367
535,596
381,536
1,654,385
1,318,388
1,071,186
Operating revenues:
Passenger
Non-ticket
Total operating revenue
Operating expenses:
Aircraft fuel (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salaries, wages and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Landing fees and other rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance, materials and repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
551,746
262,150
169,737
83,604
67,481
60,143
31,947
471,763
218,919
143,572
68,368
56,668
49,460
15,256
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
144,586
127,886
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special charges (credits) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses
Operating income
Other expense (income):
525
174
956
(8,450)
1,372,093
1,144,398
282,292
173,990
Interest expense (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized interest (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on extinguishment of debt (6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes (7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income
Earnings Per Share:
214
(214)
(401)
—
283
(118)
282,410
105,492
$
176,918
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares outstanding:
2.44
2.42
1,350
(1,350)
(925)
—
331
(594)
174,584
66,124
108,460
1.50
1.49
$
$
$
$
$
$
388,046
181,742
116,485
52,794
51,349
34,017
7,760
91,172
255
3,184
926,804
144,382
24,781
(2,890)
(575)
—
235
21,551
122,831
46,383
76,448
1.44
1.43
$
$
$
243,296
781,265
248,206
156,443
101,345
48,118
41,179
27,035
5,620
83,748
77
621
712,392
68,873
50,313
(1,491)
(328)
—
194
48,688
20,185
(52,296)
72,481
2.77
2.72
$
$
$
163,856
700,037
181,107
135,420
89,974
42,061
34,067
27,536
4,924
72,921
1,010
(392)
588,628
111,409
46,892
(951)
(345)
(19,711)
298
26,183
85,226
1,533
83,693
3.23
3.18
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,592,765
72,385,574
53,240,898
26,183,772
25,910,766
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,999,221
72,590,574
53,515,348
26,689,855
26,315,121
(1)
We estimate that the 2010 pilot strike had a net negative impact on our operating income for 2010 of approximately $24 million consisting of an
estimated $28 million in lost revenues and approximately $4 million of incremental costs resulting from the strike, offset in part by a reduction of
variable expenses during the strike of approximately $8 million for flights not flown. Additionally, under the terms of the pilot contract, we also paid
$2.3 million in return-to-work payments during the second quarter, which are not included in the strike impact costs described above.
33
(2)
Aircraft fuel expense is the sum of (i) “into-plane fuel cost,” which includes the cost of jet fuel and certain other charges such as fuel taxes and oil,
(ii) settlement gains and losses and (iii) unrealized mark-to-market gains and losses associated with fuel hedge contracts. The following table
summarizes the components of aircraft fuel expense for the periods presented:
Year Ended December 31,
2013
2012
2011
2010
2009
(in thousands)
Into-plane fuel cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 542,523
$ 471,542
$ 392,278
$ 251,754
$ 181,806
Realized losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses (gains) . . . . . . . . . . . . . . . . . . . . . . . .
8,958
265
175
46
(7,436)
3,204
(1,483)
(2,065)
750
(1,449)
Aircraft fuel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 551,746
$ 471,763
$ 388,046
$ 248,206
$ 181,107
(3)
(4)
(5)
(6)
(7)
Special charges (credits) include: (i) for 2009, amounts relating to the early termination in mid-2008 of leases for seven Airbus A319 aircraft, a
related reduction in workforce and the exit facility costs associated with returning planes to lessors in 2008; (ii) for 2009 and 2010, amounts relating
to the sale of previously expensed MD-80 parts; (iii) for 2010 and 2011 amounts relating to exit facility costs associated with moving our Detroit,
Michigan maintenance operations to Fort Lauderdale, Florida; (iv) termination costs in connection with the IPO during the three months ended June
30, 2011 comprised of amounts paid to Indigo Partners, LLC to terminate its professional services agreement with us and fees paid to three
individual, unaffiliated holders of our subordinated notes; (v) for 2011 and 2012, a $9.1 million gain related to the sale of four permanent air carrier
slots at Ronald Reagan National Airport (DCA) offset by costs connected with the 2012 secondary offerings; and for 2013, costs related to the 2013
secondary offering. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Our Operating Expenses—Special Charges (Credits).”
Substantially all of the interest expense recorded in 2009, 2010 and 2011 relates to notes and preferred stock held by our principal stockholders that
were repaid or redeemed, or exchanged for shares of common stock, in connection with the Recapitalization in 2011 that was effected in connection
with the IPO. Interest expense in 2012 primarily relates to interest on PDPs and interest related to the TRA. Interest expense in 2013 primarily
relates to interest related to the TRA.
Interest attributable to funds used to finance the acquisition of new aircraft, including PDPs is capitalized as an additional cost of the related asset.
Interest is capitalized at the weighted average implicit lease rate of our aircraft.
Gain on extinguishment of debt represents the recognition of contingencies provided for in our 2006 recapitalization agreements, which provided
for the cancellation of shares of Class A preferred stock and reduction of the liquidation preference of the remaining Class A preferred stock and
associated accrued but unpaid dividends based on the outcome of the contingencies.
Net income for 2010 includes a $52.3 million net tax benefit primarily due to the release of a valuation allowance resulting in a deferred tax benefit
of $52.8 million in 2010. Absent the release of the valuation allowance and corresponding tax benefit, our net income would have been $19.7
million for 2010.
The following table presents balance sheet data for the periods presented.
Balance Sheet Data:
(in thousands)
As of December 31,
2013
2012
2011
2010
2009
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
530,631
$
416,816
$
343,328
$
82,714
$
86,147
1,180,765
919,884
745,813
Long-term debt, including current portion . . . . . . . .
Mandatorily redeemable preferred stock. . . . . . . . . .
—
—
—
—
—
—
475,757
260,827
79,717
327,866
242,232
75,110
Stockholders' equity (deficit). . . . . . . . . . . . . . . . . . .
769,117
582,535
466,706
(105,077)
(178,127)
34
OPERATING STATISTICS
Operating Statistics (unaudited) (A)
Average aircraft. . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft at end of period . . . . . . . . . . . . . . . . . . . .
Airports served in the period (B) . . . . . . . . . . . . .
Average daily Aircraft utilization (hours). . . . . . .
Average stage length (miles). . . . . . . . . . . . . . . . .
Year Ended December 31,
2013
2012
2011
2010
2009
49.9
54
56
12.7
958
41.2
45
55
12.8
909
34.8
37
50
12.7
921
30.5
32
41
12.8
941
28.0
28
43
13.0
931
Block hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Passenger flight segments (thousands) . . . . . . . . .
231,148
12,414
192,403
10,423
Revenue passenger miles (RPMs) (thousands). . .
12,001,088
9,663,721
Available seat miles (ASMs) (thousands). . . . . . .
13,861,393
11,344,731
161,898
8,518
8,006,748
9,352,553
141,864
6,952
6,664,395
8,119,923
133,227
6,325
6,039,064
7,485,141
Load factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average ticket revenue per passenger flight
segment ($) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average non-ticket revenue per passenger flight
segment ($) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue per passenger segment ($) . . . . . . .
Average yield (cents) . . . . . . . . . . . . . . . . . . . . . .
RASM (cents) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASM (cents) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted CASM (cents) (C) . . . . . . . . . . . . . . . . .
Adjusted CASM ex fuel (cents) (C) . . . . . . . . . . .
86.6
79.43
53.84
133.27
13.79
11.94
9.90
9.89
5.91
85.2
75.11
51.39
126.50
13.64
11.62
10.09
10.15
6.00
85.6
80.97
44.79
125.76
13.38
11.45
9.91
9.84
5.72
82.1
77.39
35.00
112.39
11.72
9.62
8.77
8.79
5.71
Fuel gallons consumed (thousands) . . . . . . . . . . .
171,931
142,991
121,030
106,628
Average economic fuel cost per gallon ($) . . . . . .
3.21
3.30
3.18
2.35
80.7
84.77
25.91
110.68
11.59
9.35
7.86
7.89
5.45
98,422
1.85
(A)
(B)
(C)
See “Glossary of Airline Terms” elsewhere in this annual report for definitions of terms used in this table.
Includes airports served during the period that had service canceled as of the end of the period. Previously, we reported only airports served during
the period with continuing operations.
Excludes special charges (credits) of $(0.4) million (less than (0.01) cents per ASM) in 2009, $0.6 million (less than 0.01 cents per ASM) in 2010,
$3.2 million (0.03 cents per ASM) in 2011, $(8.5) million ((0.07) cents per ASM) in 2012 and $0.2 million (less than 0.01 cents per ASM) in 2013.
These amounts are excluded from all calculations of Adjusted CASM provided in this prospectus. Please see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Our Operating Expenses—Special Charges (Credits).” Also excludes unrealized mark-
to-market, or MTM, (gains) and losses $(1.4) million ((0.02) cents per ASM) in 2009, $(2.1) million ((0.03) cents per ASM) in 2010, $3.2 million
(0.03 cents per ASM) in 2011, $0.0 million (less than 0.01 cents per ASM) in 2012 and $0.3 million (less than 0.01 cent per ASM) in 2013. Please
see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”
35
ITEM 7.
OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
You should read the following discussion of our financial condition and results of operations in conjunction with the financial
statements and the notes thereto included elsewhere in this annual report.
2013 Year in Review
The year 2013 marks the seventh consecutive year of profitability and one of the most successful years on record for
us. We achieved earnings of $176.9 million ($2.42 per share, diluted), compared to net income of $108.5 million ($1.49 per
share, diluted) in 2012. The increase in our 2013 net income is a result of our increased capacity, continued strong demand for
our ultra-low fares and growth in our ancillary revenues.
For the year ended December 31, 2013, we achieved record annual profits and a 17.1% operating profit margin, the
highest in our history, on $1,654.4 million in operating revenues. Our traffic grew by 24.2% as we continued to stimulate
demand with ultra-low fares. Total revenue per passenger flight segment increased by 5.4% from $126.50 to $133.27. Total
RASM for 2013 was 11.94 cents, an increase of 2.8% compared to the prior year period, as a result of both higher average
passenger yields and increased load factors. Strength in demand throughout 2013 allowed us to leverage our ability to revenue
manage our inventory, resulting in increased profitability year over year.
Our operating cost structure is a primary area of focus and is at the core of our ULCC business model in which we
compete solely on the basis of price. Spirit's unit operating costs continue to be among the lowest of any airline in the
Americas. During 2013, we increased our capacity by 22.2% as we grew our fleet of Airbus single-aisle aircraft from 45 to 54,
added 25 new nonstop routes during the year, and launched service to two new destinations: New Orleans, Louisiana and
Philadelphia, Pennsylvania.
During 2013, we increased our average non-ticket revenue per passenger flight segment by 4.8%, or $2.45, to $53.84.
Our total non-ticket revenue increased by 24.8%, or $132.8 million, to $668.4 million in 2013. The year-over-year increase in
average non-ticket revenue per passenger flight segment was primarily driven by changes we made late in 2012 to our bag fee
schedule to optimize revenue by channel, a change we made in July 2013 to align our foreign passenger usage fee with our
domestic passenger usage fee, and an increase in service charges collected as a result of increased volume of third-party
bookings. Growth in travel package sales including the offering of third-party travel-related options such as hotels and rental
cars for sale through our website, subscriptions to our $9 Fare Club and other options designed to enhance our customers' travel
experience also contributed to the growth of our non-ticket revenue.
During 2013, our adjusted CASM ex-fuel decreased by 1.5% to 5.91 cents. Better operational performance during
2013 as compared to 2012 helped drive lower wages and passenger re-accommodation expenses. In addition, during 2013, we
entered into lease extensions covering 14 of our existing A319 aircraft resulting in reduced lease rates for the remaining term of
the leases which contributed to the decrease in adjusted CASM ex-fuel as compared to 2012. These decreases were partially
offset by higher heavy maintenance amortization expense for 2013 resulting from the increase in deferred heavy aircraft
maintenance events as compared to the same period in 2012.
During 2013, we reached a Company milestone with the introduction of the 50th aircraft into our operating fleet. As of
December 31, 2013, our 54 Airbus A320-family aircraft fleet was comprised of 29 A319s, 23 A320s and 2 A321s. As of
December 31, 2013, our aircraft orders consisted of 112 A320 family aircraft with Airbus and 5 direct operating leases for
A320neos with a third party, scheduled for delivery from 2014 through 2021. Our plan calls for growing the fleet by 20.4% in
2014.
2011 IPO
On June 1, 2011, we completed our initial public offering of common stock, or IPO, which raised net proceeds of $150.0
million after repayment of debt, payment of transaction expenses and other fees. In connection with the IPO, we effected a
recapitalization, which we refer to as the 2011 Recapitalization, that resulted in the repayment or conversion of all of our notes
and shares of preferred stock into shares of common stock.
Our Operating Revenues
Our operating revenues are comprised of passenger revenues and non-ticket revenues.
Passenger Revenues. Passenger revenues consist of the base fares that customers pay for air travel.
36
Non-ticket Revenues. Non-ticket revenues are generated from air travel-related charges for baggage, passenger usage fee
(PUF) for bookings through our distribution channels, advance seat selection, itinerary changes, hotel travel packages and
loyalty programs such as our FREE SPIRIT affinity credit card program and $9 Fare Club. Non-ticket revenues also include
revenues derived from services not directly related to providing transportation such as the sale of advertising to third parties on
our website and on board our aircraft.
Substantially all of our revenues are denominated in U.S. dollars. Passenger revenues are recognized once the related
flight departs. Accordingly, the value of tickets sold in advance of travel is included under our current liabilities as “air traffic
liability,” or ATL, until the related air travel is provided. Non-ticket revenues are generally recognized at the time the ancillary
products are purchased or ancillary services are provided. Non-ticket revenues also include revenues from our subscription-
based $9 Fare Club, which we recognize on a straight-line basis over 12 months. Revenue generated from the FREE SPIRIT
credit card affinity program are recognized in accordance with the criteria as set forth in Accounting Standards Update ASU
No. 2009-13. Please see “—Critical Accounting Policies and Estimates—Frequent Flier Program”.
We recognize revenues net of certain taxes and airport passenger fees, which are collected by us on behalf of airports and
governmental agencies and remitted to the applicable governmental entity or airport on a periodic basis. These taxes and fees
include U.S. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and
departure taxes. These items are collected from customers at the time they purchase their tickets, but are not included in our
revenues. We record a liability upon collection from the customer and relieve the liability when payments are remitted to the
applicable governmental agency or airport.
Our Operating Expenses
Our operating expenses consist of the following line items.
Aircraft Fuel. Aircraft fuel expense is our single largest operating expense. It includes the cost of jet fuel, related federal
taxes, fueling into-plane fees and transportation fees. It also includes realized and unrealized gains and losses arising from any
fuel price hedging activity.
Salaries, Wages and Benefits. Salaries, wages and benefits expense includes the salaries, hourly wages, bonuses and
equity compensation paid to employees for their services, as well as the related expenses associated with employee benefit
plans and employer payroll taxes.
Aircraft Rent. Aircraft rent expense consists of monthly lease rents for aircraft and spare engines under the terms of the
related operating leases and is recognized on a straight-line basis. Aircraft rent expense also includes supplemental rent.
Supplemental rent is made up of maintenance reserves paid or to be paid to aircraft lessors in advance of the performance of
major maintenance activities that are not probable of being reimbursed and lease return condition obligations which we begin
to accrue when they are probable. Aircraft rent expense is net of the amortization of gains and losses on sale and leaseback
transactions on our flight equipment. Presently, all of our aircraft and spare engines are financed under operating leases.
Landing Fees and Other Rents. Landing fees and other rents include both fixed and variable facilities expenses, such as
the fees charged by airports for the use or lease of airport facilities, overfly fees paid to other countries and the monthly rent
paid for our headquarters facility.
Distribution. Distribution expense includes all of our direct costs including the cost of web support, our third-party call
center, travel agent commissions and related GDS fees and credit card transaction fees, associated with the sale of our tickets
and other products and services.
Maintenance, Materials and Repairs. Maintenance, materials and repairs expense includes all parts, materials, repairs and
fees for repairs performed by third-party vendors directly required to maintain our fleet. It excludes direct labor cost related to
our own mechanics, which is included under salaries, wages and benefits. It also excludes the amortization of heavy
maintenance expenses, which we defer under the deferral method of accounting and amortize as a component of depreciation
and amortization expense.
Depreciation and Amortization. Depreciation and amortization expense includes the depreciation of fixed assets we own
and leasehold improvements. It also includes the amortization of heavy maintenance expenses we defer under the deferral
method of accounting for heavy maintenance events and recognize into expense on a straight-line or usage basis until the
earlier of the next estimated heavy maintenance event or the aircraft's return at the end of the lease term.
Loss on Disposal of Assets. Loss on disposal of assets includes the net losses on the disposal of our fixed assets, including
losses on sale and leaseback transactions.
37
Other Operating Expenses. Other operating expenses include airport operations expense and fees charged by third-party
vendors for ground handling services and food and liquor supply service expenses, passenger re-accommodation expense, the
cost of passenger liability and aircraft hull insurance, all other insurance policies except for employee health insurance, travel
and training expenses for crews and ground personnel, professional fees, personal property taxes and all other administrative
and operational overhead expenses. No individual item included in this category represented more than 5% of our total
operating expenses.
Special Charges (Credits). Special charges (credits) include termination costs, secondary offering costs and the gain on
the sale of take-off and landing slots.
In 2012, we sold four permanent air carrier slots at Ronald Reagan National Airport (DCA) to another airline for $9.1
million. We recognized the $9.1 million gain within special charges (credits) in the third quarter of 2012, the period in which
the FAA operating restriction lapsed and written confirmation of the slot transfer was received by the buyer from the FAA.
During the third quarter of 2013, certain stockholders affiliated with Indigo Partners LLC (Indigo) sold an aggregate of
12,070,920 shares of common stock in an underwritten public offering. We incurred $0.3 million in costs related to this offering
in 2013. Upon completion of this secondary offering, investment funds affiliated with Indigo owned no shares of our common
stock.
On July 31, 2012, certain stockholders affiliated with Oaktree Capital Management (Oaktree) sold an aggregate of
9,394,927 shares of common stock in an underwritten public offering. We incurred $0.7 million in costs related to this offering
in 2012. Upon completion of this secondary offering, investment funds affiliated with Oaktree owned no shares of our common
stock.
On January 25, 2012, certain stockholders of the Company, including affiliates of Oaktree and Indigo and certain
members of our executive team, sold an aggregate of 12,650,000 shares of common stock in an underwritten public offering.
We incurred a total of $1.3 million in costs between 2011 and 2012 related to this secondary offering, offset by reimbursements
from certain selling stockholders of $0.6 million in accordance with the Fourth Amendment to the Second Amended and
Restated Investor Rights Agreement.
We did not receive any proceeds from any of these secondary offerings.
In the second quarter of 2011, we incurred $2.3 million of termination costs in connection with the IPO comprised of
amounts paid to Indigo to terminate its professional services agreement with us and fees paid to three individual, unaffiliated
holders of our subordinated notes.
Our Other Expense (Income)
Interest Expense. Paid-in-kind interest on notes due to related parties and preferred stock dividends due to related parties
account, on average, for over 80% of interest expense incurred in 2011. Non-related party interest expense accounted for the
remainder of interest expense in 2011. All of the notes and preferred stock were repaid or redeemed, or exchanged for common
stock, in connection with the 2011 Recapitalization. Interest expense in 2012 primarily relates to interest on PDPs and interest
related to the Tax Receivable Agreement, or TRA. Interest expense in 2013 primarily relates to interest on the TRA.
Capitalized Interest. Capitalized interest represents interest cost incurred during the acquisition period of an aircraft
which theoretically could have been avoided had we not made PDPs for that aircraft. These amounts are capitalized as part of
the cost of the aircraft upon delivery. Capitalization of interest ceases when the asset is ready for service. Capitalized interest
for 2011 primarily relates to the interest incurred on debt due to related parties. Capitalized interest for 2012 and 2013 primarily
relates to interest incurred in connection with payments owed under the TRA.
Our Income Taxes
We account for income taxes using the liability method. We record a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets
and liabilities and available tax loss and credit carryforwards. In assessing the realizability of the deferred tax assets, we
consider whether it is more likely than not that some or all of the deferred tax assets will be realized. In evaluating the ability to
utilize our deferred tax assets, we consider all available evidence, both positive and negative, in determining future taxable
income on a jurisdiction by jurisdiction basis.
In connection with the IPO, we entered into the TRA and thereby distributed immediately prior to the completion of the
IPO to the holders of common stock as of such time, or the Pre-IPO Stockholders, the right to receive an amount equal to 90%
38
of the cash savings in federal income tax realized by it by virtue of the use of the federal net operating loss, deferred interest
deductions and alternative minimum tax credits held by us as of March 31, 2011, which is defined as the Pre-IPO NOL. Cash
tax savings generally will be computed by comparing actual federal income tax liability to the amount of such taxes that we
would have been required to pay had such Pre-IPO NOLs (as defined in the TRA) not been available. Upon consummation of
the IPO and execution of the TRA, we recorded a liability with an offsetting reduction to additional paid in capital. The amount
and timing of payments under the TRA will depend upon a number of factors, including, but not limited to, the amount and
timing of taxable income generated in the future and any future limitations that may be imposed on our ability to use the Pre-
IPO NOLs. The term of the TRA will continue until the first to occur (a) the full payment of all amounts required under the
agreement with respect to utilization or expiration of all of the Pre-IPO NOLs, (b) the end of the taxable year including the
tenth anniversary of the IPO or (c) a change in control of the Company.
In accordance with the TRA, we are required to submit a Tax Benefit Schedule showing the proposed TRA payout
amount to the Stockholder Representatives within 45 calendar days after we file our tax return. Stockholder Representatives are
defined as Indigo Pacific Partners, LLC and OCM FIE, LLC, representing the two largest ownership interest of pre-IPO shares.
The Tax Benefit Schedule shall become final and binding on all parties unless a Stockholder Representative, within 45 calendar
days after receiving such schedule, provides us with notice of a material objection to such schedule. If the parties, for any
reason, are unable to successfully resolve the issues raised in any notice within 30 calendar days of receipt of such notice, we
and the Stockholder Representatives have the right to employ the reconciliation procedures as set forth in the TRA. If the Tax
Benefit Schedule is accepted, then we have five days after acceptance to make payments to the Pre-IPO stockholders. Pursuant
to the TRA's reconciliation procedures, any disputes that cannot be settled amicably, are settled by arbitration conducted by a
single arbitrator jointly selected by both parties.
During the second quarter of 2012, we paid $27.2 million, or 90% of the 2011 tax savings realized from the utilization of
NOLs, including $0.3 million of applicable interest. During 2012, management adjusted for an immaterial error in the original
estimate of the liability. This adjustment reduced the liability with an offset to additional paid in capital.
During 2013, we filed an amended 2009 income tax return in order to correct its NOL carry forward as of December 31,
2009. As a result, our NOL carry forward as of March 31, 2011 was consequently reduced by $7.8 million, which corresponds
to a reduction in the estimated TRA benefit of $2.4 million with an offset to additional paid in capital. On September 13, 2013,
we filed our 2012 federal income tax return, and on October 14, 2013, we submitted a Tax Benefit Schedule to the Stockholder
Representatives. On November 27, 2013, pursuant to the TRA, we received an objection notice to the Tax Benefit Schedule
from the Stockholder Representatives. As of December 31, 2013, we estimated the TRA liability to be $5.6 million. We are in
discussions with the Stockholder Representatives attempting to resolve the objection related to the Tax Benefit Schedule and
thus have not employed the TRA's reconciliation procedures.
Trends and Uncertainties Affecting Our Business
We believe our operating and business performance is driven by various factors that affect airlines and their markets,
trends affecting the broader travel industry and trends affecting the specific markets and customer base that we target. The
following key factors may affect our future performance.
Competition. The airline industry is highly competitive. The principal competitive factors in the airline industry are fare
pricing, total price, flight schedules, aircraft type, passenger amenities, number of routes served from a city, customer service,
safety record and reputation, code-sharing relationships and frequent flier programs and redemption opportunities. Price
competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, target
promotions and frequent flier initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during
normally slower travel periods to generate cash flow and to maximize unit revenue. The prevalence of discount fares can be
particularly acute when a competitor has excess capacity that it is under financial pressure to sell.
Seasonality and Volatility. Our results of operations for any interim period are not necessarily indicative of those for the
entire year because the air transportation business is subject to significant seasonal fluctuations. We generally expect demand to
be greater in the second and third quarters compared to the rest of the year. The air transportation business is also volatile and
highly affected by economic cycles and trends. Consumer confidence and discretionary spending, fear of terrorism or war,
weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, changed in governmental regulations
on taxes and fees, weather and other factors have resulted in significant fluctuations in revenues and results of operations in the
past. We believe demand for business travel historically has been more sensitive to economic pressures than demand for low-
price travel. Finally, a significant portion of our operations are concentrated in markets such as South Florida, the Caribbean,
Latin America and the Northeast and northern Midwest regions of the United States, which are particularly vulnerable to
weather, airport traffic constraints and other delays.
39
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
40
the last few years of the leases as compared to the costs in earlier periods. Please see “—Critical Accounting Policies and
Estimates—Aircraft Maintenance, Materials, Repair Costs and Related Heavy Maintenance Amortization.”
Maintenance Reserve Obligations. The terms of some of our aircraft lease agreements require us to post deposits for
future maintenance, also known as maintenance reserves, to the lessor in advance of and as collateral for the performance of
major maintenance events, resulting in our recording significant prepaid deposits on our balance sheet. As a result, the cash
costs of scheduled major maintenance events are paid well in advance of the recognition of the maintenance event in our results
of operations. Please see “—Critical Accounting Policies and Estimates—Aircraft Maintenance, Materials, Repair Costs and
Related Heavy Maintenance Amortization” and “—Maintenance Reserves.”
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results of operations is based on our financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets
and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial
statements. For a detailed discussion of our significant accounting policies, please see “Notes to Financial Statements—1.
Summary of Significant Accounting Policies”.
Critical accounting policies are defined as those policies that reflect significant judgments or estimates about matters that
are both inherently uncertain and material to our financial condition or results of operations.
Revenue Recognition. Revenues from tickets sold are initially deferred as ATL. Passenger revenues are recognized when
transportation is provided. An unused non-refundable ticket expires at the date of scheduled travel and is recognized as
revenue for the expired ticket value at the date of scheduled travel.
Our most significant non-ticket revenues include revenues generated from air travel-related services paid for baggage,
bookings through our call center or third-party vendors, advance seat selection, itinerary changes and loyalty programs, and are
recognized at the time products are purchased or ancillary services are provided. These revenues also include commissions
from the sales of hotel rooms, trip insurance and rental cars recognized at the time the service is rendered. Non-ticket revenues
also include revenues from our subscription-based $9 Fare Club, recognized on a straight-line basis over 12 months.
Customers may elect to change their itinerary prior to the date of departure. A service charge is assessed and recognized
on the date the change is initiated and is deducted from the face value of the original purchase price of the ticket, and the
original ticket becomes invalid. The amount remaining after deducting the service charge is called a credit shell which expires
60 days from the date the credit shell is created and can be used towards the purchase of a new ticket and our other service
offerings. The amount of credits expected to expire is recognized as revenue upon issuance of the credit and is estimated based
on historical experience. Estimating the amount of credits that will go unused involves some level of subjectivity and judgment.
Frequent Flier Program. We accrue for mileage credits earned through travel, including mileage credits for members
with an insufficient number of mileage credits to earn an award, under our FREE SPIRIT program based on the estimated
incremental cost of providing free travel for credits that are expected to be redeemed. Incremental costs include fuel, insurance,
security, ticketing and facility charges reduced by an estimate of amounts required to be paid by the passenger when redeeming
the award.
Under our affinity card program, funds received for the marketing of a co-branded Spirit credit card and delivery of
award miles are accounted for as a mulitple-deliverable arrangement. At the inception of the arrangement, we evaluated all
deliverables in the arrangement to determine whether they represent separate units of accounting. We determined the
arrangement had three separate units of accounting: (i) travel miles to be awarded, (ii) licensing of brand and access to member
lists and (iii) advertising and marketing efforts. At inception of the arrangement, we established the relative selling price for all
deliverables that qualified for separation, as arrangement consideration should be allocated based on relative selling price. The
manner in which the selling price was established was based on the applicable hierarchy of evidence. Total arrangement
consideration was then allocated to each deliverable on the basis of the deliverable's relative selling price. In considering the
hierarchy of evidence, we first determined whether vendor-specific objective evidence of selling price or third-party evidence
of selling price existed. We determined that neither vendor-specific objective evidence of selling price nor third-party evidence
existed due to the uniqueness of our program. As such, we developed our best estimate of the selling price for all deliverables.
For the selling price of travel, we considered a number of entity-specific factors including the number of miles needed to
redeem an award, average fare of comparable segments, breakage, restrictions and other charges. For licensing of brand and
access to member lists, we considered both market-specific factors and entity-specific factors, including general profit margins
realized in the marketplace/industry, brand power, market royalty rates and size of customer base. For the advertising and
marketing element, we considered market-specific factors and entity-specific factors including, our internal costs (and
41
fluctuations of costs) of providing services, volume of marketing efforts and overall advertising plan. Consideration allocated
based on the relative selling price to both brand licensing and advertising elements is recognized as revenue when earned and
recorded in non-ticket revenue. Consideration allocated to award miles is deferred and recognized ratably as passenger revenue
over the estimated period the transportation is expected to be provided which is currently estimated at 16 months. We used
entity-specific assumptions coupled with the various judgments necessary to determine the selling price of a deliverable in
accordance with the required selling price hierarchy. Changes in these assumptions could result in changes in the estimated
selling prices. Determining the frequency to reassess selling price for individual deliverables requires significant judgment. For
additional information, please see “Notes to Financial Statements—1. Summary of Significant Accounting Policies—Frequent
Flier Program”.
Aircraft Maintenance, Materials, Repair Costs and Related Heavy Maintenance Amortization. We account for heavy
maintenance under the deferral method. Under the deferral method the cost of heavy maintenance is capitalized and amortized
as a component of depreciation and amortization expense until the earlier of the next estimated heavy maintenance event or the
aircraft's return at the end of the lease term. Amortization of engine and aircraft overhaul costs was $23.6 million, $9.1 million
and $2.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. If heavy maintenance costs were
amortized within maintenance, material and repairs expense in the statement of operations, our maintenance, material and
repairs expense would have been $83.8 million, $58.6 million and $36.6 million for the years ended December 31, 2013, 2012
and 2011, respectively. During the years ended December 31, 2013, 2012 and 2011, we capitalized $70.8 million, $61.6 million
and $22.1 million of costs for heavy maintenance, respectively. The timing of the next heavy maintenance event is estimated
based on assumptions including estimated usage, FAA-mandated maintenance intervals and average removal times as
suggested by the manufacturer. These assumptions may change based on changes in our utilization of our aircraft, changes in
government regulations and suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by
unplanned incidents that could damage an airframe, engine or major component to a level that would require a heavy
maintenance event prior to a scheduled maintenance event. To the extent our planned usage increases, the estimated life would
decrease before the next maintenance event, resulting in additional expense over a shorter period. Heavy maintenance events
are our 6-year and 12-year airframe checks (HMV4 and HMV8, respectively), engine overhauls and overhauls to major
components. Certain maintenance functions are outsourced under contracts that require payment based on a performance
measure such as flight hours. Costs incurred for maintenance and repair under flight hour maintenance contracts, where labor
and materials price risks have been transferred to the service provider, are accrued based on contractual payment terms. Routine
cost for maintaining the airframes and engines and line maintenance are charged to maintenance, materials and repairs expense
as performed.
Maintenance Reserves. Some of our master lease agreements provide that we pay maintenance reserves to aircraft lessors
to be held as collateral in advance of our performance of major maintenance activities. These lease agreements provide that
maintenance reserves are reimbursable to us upon completion of the maintenance event in an amount equal to the lesser of (1)
the amount of the maintenance reserve held by the lessor associated with the specific maintenance event or (2) the qualifying
costs related to the specific maintenance event. Substantially all of these maintenance reserve payments are calculated based on
a utilization measure, such as flight hours or cycles and are used solely to collateralize the lessor for maintenance time run off
the aircraft until the completion of the maintenance of the aircraft.
At lease inception and at each balance sheet date, we assess whether the maintenance reserve payments required by the
master lease agreements are substantively and contractually related to the maintenance of the leased asset. Maintenance reserve
payments that are substantively and contractually related to the maintenance of the leased asset are accounted for as
maintenance deposits. Maintenance deposits expected to be recovered from lessors are reflected as prepaid maintenance
deposits in the accompanying balance sheets. When it is not probable we will recover amounts currently on deposit with a
lessor, such amounts are expensed as supplemental rent. Because we are required to pay maintenance reserves for our operating
leased aircraft, and we choose to apply the deferral method for maintenance accounting, management expects that the final
heavy maintenance events will be amortized over the remaining lease term rather than over the next estimated heavy
maintenance event. As a result, our maintenance costs in the last few years of leases could be significantly in excess of the costs
in earlier periods. In addition, these late periods could include additional costs from unrecoverable maintenance reserve
payments required in the late years of the lease. We expensed $1.9 million, $2.0 million and $1.5 million of paid maintenance
reserves as supplemental rent during 2013, 2012 and 2011, respectively.
As of December 31, 2013 and 2012, we had prepaid maintenance deposits of $220.7 million and $198.5 million,
respectively, on our balance sheets. We have concluded that these prepaid maintenance deposits are probable of recovery
primarily due to the rate differential between the maintenance reserve payments and the expected cost for the related next
maintenance event that the reserves serve to collateralize.
These master lease agreements also provide that most maintenance reserves held by the lessor at the expiration of the
lease are nonrefundable to us and will be retained by the lessor. Consequently, we have determined that any usage-based
42
maintenance reserve payments after the last major maintenance event are not substantively related to the maintenance of the
leased asset and therefore are accounted for as contingent rent. We accrue contingent rent beginning when it becomes probable
and reasonably estimable we will incur such nonrefundable maintenance reserve payments. We make certain assumptions at the
inception of the lease and at each balance sheet date to determine the recoverability of maintenance deposits. These
assumptions are based on various factors such as the estimated time between the maintenance events, the cost of future
maintenance events and the number of flight hours the aircraft is estimated to be utilized before it is returned to the lessor.
Maintenance reserves held by lessors that are refundable to us at the expiration of the lease are accounted for as prepaid
maintenance deposits on the balance sheet when they are paid.
RESULTS OF OPERATIONS
In 2013, we generated operating revenues of $1,654.4 million and operating income of $282.3 million resulting in a
17.1% operating margin and net earnings of $176.9 million. In 2012, we generated operating revenues of $1,318.4 million and
operating income of $174.0 million resulting in a 13.2% operating margin and net earnings of $108.5 million. Operating
revenues increased year-over-year as a result of a 24.2% increase in traffic and a 1.1% improvement in average yield. The
increase in operating income in 2013 over 2012 of $108.3 million, is mainly due to a 25.5% increase in revenue partially offset
by increased fuel and other expenses resulting from increase in operations. Fuel costs increased by $80.0 million during 2013
compared to 2012, primarily driven by an 20.2% increase in consumption resulting from our increase in operations. Operating
expenses increased primarily due to our growth in capacity resulting from the addition of nine aircraft to our fleet and our route
network expansion. The increase in operating margin year-over-year is due in part to the negative revenue impact in the fourth
quarter of 2012 related to Hurricane Sandy, which we estimated to be $25 million, as well as lower fuel cost per gallon in 2013.
As of December 31, 2013, our cash and cash equivalents grew to $530.6 million, an increase of $113.8 million compared
to the prior year, mainly driven by cash from our operating activities offset by cash used to fund PDPs and capital expenditures.
Operating Revenue
Year Ended
2013
% change 2013
versus 2012
Year Ended
2012
% change 2012
versus 2011
Year Ended
2011
Passenger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-ticket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
986,018
668,367
Total operating revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,654,385
RASM (cents) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average ticket revenue per passenger flight segment. . . . $
Average non-ticket revenue per passenger flight segment $
11.94
79.43
53.84
Total revenue per passenger flight segment . . . . . . . . . . . $
133.27
26.0%
24.8%
25.5%
2.8%
5.8%
4.8%
5.4%
$
$
$
$
$
782,792
535,596
1,318,388
11.62
75.11
51.39
126.50
13.5%
40.4%
23.1%
1.5%
(7.2)%
14.7%
0.6%
$
$
$
$
689,650
381,536
1,071,186
11.45
80.97
44.79
125.76
2013 compared to 2012
Operating revenue increased by $336.0 million, or 25.5%, to $1,654.4 million in 2013 compared to 2012 as we increased
traffic by 24.2% and improved our average yield by 1.1% to 13.79 cents.
Our results for 2013 were driven by a capacity increase of 22.2% compared to 2012 while maintaining a high load factor
of 86.6% and an increase of 1.4 points compared to 2012. In addition, the year-over-year increase was partly attributable to the
negative revenue impact in the fourth quarter 2012 related to Hurricane Sandy which we estimated to be $25 million. Total
RASM for 2013 was 11.94 cents, an increase of 2.8% compared to 2012, as a result of higher average passenger yields and
higher load factor. Total revenue per passenger flight segment increased 5.4% from $126.50 in 2012 to $133.27 in 2013.
Non-ticket revenue increased 24.8% in 2013, as compared to 2012, mainly due to a 24.2% increase in traffic and an
increase in baggage revenue per passenger flight segment. Non-ticket revenue as a percentage of total revenue remained
relatively stable from 40.6% for 2012 to 40.4% for 2013. On a per passenger segment basis the increase is in non-ticket is
attributed to changes to our bag fee schedule which better optimized revenue by channel. Additionally, during June 2012 and
July 2013, we made adjustments to our passenger usage fee (PUF) helping to drive the increase in PUF fees year-over-year.
Stronger demand throughout 2013, particularly in the second half of the year, as compared to 2012, allowed us to better
leverage our ability to revenue manage our inventory, resulting in higher ticket revenue per passenger segment. Our average
ticket fare per passenger flight segment increased 5.8% from $75.11 in 2012 to $79.43 in 2013.
43
2012 compared to 2011
Operating revenues increased by $247.2 million, or 23.1%, to $1,318.4 million in 2012 compared to 2011 as increased
traffic by 20.7% and improved our average yield by 1.9% to 13.64 cents.
Our results for 2012 were driven by growing capacity 21.3% compared to 2011 while maintaining a high load factor of
85.2% and a network reorientation in mid-2011 that added capacity in Dallas-Fort Worth, Chicago and Las Vegas. In October
2012, we canceled 136 flights, or 19.9 million available seat miles, as a result of adverse weather conditions and airport
closures in connection with Hurricane Sandy. The negative impact of the storm on 2012 revenue was approximately $25
million. We generated greater demand in 2012 by lowering our average ticket revenue per passenger flight segment to $75.11,
or by 7.2% compared to 2011, while increasing our non-ticket revenue per passenger flight segment from $44.79 to $51.39, a
14.7% increase compared to 2011. Total revenue per passenger flight segment increased 0.6% from $125.76 in 2011 to $126.50
in 2012.
We experienced a 40.4% increase in non-ticket revenues in 2012 compared to 2011, reflecting the continued development
and optimization of ancillary revenues and a 22.4% increase in passenger flight segments. During the fourth quarter of 2011
and continuing into 2012, we further standardized our passenger usage fee across all markets and fare classes, which drove
much of the increases in non-ticket revenue in 2012 compared to 2011. Non-ticket revenue represented 40.6% of total revenue
in 2012 compared to 35.6% in 2011.
Operating Expenses
Since adopting our ULCC model, we have continuously sought to reduce our unit operating costs and have created one of
the industry's lowest cost structures in the Americas. The table below presents our operating expenses, as a percentage of
operating revenue for the last three years, as well as unit operating costs (CASM).
Year Ended December 31,
2013
2012
2011
% of
Revenue
100.0%
CASM
% of
Revenue
100.0%
CASM
% of
Revenue
100.0%
CASM
Operating revenue
Operating expenses:
Aircraft fuel (1) . . . . . . . . . . . . . . . . . .
33.4%
3.98¢
35.8%
4.16¢
36.2%
4.15¢
Salaries, wages and benefits. . . . . . . . .
Aircraft rent . . . . . . . . . . . . . . . . . . . . .
Landing fees and other rentals . . . . . . .
Distribution. . . . . . . . . . . . . . . . . . . . . .
Maintenance, materials and repairs . . .
Depreciation and amortization . . . . . . .
Other operating expenses . . . . . . . . . . .
Loss on disposal of assets. . . . . . . . . . .
Special charges (credits) (2) . . . . . . . . .
15.8
10.3
5.1
4.1
3.6
1.9
8.7
—
—
Total operating expense
82.9%
CASM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MTM losses (gains)per ASM . . . . . . . . . . . .
Special charges (credits) per ASM . . . . . . . .
Adjusted CASM (excludes MTM gains or
losses, loss on disposal of assets and special
charges (credits)) . . . . . . . . . . . . . . . . . . . . . .
Adjusted CASM excluding fuel . . . . . . . . . .
1.89
1.22
0.60
0.49
0.43
0.23
1.04
—
—
9.90¢
—
—
9.89
5.91
16.6
10.9
5.2
4.3
3.8
1.2
9.7
0.1
(0.6)
86.8%
1.93
1.27
0.60
0.50
0.44
0.13
1.13
0.01
(0.07)
10.09¢
—
(0.07)
10.15
6.00
17.0
10.9
4.9
4.8
3.3
0.7
8.4
—
0.3
86.5%
1.94
1.25
0.56
0.55
0.38
0.08
0.96
—
0.03
9.91¢
0.03
0.03
9.84
5.72
(1)
Aircraft fuel expense is the sum of (i) “into-plane fuel cost,” which includes the cost of jet fuel and certain other
charges such as fuel taxes and oil, (ii) settlement gains and losses and (iii) unrealized mark-to-market gains and losses
both associated with fuel hedge contracts. The following table summarizes the components of aircraft fuel expense for
the periods presented:
44
Year Ended December 31,
2013
2012
2011
Into-plane fuel cost. . . . . . . . . . . . . . . . . . $ 542,523
Settlement losses (gains) . . . . . . . . . . . . .
8,958
265
Unrealized mark-to-market losses (gains)
Aircraft fuel . . . . . . . . . . . . . . . . . . . . . . . $ 551,746
(in thousands)
$ 471,542
175
46
$ 392,278
(7,436)
3,204
$ 471,763
$ 388,046
(2)
Includes special charges (credits) of $(8.5) million ((0.07) cents per ASM) in 2012 and $3.2 million (0.03 cents per
ASM) in 2011. Special charges (credits) for 2012 primarily include a $9.1 million gain related to the sale
of four permanent air carrier slots at Ronald Reagan National Airport (DCA), offset by $0.6 million in secondary
offering costs. Special charges for 2011 include $2.3 million of termination costs in connection with the IPO
comprised of amounts paid to Indigo Partners, LLC to terminate its professional services agreement with us and fees
paid to three individual, unaffiliated holders of our subordinated notes and $0.8 million of legal, accounting, printing
and filing fees in the fourth quarter related to the secondary offering completed on January 25, 2012. Please see “—
Our Operating Expenses—Special Charges (Credits).”
2013 compared to 2012
Operating expense increased by $227.7 million, or 19.9%, in 2013 primarily due to our 22.2% growth in capacity as well
as higher amortization of heavy maintenance events on our aircraft.
Our adjusted CASM ex fuel for 2013 decreased by 1.5% as compared to 2012. Better operational performance during
2013 as compared to 2012 helped drive lower wages and passenger re-accommodation expenses. In addition, during 2013, we
entered into lease extensions covering 14 of our existing A319 aircraft resulting in reduced lease rates for the remaining term of
the leases which contributed to the decrease in adjusted CASM ex-fuel as compared to 2012. These decreases were partially
offset by higher heavy maintenance amortization expense for 2013 resulting from the increase in deferred heavy aircraft
maintenance events as compared to 2012.
Aircraft fuel expenses includes both into-plane expense (as defined below) plus the effect of mark-to-market adjustments
to our portfolio of derivative instruments, which is a component of aircraft fuel expenses. Into-plane fuel expense is defined as
the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Into-plane fuel prices are
affected by world oil prices and refining costs, which can vary by region in the United States and the other countries where we
operate. Into-plane fuel expense approximates cash paid to the supplier and does not reflect the effect of our fuel derivatives.
Because our fuel derivative contracts do not qualify for hedge accounting, we recognize both realized and unrealized changes
in the fair value of our derivatives when they occur as a component of aircraft fuel expense.
We evaluate economic fuel expense, which we define as into-plane fuel expense including the cash we receive from or
pay to counterparties for hedges that we settle during the relevant period, including hedges that we terminate early during the
period. The key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on
our hedge portfolio. When we refer to economic fuel expense, we include net settlement gains or losses only when they are
realized through a cash payment from our derivative contract counterparties for those contracts that were settled during the
period. We believe this is the best measure of the effect that fuel prices are currently having on our business because it most
closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry
analysts also evaluate airline results using this measure, and it is frequently used in our internal management reporting.
Aircraft fuel expense increased by 17% from $471.8 million in 2012 to $551.7 million in 2013. The increase was
primarily due to an 20.2% increase in fuel gallons consumed partially offset by a 2.7% decrease in fuel prices per gallon.
45
The difference between aircraft fuel expense and economic fuel expense and the elements of the changes are illustrated in
the following table:
Into-plane fuel expense
Cash paid (received) from settled derivatives, net
Economic fuel expense
Impact on fuel expense from unrealized (gains) and losses arising from mark-to-
market adjustments to our outstanding fuel derivatives
Aircraft fuel expense (per Statement of Operations)
Fuel gallons consumed
Economic fuel cost per gallon
Into-plane fuel cost per gallon
Year Ended December 31,
2013
2012
(in thousands, except per
gallon amounts)
Percent
Change
$ 542,523
$ 471,542
15.1 %
8,958
175
5,018.9 %
551,481
471,717
16.9 %
265
46
476.1 %
$ 551,746
$ 471,763
171,931
3.21
3.16
$
$
142,991
3.30
3.30
$
$
17.0 %
20.2 %
(2.7)%
(4.2 )%
Fuel gallons consumed increased 20.2% as a result of increased operations, as evidenced by a 20.1% increase in block
hours.
Total net loss recognized for hedges that settled during 2013 was $9.0 million, compared to a net loss of $0.2 million in
2012. These amounts represent the net cash paid (received) for the settlement of hedges.
Labor costs in 2013 increased by $43.2 million, or 19.7%, compared to 2012, due mainly to a 30.9% increase in our pilot
and flight attendant workforce required to operate the nine new aircraft deliveries in 2013. On a per-ASM basis, labor costs
decreased as a result of better operational performance during 2013 as compared to 2012, which helped drive lower crew-
related salary expenses during 2013.
During 2013, aircraft rent increased $26.2 million, or 18.2%, compared to 2012. This increase was primarily driven by
the delivery of nine new aircraft during 2013. On a per-ASM basis, aircraft rent expense decreased as a result of the
modification and extension of 14 A319 aircraft leases. The modification resulted in reduced lease rates for the remaining term
of these leases. This reduction was slightly offset by higher supplemental rent on three 40-month aircraft leases taken during
late 2012 and early 2013.
Landing fees and other rents for 2013 increased by $15.2 million, or 22.3%, compared to 2012 primarily due to
a 14.9% increase in departures as well as increased volume at higher cost airports. On a per-ASM basis, landing fees and other
rents remained flat as increased volume at higher-cost airports were offset by the increase in capacity which outpaced the
increase of departures due to higher stage length year over year.
The increase in distribution expense of $10.8 million, or 19.1%, in 2013 compared to 2012 was primarily due to
increased sales volume driving up credit card fees as well as an increase of approximately 6.3 percentage points year-over-year
in the percentage of sales from third-party travel agents, which are more expensive than sales directly through our website. This
shift in distribution mix did not materially affect operating income because the revenues received from sales through third-party
travel agents are designed to at least offset the associated incremental costs. On a per-ASM basis, distribution expense was
relatively flat as credit card fee rates remained stable period over period.
The following table shows our distribution channel usage:
Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61.0% 64.2%
Third-party travel agents . . . . . . . . . . . . . . . . . . . . . . . . . .
Call center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33.5
5.5
27.2
8.6
Year Ended
December 31,
2013
2012
Change
(3.2)
6.3
(3.1)
46
Maintenance, materials and repair costs increased by $10.7 million, or 21.6%, in 2013, as compared to 2012. The
increase in maintenance costs is primarily due to the aging of our fleet, which requires more comprehensive work during
routine scheduled maintenance, as well as the timing of the mix of maintenance checks performed during 2013 as compared to
2012. On October 15, 2013, we had an aircraft experience an engine failure shortly after takeoff. The airframe and engine
incurred damage as a result of the failure. We anticipate we will recover insurance proceeds to cover the expenses related to
this incident and therefore we have expensed the insurance deductible of approximately $0.8 million included in maintenance,
materials and repairs expense. On a per-ASM basis, maintenance, materials and repair costs were generally flat due to the one
time costs associated with the seat maintenance program we incurred in 2012. Maintenance expense and amortization of
deferred heavy maintenance events is expected to increase significantly as our fleet continues to age, resulting in the need for
additional repairs over time.
Depreciation and amortization increased by $16.7 million, or 109.4%, primarily due to deferred heavy aircraft
maintenance events, which in turn resulted in higher amortization expense recorded in 2013 compared to 2012.
Other operating expenses in 2013 increased by $16.7 million, or 13.1%, compared to 2012 primarily due to an increase in
departures of 14.9% which led to increases in variable operating expenses such as ground handling and security expense. On a
per-ASM basis, our other operating expenses decreased as compared to the same period in 2012. The decrease is primarily due
to better operational performance during 2013 as compared to 2012 which helped drive lower passenger re-accommodation
expenses. In addition, we incurred less software consulting costs related to our Enterprise Resource Planning (ERP) system
implementation during 2013 as compared to 2012.
Special charges (credits) for 2012 primarily include a $9.1 million gain related to the sale of four permanent air carrier
slots at Ronald Reagan National Airport (DCA), offset by $0.6 million in secondary offering costs.
2012 compared to 2011
Operating expense increased by $217.6 million for 2012 compared to 2011 mostly due to increases in fuel and labor
costs, which were primarily driven by our 21.3% capacity growth, in addition to increases in other operating costs.
Our adjusted CASM ex fuel for 2012 increased by 4.9% as compared to the same period in 2011. During 2012, we
incurred higher other operating expenses driven by higher costs associated with passenger re-accommodations related to
slightly higher flight cancellations. Additionally, overall increased rates at the airports resulted in increased variable operating
costs such as ground handling expenses and travel and lodging expense. During 2012, we also incurred an increase in
maintenance costs related to our seat maintenance program and an increase in deferred heavy aircraft maintenance events,
which in turn resulted in higher heavy maintenance amortization expense. Our average stage length for 2012 decreased
by 1.3%, contributing to the year-over-year increase in adjusted CASM ex fuel.
Aircraft fuel expense increased from $388.0 million in 2011 to $471.8 million in 2012, representing 41.2% of our total
operating expenses for 2012. The increase was primarily due to an 18.1% increase in fuel gallons consumed as well as a 3.8%
increase in fuel prices.
The difference between aircraft fuel expense and economic fuel expense and the elements of the changes are illustrated in
the following table:
Into-plane fuel expense
Cash paid (received) from settled derivatives, net
Economic fuel expense
Impact on fuel expense from unrealized (gains) and losses arising from mark-to-
market adjustments to our outstanding fuel derivatives
Aircraft fuel expense (per Statement of Operations)
Fuel gallons consumed
Economic fuel cost per gallon
Into-plane fuel cost per gallon
47
Year Ended December 31,
2012
2011
(in thousands, except per
gallon amounts)
Percent
Change
$ 471,542
175
471,717
$ 392,278
(7,436)
384,842
20.2 %
(102.4)%
22.6 %
46
3,204
(98.6)%
$ 471,763
$ 388,046
142,991
3.30
3.30
$
$
121,030
3.18
3.24
$
$
21.6 %
18.1 %
3.8 %
1.9 %
Fuel gallons consumed increased 18.1% as a result of increased operations, as evidenced by an 18.8% increase in block
hours. Our average daily aircraft utilization in 2012 increased slightly compared to 2011. We estimate the fuel savings related
to the 136 flights cancellations due to Hurricane Sandy were approximately $0.6 million.
Total net loss recognized for hedges that settled during 2012 was $0.2 million, compared to a net loss of $7.4 million in
2011. These amounts represent the net cash paid (received) for the settlement of hedges.
Labor costs in 2012 increased by $37.2 million, or 20.5%, compared to 2011, primarily driven by a 22.4% increase in our
pilot and flight attendant workforce as we increased our fleet size by 21.6%, or eight aircraft, during 2012. During 2012, we
incurred an incremental $3.8 million of share-based compensation recorded within salaries, wages and benefits, driven
primarily by the commencement of the Performance Share Awards program in 2012.
During 2012, aircraft rent increased $27.1 million, or 23.3%, mainly due to the delivery of eight Airbus A320 aircraft
subsequent to the fourth quarter of 2011. All aircraft were financed through operating leases. The increase of aircraft rent
expense on a per-ASM basis is primarily due to the fact that we incurred $2.5 million of additional aircraft rent during
2012 related to a short-term lease agreement with a third-party provider (wet-leased aircraft) to maintain desired capacity
during the summer months.
Landing fees and other rents for 2012 increased by $15.6 million, or 29.5%, compared to 2011 primarily due to
a 19.9% increase in departures. On a per-ASM basis, the increase in landing fees and other rents of 7.1% during 2012 as
compared to the prior year period is due to increased volume at higher-cost airports, including the addition of six new airports
served in 2012, which on average are higher-cost airports than the system average.
The increase in distribution expense of $5.3 million, or 10.4%, in 2012 compared to 2011 was primarily due to increased
volume and an increase of approximately 4.1 percentage points year-over-year in the percentage of sales from third-party travel
agents, which are more expensive than sales directly through our website. This shift in distribution mix did not materially affect
operating income because the revenues received from sales through third-party travel agents are designed to at least offset the
associated incremental costs. The decrease on a per-unit basis is primarily due to a decrease of approximately 14% in credit
card fee rates period over period.
The following table shows our distribution channel usage:
Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64.2% 66.3%
Third-party travel agents . . . . . . . . . . . . . . . . . . . . . . . . . .
Call center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27.2
8.6
23.1
10.6
Year Ended
December 31,
2012
2011
Change
(2.1)
4.1
(2.0)
Maintenance, materials and repair costs increased by $15.4 million, or 45.4%, in 2012. The increase in maintenance costs
is primarily due to $6.8 million in one-time start-up costs of the seat maintenance program, which was introduced and
completed in 2012. We do not expect the ongoing expense of our seat maintenance program to have a material impact on our
overall future maintenance cost outlook. The average age of our fleet increased to 4.6 years as of December 31, 2012 from 4.5
years as of December 31, 2011. Maintenance expense is expected to increase significantly as our fleet continues to age,
resulting in the need for additional repairs over time.
Depreciation and amortization increased by $7.5 million, or 96.6%, primarily due to deferred heavy aircraft maintenance
events, which in turn resulted in higher amortization expense recorded in 2012 compared to 2011.
Other operating expenses in 2012 increased by $36.7 million, or 40.3%, compared to 2011 primarily due to a 19.9%
increase in departures. Overall increased rates at the airports we serve resulted in increased variable operating costs such as
ground handling expenses and travel and lodging expense in 2012 compared to 2011. The increase on a per-ASM basis of
17.7% is primarily due to a shift in our route network to include higher volumes at the higher-cost airports we serve. In
addition, we experienced increases in travel and lodging costs driven by both volume and hotel rate increases associated with
increased training and scope of operations, as well as higher passenger re-accommodation expenses associated with slightly
higher flight cancellations during 2012. We also incurred additional expenses related to the implementation of our ERP system.
Special charges (credits) for 2012 primarily include a $9.1 million gain related to the sale of four permanent air carrier
slots at Ronald Reagan National Airport (DCA), offset by $0.6 million in secondary offering costs. Special charges for 2011
relate to termination costs of $2.6 million in connection with our IPO, including $1.8 million paid to Indigo Partners, LLC to
48
terminate its professional services agreement with us and $0.5 million paid to three individual, unaffiliated holders of our
subordinated notes.
Other (income) expense, net
2013 compared to 2012
Other (income) expense, net decreased from $(0.6) million in 2012 to $(0.1) million in 2013. The decrease is primarily
driven by a decrease of $0.5 million of interest income year over year due to the lower interest rates year over year that we earn
from our money market investments.
2012 compared to 2011
In 2011 we incurred $22.1 million of other (income) expense, net compared to $(0.6) million in 2012. During 2011, the
interest expense is related to interest on debt for five months in 2011 prior to the elimination of debt in 2011 in conjunction
with the IPO in June 2011. Related-party and non-related interest expense incurred in 2011 was $21.0 million and $3.8 million,
respectively, and was offset slightly by capitalized interest. During 2012, we earned interest income on money market
investments of $0.9 million offset by other expense of $0.3 million.
Income Taxes
Our effective tax rate was 37.4% compared to 37.9% in 2012 and 37.8% in 2011. While we expect our tax rate to be
fairly consistent in the near term, it will tend to vary depending on recurring items such as the amount of income we earn in
each state and the state tax rate applicable to such income. Discrete items particular to a given year may also affect our effective
tax rates.
49
Quarterly Financial Data (unaudited)
March 31,
2012
June 30,
2012
September 30,
2012
December 31,
2012
March 31,
2013
June 30,
2013
September 30,
2013
December 31,
2013
(in thousands except share and per share amounts)
Three Months Ended
Total operating revenue
$
301,495
$
346,308
$
342,317
$
328,268
$
370,437
$
407,339
$
456,625
$
Passenger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-ticket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings Per Share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding
$
$
$
180,078
121,417
37,244
23,419
0.32
0.32
$
$
$
211,812
134,496
55,132
34,591
0.48
0.48
$
$
$
202,181
140,136
49,681
30,884
0.43
0.43
$
$
$
188,721
139,547
31,933
19,566
0.27
0.27
$
$
$
218,897
151,540
49,669
30,554
0.42
0.42
$
$
$
241,119
166,220
66,758
42,068
279,499
177,126
97,804
61,103
419,984
246,503
173,481
68,061
43,193
0.58
0.58
$
$
0.84
0.84
$
$
0.59
0.59
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,292,164
72,498,705
72,379,185
72,583,690
72,427,490
72,658,298
72,442,183
72,622,718
72,486,209
72,804,245
72,592,973
72,992,084
72,631,646
73,002,761
72,657,916
73,195,479
50
Other operating statistics
Aircraft at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Airports served (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average daily Aircraft utilization (hours) . . . . . . . . . . . . . . . . . . . . .
Average stage length (miles). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Passenger flight segments (thousands) . . . . . . . . . . . . . . . . . . . . . . .
Revenue passenger miles (RPMs) (thousands) . . . . . . . . . . . . . . . . .
Available seat miles (ASMs) (thousands) . . . . . . . . . . . . . . . . . . . . .
Load factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average ticket revenue per passenger flight segment ($) . . . . . . . . .
Average non-ticket revenue per passenger flight segment ($) . . . . .
Operating revenue per ASM (RASM) (cents). . . . . . . . . . . . . . . . . .
CASM (cents) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted CASM (cents) (2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted CASM ex fuel (cents) (2). . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel gallons consumed (thousands) . . . . . . . . . . . . . . . . . . . . . . . . .
Average economic fuel cost per gallon ($) . . . . . . . . . . . . . . . . . . . .
March 31,
2012
June 30,
2012
September 30,
2012
December 31,
2012
March 31,
2013
June 30,
2013
September 30,
2013
December 31,
2013
Three Months Ended
40
50
12.8
912
2,349
42
52
12.9
902
2,613
42
53
12.8
892
2,814
45
53
12.6
932
2,647
49
52
12.6
941
2,768
50
55
12.8
935
3,111
51
54
12.8
956
3,374
54
53
12.5
998
3,161
2,194,350
2,589,014
2,397,663
2,826,916
2,552,316
2,972,651
2,519,392
2,956,150
2,661,491
3,127,214
2,930,912
3,420,257
3,241,309
3,637,951
3,167,376
3,675,972
84.8
76.65
51.68
11.65
10.21
10.18
5.99
32,730
3.31
84.8
81.06
51.47
12.25
10.30
10.26
6.05
35,829
3.32
85.9
71.85
49.80
11.52
9.84
10.15
6.02
37,761
3.26
85.2
71.30
52.73
11.10
10.02
10.03
5.93
36,670
3.31
85.1
79.09
54.75
11.85
10.26
10.14
6.04
38,628
3.32
85.7
77.51
53.43
11.91
9.96
9.78
6.00
42,683
3.03
89.1
82.84
52.50
12.55
9.86
10.00
5.86
45,521
3.31
86.2
77.98
54.88
11.43
9.57
9.67
5.78
45,100
3.17
(1) Includes airports served during the period that had service canceled as of the end of the period. Previously, we reported only airports served during the period with continuing operations.
(2) Excludes special charges (credits) of $(0.1) million (less than (0.01) cents per ASM) in the three months ended March 31, 2012, $0.0 million (less than 0.01 cents per ASM) in the three months ended June 30,
2012, $(8.3) million ((0.28) cents per ASM) in the three months ended September 30, 2012, $(0.1) million (less than (0.01) cents per ASM) in the three months ended December 31, 2012, $0.0 million (less than 0.01
cents per ASM) in the three months ended March 31, 2013, $0.0 million (less than 0.01 cents per ASM) in the three months ended June 30, 2013, $0.4 million (0.01 cents per ASM) in the three months ended
September 30, 2013 and $(0.3) million ((0.01) cents per ASM) in the three months ended December 31, 2013. These amounts are excluded from all calculations of Adjusted CASM provided in this annual report.
Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Operating Expenses—Special Charges (Credits)."
(3) Excludes unrealized mark-to-market (gains) and losses of $0.3 million (0.01 cents per ASM) in the three months ended March 31, 2012,
$1.1 million (0.04 cents per ASM) in the three months ended June 30, 2012, $(0.9) million ((0.03) cents per ASM) in the three months ended September 30, 2012,
$(0.4) million ((0.01) cents per ASM) in the three months ended December 31, 2012, $3.4 million (0.11 cents per ASM) in the three months ended March 31, 2013, $5.8 million (0.17 cents per ASM) in the three
months ended June 30, 2013, $(5.7) million ((0.16) cents per ASM) in the three months ended September 30, 2013 and $(3.2) million ((0.09) cents per ASM) in the three months ended December 31, 2013. Please see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Operating Expenses—Critical Accounting Policies and Estimates.”
51
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash on hand and cash provided by operations. Primary uses of liquidity are for
working capital needs, capital expenditures, aircraft pre-delivery deposits (PDPs) and maintenance reserves. Our total cash at
December 31, 2013 was $530.6 million, an increase of $113.8 million from December 31, 2012.
Currently our single largest capital need is to fund the acquisition costs of our aircraft. PDPs relating to future deliveries
under our agreement with Airbus are required at various times prior to each delivery date. During 2013, $36.7 million of PDPs
have been returned related to delivered aircraft in the period, and we have paid $107.0 million in PDPs for future deliveries of
aircraft and spare engines. As of December 31, 2013, we have secured financing commitments with third parties for seven
aircraft deliveries from Airbus, scheduled for delivery in 2014, and for five aircraft to be leased directly from a third party,
scheduled for delivery between 2015 and 2016. We do not have financing commitments in place for the remaining 105 Airbus
firm aircraft orders scheduled for delivery between 2014 and 2021.
In addition to funding the acquisition of our future fleet, we are required to make maintenance reserve payments for a
majority of our current fleet. Maintenance reserves are paid to aircraft lessors and are held as collateral in advance of our
performance of major maintenance activities. In 2013, we recorded an increase of $24.1 million in maintenance reserves, net of
reimbursements, and as of December 31, 2013, we have $220.7 million ($59.2 million in prepaid expenses and other current
assets and $161.5 million in aircraft maintenance deposits) on our balance sheet, representing the amount paid in reserves since
inception, net of reimbursements.
As of December 31, 2013, we are compliant with our credit card processing agreements, and not subject to any credit
card holdbacks. The maximum potential exposure to cash holdbacks by our credit card processors, based upon advance ticket
sales and $9 Fare Club memberships as of December 31, 2013 and December 31, 2012, was $188.6 million and $144.8 million,
respectively.
During 2011, we completed our IPO, which raised net proceeds of $150.0 million after repayment of debt, payment of
transaction expenses and payments of fees to certain unaffiliated holders of our notes. Additionally, during 2011, the IPO
allowed us to amend our agreements with our credit card processors enabling us to eliminate our restricted cash balance
(holdback) and increase our unrestricted cash balance.
Net Cash Flows Provided By Operating Activities. Operating activities in 2013 provided $195.4 million in cash compared
to $113.6 million provided in 2012. The increase is primarily due to larger operating profits in 2013 as compared to 2012. In
addition, a slightly higher air traffic liability year-over-year led to higher cash inflows at the end of 2013. This increase is
driven by higher capacity and future bookings.
Operating activities in 2012 provided $113.6 million in cash compared to $171.2 million provided in 2011. The decrease
is primarily due to $72.7 million received from the release of all credit card holdbacks in 2011 coupled with significantly higher
heavy scheduled maintenance costs in 2012, slightly offset by cash inflows received on future travel as of December 31, 2012.
Net Cash Flows Used In Investing Activities. During 2013, investing activities used $90.1 million, compared to $27.3
million used in 2012. The increase is mainly due to an increase in paid PDPs, net of refunds, during 2013, compared to 2012,
driven by the timing of aircraft deliveries and our amended order with Airbus. This was offset by $9.1 million received as a
result of proceeds from the sale of slots at Ronald Reagan National Airport (DCA). Capital expenditures decreased year-over-
year mainly due to higher expenses incurred in 2012 related to the implementation of our ERP system.
During 2012, investing activities used $27.3 million, compared to $67.2 million used in 2011. The decrease is mainly due
to the refund of $40.5 million in PDPs related to the delivery of seven aircraft from Airbus and corresponding sale and
leaseback transactions, and the sale of airport slots for $9.1 million. These effects were offset by higher capital expenditures,
including the purchase of two spare engines for $10.3 million during 2012.
Net Cash Provided By Financing Activities. During 2013, financing activities provided $8.5 million. We received $6.9
million in proceeds from the sale of one spare engine as part of sale and leaseback transactions, retained $1.9 million as a result
of excess tax benefits related to share-based payments and received cash as a result of exercised stock options. Additional cash
used in financing activities consisted of cash used to purchase treasury stock. As of December 31, 2013, an estimated
remaining cash benefit of $5.6 million is expected to be paid to our Pre-IPO Stockholders under the terms of the TRA.
During 2012, $12.8 million was used for financing activities driven mostly by the payment to Pre-IPO Stockholders
pursuant to the TRA offset by the proceeds received from the sale of two spare engines as part of sale and leaseback
transactions.
52
During 2011, we completed our recapitalization and initial public offering, from which we received $150.0 million in
proceeds, net of underwriting fees, transaction costs and our repayment of $20.6 million of stockholder debt of which $2.3
million was paid in kind interest and included in operating activities. Remaining stockholder debt was exchanged for newly
issued shares of our common stock. In addition, during 2011 we received $4.5 million in proceeds from the sale of one engine
as part of a sale leaseback transaction.
Commitments and Contractual Obligations
The following table discloses aggregate information about our contractual obligations as of December 31, 2013 and the
periods in which payments are due (in millions):
Operating lease obligations . . . . . . . . . . . . . . . . .
Flight equipment purchase obligations . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future payments on contractual
obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2014
2015 - 2016
2017 - 2018
2019 and
beyond
203
559
5
$
396
$
319
$
527
$
1,252
10
1,348
6
2,197
—
Total
1,445
5,356
21
767
$
1,658
$
1,673
$
2,724
$
6,822
Some of our master lease agreements provide that we pay maintenance reserves to aircraft lessors to be held as collateral
in advance of our required performance of major maintenance activities. Some maintenance reserve payments are fixed
contractual amounts, while others are based on actual flight hours. In addition to the contractual obligations disclosed in the
table above, we have fixed maintenance reserve payments for these aircraft and related flight equipment, including estimated
amounts for contractual price escalations, which are approximately $7.4 million in 2014, $7.6 million in 2015, $8.0 million in
2016, $7.4 million in 2017, $5.8 million in 2018 and $18.4 million in 2019 and beyond.
Additionally, we are contractually obligated to make payments to the Pre-IPO Stockholders under the Tax Receivable
Agreement. As of December 31, 2013, we estimated the TRA liability to be $5.6 million. For additional information, please see
“Notes to Financial Statements—18. Initial Public Offering and Tax Receivable Agreement".
Off-Balance Sheet Arrangements
We have significant obligations for aircraft as all 54 of our aircraft are operated under operating leases and therefore are
not reflected on our balance sheets. These leases expire between 2016 to 2025. Aircraft rent payments were $166.3 million and
140.8 million for 2013 and 2012, respectively. Our aircraft lease payments for 49 of our aircraft are fixed-rate obligations. Five
of our leases provide for variable rent payments, which fluctuate based on changes in LIBOR (London Interbank Offered Rate).
Our contractual purchase commitments consist primarily of aircraft and engine acquisitions through manufacturer and
aircraft leasing companies. During 2013, we converted ten Airbus A320 orders to Airbus A321 orders and converted five
Airbus A321 orders to Airbus A321neo orders. As of December 31, 2013, our aircraft orders consisted of the following:
2014
2015
2016
2017
2018
2019
2020
2021
Airbus
Third-Party
Lessor
A320
A320NEO
A321
A321NEO
A320NEO
Total
11
11
5
10
37
2
8
10
5
25
6
8
13
18
45
5
5
1
4
5
11
14
17
20
11
13
13
18
117
We also have six spare engine orders for V2500 SelectOne engines with IAE and nine spare engine orders for PurePower
PW 1100G-JM engines with Pratt & Whitney. Spare engines are scheduled for delivery from 2014 through 2024.
53
As of December 31, 2013, we had lines of credit related to corporate credit cards of $18.6 million from which we had
drawn $3.7 million.
As of December 31, 2013, we had lines of credit with counterparties for both physical fuel delivery and jet fuel
derivatives in the amount of $34.5 million. As of December 31, 2013, we had drawn $13.8 million on these lines of credit. We
are required to post collateral for any excess above the lines of credit if the derivatives are in a net liability position and make
periodic payments in order to maintain an adequate undrawn portion for physical fuel delivery.
As of December 31, 2013, we have $6.0 million in uncollateralized surety bonds and a $25.1 million unsecured standby
letter of credit facility, representing an off balance-sheet commitment, of which $10.4 million had been drawn upon for issued
letters of credit.
54
Set forth below is a glossary of industry terms:
GLOSSARY OF AIRLINE TERMS
“Adjusted CASM” means operating expenses, excluding mark-to-market gains or losses, loss on disposal of assets, and
special charges (credits), divided by ASMs.
“Adjusted CASM ex fuel” means operating expenses excluding aircraft fuel expense, loss on disposal of assets, and
special charges (credits), divided by ASMs.
“AFA-CWA” means the Association of Flight Attendants-CWA.
“Air traffic liability” or “ATL” means the value of tickets sold in advance of travel.
“ALPA” means the Airline Pilots Association, International.
“ASIF” means an Aviation Security Infrastructure Fee assessed by the TSA on each airline.
“Available seat miles” or “ASMs” means the number of seats available for passengers multiplied by the number of miles
the seats are flown, also referred to as "capacity".
“Average aircraft” means the average number of aircraft in our fleet as calculated on a daily basis.
“Average daily aircraft utilization” means block hours divided by number of days in the period divided by average
aircraft.
“Average economic fuel cost per gallon” means total aircraft fuel expense, excluding mark-to-market gains and losses,
divided by the total number of fuel gallons consumed.
“Average non-ticket revenue per passenger flight segment” means the total non-ticket revenue divided by passenger flight
segments.
“Average ticket revenue per passenger flight segment” means total passenger revenue divided by passenger flight
segments.
“Average stage length” represents the average number of miles flown per flight.
“Average yield” means average operating revenue earned per RPM, calculated as total revenue divided by RPMs.
“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate
departure before take-off until the time of gate arrival at the destination.
“CASM” or “unit costs” means operating expenses divided by ASMs.
“CBA” means a collective bargaining agreement.
“CBP” means United States Customs and Border Protection.
“DOT” means the United States Department of Transportation.
“EPA” means the United States Environmental Protection Agency.
“FAA” means the United States Federal Aviation Administration.
“FCC” means the United States Federal Communications Commission.
“FLL Airport” means the Fort Lauderdale-Hollywood International Airport.
“GDS” means Global Distribution System (e.g., Amadeus, Galileo, Sabre and Worldspan).
“Into-plane fuel cost per gallon” means into-plane fuel expense divided by number of fuel gallons consumed.
“Into-plane fuel expense” represents the cost of jet fuel and certain other charges such as fuel taxes and oil.
“Load factor” means the percentage of aircraft seats actually occupied on a flight (RPMs divided by ASMs).
55
“NMB” means the National Mediation Board.
“Operating revenue per ASM,” “RASM” or “unit revenue” means operating revenue divided by ASMs.
“OTA” means Online Travel Agent (e.g., Orbitz and Travelocity).
“Passenger flight segments” means the total number of passengers flown on all flight segments.
“PDP” means pre-delivery deposit payment.
“Revenue passenger mile” or “RPM” means one revenue passenger transported one mile. RPMs equals revenue
passengers multiplied by miles flown, also referred to as "traffic".
“RLA” means the United States Railway Labor Act.
“TWU” means the Transport Workers Union of America.
“TSA” means the United States Transportation Security Administration.
“ULCC” means “ultra low-cost carrier.”
“VFR” means visiting friends and relatives.
"Wet-leased aircraft" means a lease where the lessor provides for aircraft, crew, maintenance and insurance, also known
as an "ACMI".
56
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk-Sensitive Instruments and Positions
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 provided below 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.
Aircraft Fuel. Our results of operations can vary materially due to changes in the price and availability of aircraft fuel.
Aircraft fuel expense for the years ended December 31, 2013, 2012 and 2011 represented approximately 40.2%, 41.2% and
41.9% of our operating expenses. Increases in aircraft fuel prices or a shortage of supply could have a material adverse effect
on our operations and operating results. 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 during hurricane season when refinery shutdowns have occurred, 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. In addition to other fuel derivative contracts, we have historically protected approximately 70%
of our forecasted fuel requirements during peak hurricane season (August through October) using jet fuel swaps. Gulf Coast Jet
indexed fuel is the basis for a substantial majority of our fuel consumption. Based on our annual fuel consumption, a 10%
increase in the average price per gallon of aircraft fuel would have increased into-plane aircraft fuel cost for 2013 by
approximately $54.3 million. As of December 31, 2013, we had no derivative contracts outstanding.
The fair value of our fuel derivative contracts as of December 31, 2012 was $0.3 million net liability. We measure our
financial derivative instruments at fair value. Fair value of the instruments is determined using standard option valuation
models. We measure the fair value of the derivative instruments based on either quoted market prices or values provided by the
counterparty. Changes in the related commodity derivative instrument cash flows 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. As of December 31, 2013, we had no credit exposure related to counterparties as we had no derivative
contracts outstanding.
Interest Rates. We have market risk associated with changing interest rates due to LIBOR-based lease rates on five of our
aircraft. A hypothetical 10% change in interest rates in 2013 would affect total aircraft rent expense in 2014 by less than $0.1
million.
57
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Shareholders’ Equity (Deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
59
60
61
62
63
86
58
Spirit Airlines, Inc.
Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
2013
2012
2011
Operating revenues:
Passenger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 986,018
668,367
Non-ticket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,654,385
Operating expenses:
Aircraft fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salaries, wages and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Landing fees and other rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance, materials and repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special charges (credits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
551,746
262,150
169,737
83,604
67,481
60,143
31,947
144,586
525
174
1,372,093
$ 782,792
535,596
1,318,388
$ 689,650
381,536
1,071,186
471,763
218,919
143,572
68,368
56,668
49,460
15,256
127,886
956
(8,450)
1,144,398
388,046
181,742
116,485
52,794
51,349
34,017
7,760
91,172
255
3,184
926,804
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other (income) expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
282,292
173,990
144,382
214
(214)
(401)
283
(118)
1,350
(1,350)
(925)
331
(594)
24,781
(2,890)
(575)
235
21,551
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
282,410
105,492
174,584
66,124
122,831
46,383
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 176,918
Basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.44
Diluted earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.42
$ 108,460
$
$
1.50
1.49
$
$
$
76,448
1.44
1.43
See accompanying Notes to Financial Statements.
59
Spirit Airlines, Inc.
Balance Sheets
(In thousands, except share data)
December 31,
2013
December 31,
2012
Assets
Current assets: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment:
Flight equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ground and other equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits on flight equipment purchase contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft maintenance deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred heavy maintenance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Air traffic liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits and other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock: Common stock, $.0001 par value, 240,000,000 shares authorized at
December 31, 2013 and 2012, respectively; 72,670,673 and 70,861,822 issued and
72,566,426 and 70,801,782 outstanding as of December 31, 2013 and 2012,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock: Non-Voting common stock: $.0001 par value, 50,000,000 shares
authorized at December 31, 2013 and 2012, respectively; 0 and 1,669,205 issued
and outstanding as of December 31, 2013 and 2012, respectively . . . . . . . . . . . . . . . .
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost: 104,247 and 60,040 shares as of December 31, 2013 and
2012, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
See accompanying Notes to Financial Statements.
$
530,631
23,246
16,243
78,955
649,075
9,847
50,987
(25,221)
35,613
157,669
161,484
125,288
51,636
1,180,765
23,104
167,627
145,262
335,993
48,916
26,739
$
$
416,816
22,740
12,591
95,210
547,357
2,648
43,580
(17,825)
28,403
96,692
122,379
80,533
44,520
919,884
24,166
131,414
121,314
276,894
33,216
27,239
7
6
—
515,331
(2,291)
256,070
769,117
1,180,765
$
1
504,527
(1,151)
79,152
582,535
919,884
60
Spirit Airlines, Inc.
Statements of Cash Flows
(In thousands)
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operations:
Changes in fair value of open fuel hedge contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash restructuring credit charges, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity based stock compensation, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred gains, losses and debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on slot sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends incurred but not paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid maintenance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Air traffic liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of slots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-delivery deposits for flight equipment, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Proceeds from issuance of common stock, net of offering expenses
Proceeds from options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale and leaseback transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to pre-IPO shareholders pursuant to tax receivable agreement. . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Supplemental disclosures
Cash payments for:
Year Ended December 31,
2013
2012
2011
176,918
$
108,460
$
76,448
265
—
5,689
143
(558)
31,947
12,047
525
—
—
(214)
—
(461)
(24,058)
(65,654)
(1,674)
36,226
24,235
—
195,376
—
—
(70,288)
(19,812)
(90,100)
—
852
—
6,900
—
1,927
(1,140)
—
8,539
113,815
416,816
46
—
4,327
78
(830)
15,256
29,255
956
(9,060)
—
(1,350)
—
(7,393)
(31,567)
(68,248)
8,452
19,134
46,115
—
113,631
14
9,060
(12,626)
(23,771)
(27,323)
—
469
—
12,540
(26,905)
2,098
(1,022)
—
(12,820)
73,488
343,328
3,204
—
530
27
(1,047)
7,760
44,180
255
—
21,875
(2,890)
72,736
(5,728)
(36,848)
(15,992)
2,457
6,573
(2,189)
(153)
171,198
150
—
(53,274)
(14,093)
(67,217)
170,828
423
(18,221)
4,481
—
—
(886)
8
156,633
260,614
82,714
530,631
$
416,816
$
343,328
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
29
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
85,705
$
$
303
40,204
$
$
10,562
1,477
Non-cash transactions:
Exchange of notes due to related parties for common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Exchange of mandatorily redeemable preferred stock for common stock . . . . . . . . . . . . . . . . . . . . . . . . . $
Liability and equity related to tax receivable agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capital expenditures funded by capital lease borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
— $
— $
(2,336) $
(3,234) $
(1,497) $
— $
279,206
81,747
36,522
—
See accompanying Notes to Financial Statements.
61
Spirit Airlines, Inc.
Statements of Shareholders’ Equity (Deficit)
(In thousands)
Class A
Common
Stock
Class B
Common
Stock
Common
Stock
Non-
Voting
Common
Stock
Additional
Paid-In
Capital
Treasury
Stock
Retained
Earnings
(Accumulated
Deficit)
Total
2
$
1
$ — $ — $
676
$ — $ (105,756) $ (105,077)
Balance at December 31, 2010. $
Conversion of Class A & B
common stock to common stock
Proceeds from initial public
offering, net . . . . . . . . . . . . . . . .
Conversion of debt to common
stock . . . . . . . . . . . . . . . . . . . . . .
Conversion of preferred stock to
common stock . . . . . . . . . . . . . .
Record liability under Tax
Receivable Agreement . . . . . . . .
Share-based compensation . . . . .
Repurchase of common stock . .
Conversion of common stock to
non-voting common stock . . . . .
Proceeds from options exercised
Net income . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2011.
Adjustment to liability recorded
under Tax Receivable
Agreement . . . . . . . . . . . . . . . . .
Share-based compensation . . . . .
Repurchase of common stock . .
Proceeds from options exercised
Excess tax benefits from share-
based compensation . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . .
Balance at December 31, 2012.
Adjustment to liability recorded
under Tax Receivable
Agreement . . . . . . . . . . . . . . . . .
Share-based compensation . . . . .
Repurchase of common stock . .
Conversion of non-voting
common stock to common stock
Proceeds from options exercised
(2)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 170,827
— 279,204
—
81,746
— (36,522)
530
—
(757)
—
—
423
—
9
496,136
—
—
—
—
—
—
(129)
—
—
—
—
(129)
1,497
—
4,327
—
— (1,022)
—
469
2,098
—
504,527
—
—
(1,151)
2,336
5,689
—
852
1,927
—
—
(1,140)
—
—
—
1
—
—
—
1
—
—
—
—
—
—
1
—
—
—
(1)
—
—
—
—
—
—
—
—
—
—
—
76,448
—
(29,308)
—
—
—
—
—
108,460
79,152
—
—
—
—
—
—
—
170,828
279,206
81,747
(36,522)
530
(886)
—
423
76,448
9
466,706
1,497
4,327
(1,022)
469
2,098
108,460
582,535
2,336
5,689
(1,140)
—
852
1,927
3
1
2
1
—
—
—
(1)
—
—
—
6
—
—
—
—
—
—
6
—
—
—
1
—
—
—
7
Excess tax benefits from share-
based compensation . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . .
Balance at December 31, 2013 $ — $ — $
—
—
—
—
—
—
$ — $ 515,331
—
$ (2,291) $
176,918
256,070
176,918
$ 769,117
See accompanying Notes to Financial Statements.
62
1. Summary of Significant Accounting Policies
Basis of Presentation
Notes to Financial Statements
Spirit Airlines, Inc. (Spirit or the Company) headquartered in Miramar, Florida, is an ultra low-cost, low-fare airline that
provides affordable travel opportunities principally throughout the domestic United States, the Caribbean and Latin America.
The Company manages operations on a system-wide basis due to the interdependence of its route structure in the various
markets served. As only one service is offered (i.e., air transportation), management has concluded there is only one reportable
segment.
Certain prior period amounts have been reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States
of America requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of less than three months at the date of acquisition
to be cash equivalents. Investments included in this category primarily consist of money market funds.
Restricted Cash
Restricted cash, when reported, can consist of funds held by credit card processors as collateral for future travel paid with
a credit card.
Accounts Receivable
Accounts receivable primarily consist of amounts due from credit card processors associated with the sales of tickets and
amounts due from counterparties associated with fuel derivative instruments which have settled. The Company records an
allowance for doubtful accounts for amounts not expected to be collected. The Company estimates the allowance based on
historical write offs and chargebacks as well as aging trends. The allowance for doubtful accounts was immaterial as of
December 31, 2013, 2012 and 2011.
In addition, the provision for doubtful accounts and write-offs for 2013, 2012 and 2011 were each immaterial.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation of operating
property and equipment is computed using the straight-line method applied to each unit of property, except on flight equipment
(major rotable parts, avionics and assemblies), which are depreciated on a group basis over the average life of the applicable
equipment. Property under capital leases and related obligations are initially recorded at an amount equal to the present value of
future minimum lease payments computed using the Company's incremental borrowing rate or, when known, the interest rate
implicit in the lease. Amortization of property under capital leases is on a straight-line basis over the lease term and is included
in depreciation and amortization expense. During 2012, the Company wrote off approximately $15.3 million in fully
depreciated and out-of-service assets and recorded a corresponding entry to accumulated depreciation.
The depreciable lives used for the principal depreciable asset classifications are:
Spare rotables and flight assemblies . . . . . . . . . . . . . . . . . . . . . . Lesser of the useful life of equipment or average remaining
Estimated Useful Life
Other equipment and vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 7 years
Internal use software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 10 years
Capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease term
fleet life
All aircraft and spare engines are financed through operating leases with terms of 3 to 15 years for aircraft and 7 to 12
years for spare engines. Residual values for major spare rotable parts, avionics and assemblies are estimated to be 10%.
63
Notes to Financial Statements—(Continued)
The following table illustrates the components of depreciation and amortization expense:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,340
23,607
Amortization of heavy maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,947
(in thousands)
$ 6,156
9,100
$ 15,256
$ 5,186
2,574
$ 7,760
Year Ended December 31,
2013
2012
2011
The Company capitalizes certain internal and external costs associated with the acquisition and development of internal-
use software for new products, and enhancements to existing products, that have reached the application development stage and
meet recoverability tests. Capitalized costs include external direct costs of materials and services utilized in developing or
obtaining internal-use software, and labor cost for employees who are directly associated with, and devote time, to internal-use
software projects. Capitalized computer software, included as a component of ground and other equipment in the
accompanying balance sheets, net of accumulated depreciation, was $8.1 million and $7.8 million at December 31, 2013 and
2012, respectively.
Amortization of capitalized software development costs is charged to depreciation on a straight-line method basis.
Amortization of capitalized software development costs was $3.7 million, $3.2 million and $2.0 million for the years ended
2013, 2012 and 2011, respectively. The Company placed in service internal-use software of $7.0 million, $2.3 million and $3.3
million, during the years ended 2013, 2012 and 2011, respectively.
Measurement of Asset Impairments
The Company records impairment charges on long-lived assets used in operations when events and circumstances
indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than the
carrying amount of those assets, and the net book value of the assets exceeds their estimated fair value. In making these
determinations, the Company uses certain assumptions, including, but not limited to: (i) estimated fair value of the assets; and
(ii) estimated, undiscounted future cash flows expected to be generated by these assets, which are based on additional
assumptions such as asset utilization, length of service the asset will be used in the Company’s operations, and estimated
salvage values.
Capitalized Interest
Capitalized interest represents interest cost incurred during the acquisition period of an aircraft which theoretically could
have been avoided had the Company not made purchase delivery deposits (PDPs) for that aircraft. These amounts are
capitalized as part of the cost of the aircraft upon delivery. Capitalization of interest ceases when the asset is ready for service.
Passenger Revenue Recognition
Tickets sold are initially deferred as “air traffic liability.” Passenger revenue is recognized at time of departure when
transportation is provided. A nonrefundable ticket expires at the date of scheduled travel and is recognized as revenue at the
date of scheduled travel.
Customers may elect to change their itinerary prior to the date of departure. A service charge is assessed and recognized
on the date the change is initiated and is deducted from the face value of the original purchase price of the ticket, and the
original ticket becomes invalid. The amount remaining after deducting the service charge is called a credit shell which expires
60 days from the date the credit shell is created and can be used towards the purchase of a new ticket and the Company’s other
service offerings. The amount of credits expected to expire is recognized as revenue upon issuance of the credit and is
estimated based on historical experience. Estimating the amount of credits that will go unused involves some level of
subjectivity and judgment.
The Company is also required to collect certain taxes and fees from customers on behalf of government agencies and
airports and remit these back to the applicable governmental entity or airport on a periodic basis. These taxes and fees include
U.S. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and departure
taxes. These items are collected from customers at the time they purchase their tickets, but are not included in passenger
revenue. The Company records a liability upon collection from the customer and relieves the liability when payments are
remitted to the applicable governmental agency or airport.
64
Notes to Financial Statements—(Continued)
Frequent Flier Program
Flown Miles. The Company records a liability for mileage credits earned by passengers under its FREE SPIRIT program,
including mileage credits for members with an insufficient number of mileage credits to earn an award, based on the estimated
incremental cost of providing free travel for credits that are expected to be redeemed. Incremental costs include fuel, insurance,
security, ticketing and facility charges reduced by an estimate of fees required to be paid by the passenger when redeeming the
award.
Affinity Card Program. Under the Company's affinity card program, funds received for the marketing of a co-branded
Spirit credit card and delivery of award miles are accounted for as a mulitple-deliverable arrangement. At the inception of the
arrangement, the Company evaluated all deliverables in the arrangement to determine whether they represent separate units of
accounting using the criteria as set forth in ASU No. 2009-13. The Company determined the arrangement had three separate
units of accounting: (i) travel miles to be awarded, (ii) licensing of brand and access to member lists and (iii) advertising and
marketing efforts. Under ASU No. 2009-13, arrangement consideration was allocated based on relative selling price. At
inception of the arrangement, the Company established the relative selling price for all deliverables that qualified for
separation. The manner in which the selling price was established was based on a hierarchy of evidence that the Company
considered. Total arrangement consideration was then allocated to each deliverable on the basis of the deliverable’s relative
selling price. In considering the hierarchy of evidence under ASU No. 2009-13, the Company first determined whether vendor
specific objective evidence of selling price or third-party evidence of selling price existed. It was determined by the Company
that neither vendor specific objective evidence of selling price nor third-party evidence existed due to the uniqueness of the
Company’s program. As such, the Company developed its best estimate of the selling price for all deliverables. For the award
miles, the Company considered a number of entity-specific factors when developing the best estimate of the selling price
including the number of miles needed to redeem an award, average fare of comparable segments, breakage, restrictions and
other charges. For licensing of brand and access to member lists, the Company considered both market-specific factors and
entity-specific factors including general profit margins realized in the marketplace/industry, brand power, market royalty rates
and size of customer base. For the advertising element, the Company considered market-specific factors and entity-specific
factors, including the Company’s internal costs (and fluctuations of costs) of providing services, volume of marketing efforts
and overall advertising plan. Consideration allocated based on the relative selling price to both brand licensing and advertising
elements is recognized as revenue when earned and recorded in non-ticket revenue. Consideration allocated to award miles is
deferred and recognized ratably as passenger revenue over the estimated period the transportation is expected to be provided
which is estimated at 16 months. The Company used entity-specific assumptions coupled with the various judgments necessary
to determine the selling price of a deliverable in accordance with the required selling price hierarchy. Changes in these
assumptions could result in changes in the estimated selling prices. Determining the frequency to reassess selling price for
individual deliverables requires significant judgment. As of December 31, 2013, there have been no changes in either the
selling price or the method or assumptions used to determine selling price for any of the identified units of accounting that
would have a significant effect on the allocation of consideration.
The following table illustrates total cash proceeds received from the sale of mileage credits and the portion of such
proceeds recognized in revenue immediately as marketing component:
Cash proceeds from
sale of miles to non-airline
third parties
Portion of proceeds
recognized immediately as
marketing component
Year Ended
December 31, 2013 . . . . . . . . . . . . . . . . . $
December 31, 2012 . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . .
(in thousands)
$
28,496
24,938
20,954
23,124
20,998
16,580
The total liability for future FREE SPIRIT award redemptions and unrecognized revenue from the sale of mileage credits
was $2.6 million and $2.4 million at December 31, 2013 and 2012, respectively. These balances are recorded as a component of
air traffic liability in the accompanying balance sheets.
Non-ticket Revenue Recognition
Non-ticket revenues are generated from air travel-related services for baggage, bookings through the Company’s call
center or third-party vendors, advance seat selection, itinerary changes and loyalty programs. Non-ticket revenues also consist
of services not directly related to providing transportation such as the FREE SPIRIT affinity credit card program, $9 Fare Club
and the sale of advertising to third parties on Spirit’s website and on board aircraft.
65
Notes to Financial Statements—(Continued)
The following table summarizes the primary components of non-ticket revenue and the revenue recognition method
utilized for each service or product:
Non-ticket revenue
Recognition method
2013
2012
2011
Year Ended December 31,
Baggage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time of departure
Passenger usage fee . . . . . . . . . . . . . . . . . . . . . Time of departure
Advance seat selection . . . . . . . . . . . . . . . . . . Time of departure
Service charges for changes and cancellations When itinerary is changed
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-ticket revenue . . . . . . . . . . . . . . . . . . . . .
$ 275,958
188,911
59,241
32,546
111,711
$ 668,367
(in thousands)
$ 217,536
149,577
48,956
27,762
91,765
$ 535,596
$ 168,290
71,757
42,112
25,927
73,450
$ 381,536
Charges for services recognized at time of departure are initially recorded as a liability until time of departure. The
passenger usage fee is charged for tickets sold through the Company’s primary sales distribution channels, to cover the
Company’s distribution costs. The primary sales distribution channels for which passenger usage fees are charged include sales
through the Company’s website, sales through the third-party provided call center and sales through travel agents; the Company
does not charge a passenger usage fee for sales made at its airport ticket counters. Other non-ticket revenues include revenues
from other air related charges as well as non-air related charges. Other air related charges include optional services and
products provided to passengers such as on-board products, travel insurance and use of the Company’s call center or travel
agents, among others. Non-air related charges primarily consist of revenues from advertising on the Company’s aircraft and
website, the Company’s $9 Fare Club subscription-based membership program and the Company’s FREE SPIRIT affinity
credit card program.
Airframe and Engine Maintenance
The Company accounts for heavy maintenance and major overhaul and repair under the deferral method whereby the cost
of heavy maintenance and major overhaul and repair is deferred and amortized until the earlier of the end of the remaining
lease term or until the next scheduled heavy maintenance event.
Amortization of heavy maintenance and major overhaul costs is charged to depreciation and amortization expense and
was $23.6 million, $9.1 million and $2.6 million for the years ended 2013, 2012 and 2011, respectively. During the years ended
2013, 2012 and 2011, the Company deferred $70.8 million, $61.6 million and $22.1 million, respectively, of costs for heavy
maintenance. At December 31, 2013 and 2012, the Company had deferred heavy maintenance balance of $165.3 million and
$94.5 million, and accumulated heavy maintenance amortization of $40.0 million and $14.0 million, respectively.
On October 15, 2013, the Company had an aircraft experience an engine failure shortly after takeoff. The aircraft
immediately returned to the airport, and the passengers and crew safely disembarked from the aircraft. The airframe and engine
incurred damage as a result of the failure. The Company anticipates it will recover insurance proceeds to cover the expenses
related to this incident and therefore it has expensed the insurance deductible of approximately $0.8 million recorded within
maintenance, materials and repairs expense.
The Company outsources certain routine, non-heavy maintenance functions under contracts that require payment on a
utilization basis, such as flight hours. Costs incurred for maintenance and repair under flight hour maintenance contracts, where
labor and materials price risks have been transferred to the service provider, are expensed based on contractual payment terms.
All other costs for routine maintenance of the airframes and engines are charged to expense as performed.
The table below summarizes the extent to which the Company’s maintenance costs are rate capped due to flight hour
maintenance contracts:
Year Ended December 31,
2013
2012
2011
(in thousands)
Flight hour-based maintenance expense . . . . . . . . . . . . . . . . . . . $ 30,322
Non-flight hour-based maintenance expense. . . . . . . . . . . . . . . .
29,821
Total maintenance, materials and repairs. . . . . . . . . . . . . . . . . . . $ 60,143
$ 25,748
$ 21,974
23,712
$ 49,460
12,043
$ 34,017
66
Notes to Financial Statements—(Continued)
Leased Aircraft Return Costs
Costs associated with returning leased aircraft are accrued when it is probable that a cash payment will be made and that
amount is reasonably estimable. Leased aircraft return costs are recorded as a component of aircraft rent and characterized as
supplemental rent. Any accrual is based on time remaining on the lease, planned aircraft usages and the provisions included in
the lease agreement, although the actual amount due to any lessor upon return will not be known with certainty until lease
termination.
Aircraft Fuel
Aircraft fuel expense includes jet fuel and associated “into-plane” costs, taxes, oil and all gains and losses associated with
fuel hedge contracts.
Derivative Instruments
The Company accounts for derivative financial instruments at fair value and recognizes them in the balance sheet in
prepaid expenses and other current assets or other current liabilities. For derivatives designated as cash flow hedges, changes in
fair value of the derivative are generally reported in other comprehensive income and are subsequently reclassified into
earnings when the hedged item affects earnings. For the years ended 2013, 2012 and 2011, the Company did not hold derivative
instruments that qualified as cash flow hedges for accounting purposes. As a result, changes in the fair value of such derivative
contracts were recorded within aircraft fuel expense in the accompanying statements of operations. These amounts include both
realized gains and losses and mark-to-market adjustments of the fair value of unsettled derivative instruments at the end of each
period.
Advertising
The Company expenses advertising and the production costs of advertising as incurred. Marketing and advertising
expenses were $2.1 million, $2.4 million and $2.5 million for the years ended 2013, 2012 and 2011, respectively.
Income Taxes
The Company accounts for income taxes using the liability method. The Company records a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all
of the deferred tax assets will be not realized.
Interest Expense
Related-party interest expense incurred during 2013, 2012 and 2011 was $0.0 million, $0.0 million and $21.0 million,
respectively, and consisted primarily of paid-in-kind interest on tranche notes due to related parties, and preferred stock
dividends due to related parties. Non-related party interest expense during 2013, 2012 and 2011 was $0.2 million, $1.4 million
and $3.8 million, respectively.
Stock-Based Compensation
The Company recognizes cost of employee services received in exchange for awards of equity instruments based on the
fair value of each instrument at the date of grant. Compensation expense is recognized on a straight-line basis over the period
during which an employee is required to provide service in exchange for an award. The Company has issued and outstanding
restricted stock awards, stock option awards and performance share awards. Restricted stock awards are valued at the fair value
of the shares on the date of grant. To the extent a market price was not available, the fair value of stock awards was estimated
using a discounted cash flow analysis based on management’s estimates of revenue, driven by assumed market growth rates
and estimated costs as well as appropriate discount rates. These estimates are consistent with the plans and estimates that
management uses to manage the Company’s business. The fair value of share option awards is estimated on the date of grant
using the Black-Scholes valuation model. The fair value of performance share awards is estimated through the use of a Monte
Carlo simulation model. See Note 8 for additional information.
Concentrations of Risk
The Company’s business has been, and may continue to be, adversely affected by increases in the price of aircraft fuel,
the volatility of the price of aircraft fuel, or both. Aircraft fuel was the Company’s single largest expenditure representing
approximately 40%, 41% and 42% of total operating expenses in 2013, 2012 and 2011, respectively.
The Company’s operations are largely concentrated in the southeast United States with Fort Lauderdale being the highest
volume fueling point in the system. Gulf Coast Jet indexed fuel is the basis for a substantial majority of the Company’s fuel
67
Notes to Financial Statements—(Continued)
consumption. Any disruption to the oil production or refinery capacity in the Gulf Coast, as a result of weather or any other
disaster, or disruptions in supply of jet fuel, dramatic escalations in the costs of jet fuel and/or the failure of fuel providers to
perform under fuel arrangements for other reasons could have a material adverse effect on the Company’s financial condition
and results of operations.
The Company’s operations will continue to be vulnerable to weather conditions (including hurricane season or snow and
severe winter weather), which could disrupt service, create air traffic control problems, decrease revenue and increase costs.
Due to the relatively small size of the fleet and high utilization rate, the unavailability of one or more aircraft and
resulting reduced capacity could have a material adverse effect on the Company’s business, results of operations and financial
condition.
The Company has three union-represented employee groups that together represent approximately 59% and 54% of all
employees at December 31, 2013 and 2012, respectively. A strike or other significant labor dispute with the Company’s
unionized employees is likely to adversely affect the Company’s ability to conduct business. Additional disclosures are
included in Note 15.
2. Recent Accounting Developments
In December 2011, the FASB issued amendments to Accounting Standards Update No. 2011-11, Balance Sheet (Topic
210); Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The amendments in this update are designed to
enhance disclosures by requiring improved information about financial instruments and derivative instruments that are either
(a) offset in accordance with certain right to set-off conditions prescribed by current accounting guidance or (b) subject to an
enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current
accounting guidance. In January 2013, the FASB issued Accounting Standards Update No. 2013-01, Scope Clarification of
Disclosures about Offsetting Assets and Liabilities (ASU 2013-01), to limit the scope of ASU 2011-11, and its new balance
sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and
reverse repurchase agreements and securities borrowing and lending transactions. ASU 2011-11 and ASU 2013-01 became
effective for the Company's annual and interim periods beginning January 1, 2013, and the required disclosures are included in
Note 16 of this report.
3. Special Charges and Credits
Slot Transaction and Restructuring
In 2012, the Company sold four permanent air carrier slots at Ronald Reagan National Airport (DCA) to another airline
for $9.1 million. The Company recognized the $9.1 million gain within special charges (credits) in the third quarter of 2012, the
period in which the FAA operating restriction lapsed and written confirmation of the slot transfer was received by the buyer
from the FAA.
In 2013, the Company incurred an additional $0.1 million of cost in connection with the DCA exit and relieved $0.2
million of previously accrued exit cost in connection with Chicago O'Hare (ORD).
Secondary Offering Costs
In the third quarter of 2013, the Company incurred costs of $0.3 million, recorded within special charges (credits), related
to an underwritten public offering of 12,070,920 shares of common stock by certain stockholders affiliated with Indigo Partners
LLC (Indigo). Upon completion of this offering, investment funds affiliated with Indigo owned no shares of common stock of
Spirit Airlines. The Company did not receive any proceeds from this offering.
In the third quarter of 2012, the Company incurred costs of $0.7 million, recorded within special charges (credits), related
to an underwritten public offering of 9,394,927 shares of common stock by certain stockholders affiliated with Oaktree Capital
Management (Oaktree). Upon completion of this offering, investment funds affiliated with Oaktree owned no shares of
common stock of Spirit Airlines. The Company did not receive any proceeds from this offering.
In January 2012, certain stockholders of the Company, including affiliates of Oaktree and Indigo Partners, LLC (Indigo)
and certain members of the Company's executive team, sold an aggregate of 12,650,000 shares of common stock in an
underwritten public offering. The Company incurred a total of $1.3 million in costs between 2011 and 2012 related to this
offering, of which $0.5 million were incurred during the year ended December 31, 2012, offset by reimbursements from certain
selling shareholders of $0.6 million in accordance with the Fourth Amendment to the Second Amended and Restated Investor
Rights Agreement. The Company did not receive any proceeds from this offering.
68
Notes to Financial Statements—(Continued)
Initial Public Offering Costs
In June 2011, the Company issued and sold 15,600,000 shares of common stock in its initial public offering (IPO). The
Company incurred contract termination costs and fees of $2.3 million in connection with the IPO during the year ended
December 31, 2011, which included $1.8 million paid to Indigo to terminate its professional services agreement with the
Company, and $0.5 million paid to three individual, unaffiliated holders of the Company’s subordinated notes.
4. Letters of Credit
In connection with agreements with certain airports, the Company is required to post letters of credit, which totaled $0.2
million as of both December 31, 2013 and 2012. The issuing banks require that the Company deposit funds at those banks to
cover the amounts that could be drawn under the letters of credit. These funds are generally invested in money market accounts
and are classified as long-term assets within other long-term assets. Additionally, as of December 31, 2013, the Company had a
$25.1 million unsecured standby letter of credit facility, representing an off balance-sheet commitment, of which $10.4 million
had been drawn upon for issued letters of credit to airports and insurance underwriters.
5. Credit Card Processing Arrangements
The Company has agreements with organizations that process credit card transactions arising from the purchase of air
travel, baggage charges and other ancillary services by customers. As it is standard in the airline industry, the Company's
contractual arrangements with credit card processors permit them, under certain circumstances, to retain a holdback or other
collateral, which the Company records as restricted cash, when future air travel and other future services are purchased via
credit card transactions. The required holdback is the percentage of the Company's overall credit card sales that its credit card
processors hold to cover refunds to customers if the Company fails to fulfill its flight obligations.
During 2011, the Company amended its processing agreements with all of its processors. Prior to the amendments, the
credit card processors required the Company to maintain cash collateral equal to approximately 100% of the Company's air
traffic liability. The amendments were approved in light of the Company's improved balance sheet as a result of the IPO, the
related recapitalization and the elimination of the holdback held by the credit card processors, effectively eliminating the
Company's restricted cash balance, provided that the Company continues to satisfy certain liquidity and other financial
covenants. Failure to meet these covenants would provide the processors the right to reinstate a holdback, resulting in a
commensurate reduction of unrestricted cash. As of December 31, 2013 and 2012, the Company continued to be in compliance
with its credit card processing agreements, and the processors were holding back $0 of remittances.
The maximum potential exposure to cash holdbacks by the Company's credit card processors, based upon advance ticket
sales and $9 Fare Club memberships as of December 31, 2013 and 2012, was $188.6 million and $144.8 million, respectively.
6. Accrued Liabilities
Accrued liabilities included in other current liabilities as of December 31, 2013 and 2012 consist of the following:
Aircraft maintenance
Federal excise and other passenger taxes and fees payable
Salaries and wages
Airport expenses
Fuel
Aircraft and facility rent
Tax receivable agreement
Other
Other current liabilities
As of December 31,
2013
2012
(in thousands)
$
$
36,165
26,979
26,174
17,109
13,819
7,993
5,643
11,380
145,262
$
$
22,319
23,401
21,057
16,024
11,219
8,020
7,987
11,287
121,314
7. Common Stock and Preferred Stock
The Company’s amended and restated certificate of incorporation dated June 1, 2011, authorizes the Company to issue up
to 240,000,000 shares of common stock, $0.0001 par value per share, 50,000,000 shares of non-voting common stock, $0.0001
69
Notes to Financial Statements—(Continued)
par value per share and 10,000,000 shares of preferred stock, $0.0001 par value per share. All of the Company’s issued and
outstanding shares of common stock and preferred stock are duly authorized, validly issued, fully paid and non-assessable. The
Company’s shares of common stock and non-voting common stock are not redeemable and do not have preemptive rights.
Common Stock
Dividend Rights. Holders of the Company’s common stock are entitled to receive dividends, if any, as may be declared
from time to time by the Company’s board of directors out of legally available funds ratably with shares of the Company’s non-
voting common stock, subject to preferences that may be applicable to any then outstanding preferred stock and limitations
under Delaware law.
Voting Rights. Each holder of the Company’s common stock is entitled to one vote for each share on all matters submitted
to a vote of the stockholders, including the election of directors. The Company’s stockholders do not have cumulative voting
rights in the election of directors. Accordingly, holders of a majority of the voting shares are able to elect all of the directors
properly up for election at any given stockholders’ meeting.
Liquidation. In the event of the Company’s liquidation, dissolution or winding up, holders of the Company's common
stock will be entitled to share ratably with shares of the Company’s non-voting common stock in the net assets legally available
for distribution to stockholders after the payment of all of the Company’s debts and other liabilities and the satisfaction of any
liquidation preference granted to the holders of any then outstanding shares of preferred stock.
Rights and Preferences. Holders of the Company’s common stock have no preemptive, conversion, subscription or other
rights and there are no redemption or sinking fund provisions applicable to the Company’s common stock. The rights,
preferences and privileges of the holders of the Company’s common stock are subject to and may be adversely affected by, the
rights of the holders of shares of any series of the Company’s preferred stock that the Company may designate in the future.
Non-Voting Common Stock
Dividend Rights. Holders of the Company’s non-voting common stock are entitled to receive dividends, if any, as may be
declared from time to time by the Company’s board of directors out of legally available funds ratably with shares of the
Company’s common stock, subject to preferences that may be applicable to any then outstanding preferred stock and
limitations under Delaware law.
Voting Rights. Shares of the Company’s non-voting common stock are not entitled to vote on any matters submitted to a
vote of the stockholders, including the election of directors, except to the extent required under Delaware law.
Conversion Rights. Shares of the Company’s non-voting common stock will be convertible on a share-for-share basis into
common stock at the election of the holder subject to the Company remaining in compliance with applicable foreign ownership
limitations.
Liquidation. In the event of the Company’s liquidation, dissolution or winding up, holders of the Company’s non-voting
common stock will be entitled to share ratably with shares of the Company’s common stock in the net assets legally available
for distribution to stockholders after the payment of all of the Company’s debts and other liabilities and the satisfaction of any
liquidation preference granted to the holders of any then outstanding shares of preferred stock.
Rights and Preferences. Holders of the Company’s non-voting common stock have no preemptive, subscription or other
rights, and there are no redemption or sinking fund provisions applicable to the Company’s common stock. The rights,
preferences and privileges of the holders of the Company’s common stock are subject to and may be adversely affected by, the
rights of the holders of shares of any series of the Company’s preferred stock that the Company may designate in the future.
On December 7, 2011, the Company entered into a Stock Distribution Agreement with Indigo Miramar LLC and its
members. Pursuant to the Stock Distribution Agreement 10,576,180 shares of outstanding common stock were exchanged on a
share-for-share basis for shares of non-voting common stock. As of December 31, 2012, the number of outstanding non-voting
common stock had decreased to 1,669,205. In February 2013, all of the remaining outstanding shares of non-voting common
stock were converted to voting shares in accordance with the Stock Distribution Agreement. As of December 31, 2013, there
were no shares of non-voting common stock outstanding.
Preferred Stock
The Company’s board of directors has the authority, without further action by the Company’s stockholders, to issue up to
10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof.
These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption,
70
Notes to Financial Statements—(Continued)
liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series,
any or all of which may be greater than the rights of common stock. The Company’s issuance of preferred stock could
adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend
payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying,
deferring or preventing a change of control of the Company or other corporate action. As of December 31, 2013 and 2012,
there were no shares of preferred stock outstanding.
8. Stock-Based Compensation
The Company has stock plans under which directors, officers, key employees and consultants of the Company may be
granted restricted stock awards, stock options and other equity-based instruments as a means of promoting the Company’s
long-term growth and profitability. The plans are intended to encourage participants to contribute to and participate in the
success of the Company.
The Company's board of directors adopted, and the Company's stockholders approved, the Amended and Restated 2005
Incentive Stock Plan, or the 2005 Stock Plan, effective January 1, 2008. The total number of shares of common stock
authorized for issue pursuant to awards granted under the 2005 Stock Plan was 2,500,000 shares. The 2005 Stock Plan provided
for the grant of non-qualified stock options, stock appreciation rights, restricted stock, performance shares, phantom stock,
restricted stock units and other awards that are valued in whole or in part by reference to the Company's stock.
On May 9, 2011, the Company's board of directors adopted, and the Company's stockholders approved, the 2011 Equity
Incentive Award Plan, or 2011 Plan. Under the 2011 Plan, 3,000,000 new shares of common stock are reserved for issuance
pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights or SARs, restricted
stock awards, restricted stock unit awards, deferred stock awards, dividend equivalent awards, stock payment awards and
performance share awards and other stock-based awards, plus the number of shares remaining available for future awards under
the Company's 2005 Stock Plan. The number of shares reserved for issuance or transfer pursuant to awards under the 2011 Plan
will be increased by the number of shares represented by awards outstanding under the Company's 2005 Stock Plan that are
forfeited or lapse unexercised and which, following the effective date of the 2011 Plan, are not issued under the Company's
2005 Stock Plan. No further awards will be granted under the 2005 Stock Plan, and all outstanding awards will continue to be
governed by their existing terms. As of December 31, 2013 and December 31, 2012, 2,685,029 and 2,689,490 shares of the
Company’s common stock, respectively, remained available for future issuance under the 2011 Plan.
Stock-based compensation cost is included within salaries, wages and benefits in operating expenses in the
accompanying statements of operations. Stock-based compensation cost amounted to $5.7 million, $4.3 million and $0.5
million for 2013, 2012 and 2011, respectively. During 2013, 2012 and 2011, there was $2.1 million, $1.6 million and $0.2
million tax benefit recognized in income related to stock-based compensation, respectively.
Restricted Stock
Restricted stock and restricted stock unit awards are valued at the fair value of the shares on the date of grant. Generally,
granted shares and units vest 25% per year on each anniversary of issuance. Each restricted stock unit represents the right to
receive one share of common stock upon vesting of such restricted stock unit. Compensation expense, net of forfeitures, is
recognized on a straight-line basis over the requisite service period.
A summary of the status of the Company’s restricted stock shares (restricted stock awards and restricted stock unit
awards) as of December 31, 2013 and changes during the year ended December 31, 2013 is presented below:
Outstanding at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
449,629
151,202
(168,514)
(96,269)
336,048
Weighted-
Average
Grant Date Fair
Value ($)
16.94
27.70
13.19
19.28
22.99
There were 151,202 and 391,418 restricted stock shares granted during the years ended December 31, 2013 and
December 31, 2012, respectively. As of December 31, 2013 and December 31, 2012, there was $6.1 million and $6.1 million,
respectively, of total unrecognized compensation cost related to nonvested restricted stock to be recognized over 2.7 years and
3.2 years, respectively.
71
Notes to Financial Statements—(Continued)
The weighted-average fair value of restricted stock granted during the years ended December 31, 2013 and 2012 was
$27.70 and $20.01, respectively. There was no restricted stock granted during the year ended December 31, 2011. The total fair
value of restricted stock shares vested during the years ended December 31, 2013, 2012 and 2011 was $4.3 million, $3.9
million and $3.2 million respectively.
Stock Options
Stock option awards are granted with an exercise price equal to the fair market value of the Company’s common stock at
the date of grant, vest over four years of continuous service and have ten-year contractual terms. The fair value of each stock
option award is estimated on the date of grant using the Black Scholes model. There were no options granted during 2013 or
2012. For option grants during 2011, the Company’s weighted average assumptions for expected volatility, dividends, term and
risk-free interest rate were 46.25%, 0%, 6.25 years and 2.03%, respectively. Expected volatilities are based on the historical
volatility of a group of peer entities within the same industry. The expected term of options is based upon the simplified
method, which represents the average of the vesting term and the contractual term. The risk-free interest rate is based on U.S.
Treasury yields for securities with terms approximating the expected term of the option.
Prior to the Company's IPO, to the extent a market price was not available, the fair value of the Company’s common
stock was estimated using a discounted cash flow analysis and market multiples, based on management’s estimates of revenue,
driven by assumed market growth rates, and estimated costs as well as appropriate discount rates. These estimates are
consistent with the plans and estimates management uses to manage the Company’s business.
A summary of share option activity under the 2011 Plan as of December 31, 2013 and changes during the year ended
December 31, 2013 is presented below:
Outstanding at December 31, 2012
Exercised
Forfeited or expired
Outstanding at December 31, 2013
Exercisable at December 31, 2013
Vested or Expected to Vest at December 31, 2013
Weighted-
Average
Exercise
Price ($)
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
($000)
9.59
9.22
10.70
8.26
8.12
8.25
8.0
2,015
6.7
6.6
6.7
2,099
1,011
2,090
Number
of Options
247,650
(92,400)
(98,750)
56,500
27,125
56,260
There were no options granted during the years ended December 31, 2013 or 2012. The weighted-average fair value of
option awards granted during the year ended December 31, 2011 was $5.73. The total intrinsic value of share options exercised
during the years ended December 31, 2013, 2012 and 2011 was $2.0 million, $0.7 million and $0.2 million, respectively. The
total fair value of shares vested during the years ended December 31, 2013, 2012 and 2011 was $0.2 million, $0.4 million and
$0.3 million, respectively.
As of December 31, 2013 and December 31, 2012, there was $46.7 thousand and $650.5 thousand respectively, of
total unrecognized compensation cost related to options expected to be recognized over 0.8 years and 1.99 years, respectively.
Performance Share Awards
During 2013 and 2012, the Company granted certain senior-level executives restricted stock units that vest based on
market and service conditions as part of a long-term incentive plan, which are referred to herein as performance share awards.
The number of shares of common stock underlying each award is determined at the end of a three-year performance period. In
order to vest, the senior level executive must still be employed by the Company, with certain contractual exclusions, at the end
of the performance period. At the end of the performance period, the percentage of the stock units that will vest will be
determined by ranking the Company’s total shareholder return compared to the total shareholder return of the nine peer
companies identified in the plan. Based on the level of performance, between 0% and 200% of the award may vest. Within 60
days after vesting, the shares underlying the award will be issued to the participant. In the event of a change in control of the
Company or the disability or death of a participant, the payout of any award is limited to a pro-rated portion of such award
based upon a performance assessment prior to the change-in-control date or date of disability or death.
The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense,
net of forfeitures, for the award will be recognized assuming that the requisite service is rendered regardless of whether the
market conditions are achieved.
72
Notes to Financial Statements—(Continued)
The grant date fair value of the performance share awards was determined through the use of a Monte Carlo simulation
model, which utilizes multiple input variables that determine the probability of satisfying the market condition requirements
applicable to each award as follows:
Expected volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-Average
at Grant Date for
Year Ended
December 31, 2013
0.41
Weighted-Average
at Grant Date for
Year Ended
December 31, 2012
0.39
0.33 %
2.65
— %
0.44 %
2.72
— %
The volatility was based upon a weighted average of the volatility for the Company and the most recent volatility of the
peer group. The peer group used to calculate volatility is consistent with the group used for the traditional employee stock
options. The Company chose to use historical volatility to value these awards because historical stock prices were used to
develop the correlation coefficients between the Company and each of the peer companies within the peer group in order to
model stock price movements. The volatilities used were calculated as the remaining term of the performance period at the date
of grant. The risk-free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with
remaining terms equivalent to the remaining performance period. The Company does not intend to pay dividends on its
common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its model.
The following table summarizes the Company’s performance share awards for the year ended December 31, 2013:
Number of
Awards
Weighted-Average
Fair Value at Grant
Date ($)
Outstanding at December 31, 2012. . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2013. . . . . . . . . . . . . . . . .
280,907
126,147
—
(79,950)
327,104
20.30
28.09
—
21.76
22.94
As of December 31, 2013 and December 31, 2012, there was $6.5 million and $6.9 million, respectively, of total
unrecognized compensation cost related to performance share awards expected to be recognized over 1.54 years and 2.0 years,
respectively.
73
Notes to Financial Statements—(Continued)
9. Net Income per Share
The following table sets forth the computation of basic and diluted earnings per common share:
Year Ended December 31,
2013
2012
2011
(in thousands, except per share amounts)
Numerator:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
176,918
$
108,460
$
76,448
Denominator:
Weighted-average shares outstanding, basic. . . . . . . . . . . . . .
Effect of dilutive stock awards . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted weighted-average shares outstanding, diluted . . . . .
72,593
406
72,999
72,386
205
72,591
Net Income per Share:
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . $
2.44
2.42
$
$
1.50
1.49
$
$
Anti-dilutive weighted-average shares
1
88
53,241
274
53,515
1.44
1.43
70
10. Debt, Related-Party Transactions and Other Obligations
In connection with the closing of the IPO, the Company consummated the transaction contemplated by the
Recapitalization Agreement on June 1, 2011, which resulted in the repayment or exchange for common stock of all of the
Company’s notes and preferred stock. The Company’s principal stockholders provided certain consulting services to the
Company for a management fee of $0.3 million in 2011. In connection with the IPO, the management fee agreement with the
Company's principal stockholders was terminated. See Note 18.
As of December 31, 2013 and 2012, there was no outstanding long term debt or outstanding amounts due to related
parties. During the fourth quarter of 2013, the Company executed an agreement for the lease of two quick engine change kits
(QEC kit), classified as capital leases. Aggregate annual principal maturities of capital leases as of December 31, 2013, were
$1.0 million in 2014, $1.1 million in 2015, $1.0 million in 2016, $0.0 million in 2017 and $0.0 million in 2018 and $0.0 million
in 2019 and beyond. As of December 31, 2012, the Company had no outstanding amounts related to capital leases.
The Company had a line of credit for $18.6 million and $18.6 million related to corporate credit cards, of which the
Company had drawn $3.7 million and $3.2 million as of December 31, 2013 and 2012, respectively, which is included in
accounts payable.
As of December 31, 2013, the Company had lines of credit with counterparties for both physical fuel delivery and jet fuel
derivatives in the amount of $34.5 million. As of December 31, 2013, the Company had drawn $13.8 million on these lines of
credit, which is included in other current liabilities. As of December 31, 2012, the Company had lines of credit with
counterparties for both physical fuel delivery and jet fuel derivatives in the amount $18.0 million. As of December 31, 2012,
the Company had drawn $11.2 million on these lines of credit, which is included in other current liabilities. The Company is
required to post collateral for any excess above the lines of credit if the derivatives are in a net liability position and make
periodic payments in order to maintain an adequate undrawn portion for physical fuel delivery.
11. Leases and Prepaid Maintenance Deposits
The Company leases various types of equipment and property, primarily aircraft, spare engines and airport facilities
under leases, which expire in various years through 2032. Lease terms are generally 3 to 15 years for aircraft and up to 25 years
for other leased equipment and property.
Total rental expense for all leases charged to operations for the years ended 2013, 2012 and 2011 was $207.4 million,
$172.4 million and $139.1 million, respectively. Total rental expense charged to operations for aircraft and engine operating
leases for the years ended December 31, 2013, 2012 and 2011 was $169.7 million, $143.6 million and $116.5 million,
74
Notes to Financial Statements—(Continued)
respectively. Supplemental rent is made up of maintenance reserves paid or to be paid to aircraft lessors in advance of the
performance of major maintenance activities that are not probable of being reimbursed and probable return condition
obligations. The Company expensed $5.2 million, $2.0 million and $1.5 million of supplemental rent recorded within aircraft
rent during 2013, 2012 and 2011, respectively.
Some of the Company’s master lease agreements provide that the Company pays maintenance reserves to aircraft lessors
to be held as collateral in advance of the Company’s required performance of major maintenance activities. Some maintenance
reserve payments are fixed contractual amounts, while others are based on actual flight hours. Fixed maintenance reserve
payments for these aircraft and related flight equipment, including estimated amounts for contractual price escalations, will be
approximately $7.4 million in 2014, $7.6 million in 2015, $8.0 million in 2016, $7.4 million in 2017, $5.8 million in 2018 and
$18.4 million in 2019 and beyond. These lease agreements provide that maintenance reserves are reimbursable to the Company
upon completion of the maintenance event in an amount equal to the lesser of (1) the amount of the maintenance reserve held
by the lessor associated with the specific maintenance event or (2) the qualifying costs related to the specific maintenance
event. Substantially all of these maintenance reserve payments are calculated based on a utilization measure, such as flight
hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft until the completion of
the maintenance of the aircraft. Some of the master lease agreements do not require that the Company pay maintenance
reserves so long as the Company's cash balance does not fall below a certain level. The Company is in full compliance with
those requirements and does not anticipate having to pay reserves related to these master leases in the future.
At lease inception and at each balance sheet date, the Company assesses whether the maintenance reserve payments
required by the master lease agreements are substantively and contractually related to the maintenance of the leased asset.
Maintenance reserve payments that are substantively and contractually related to the maintenance of the leased asset are
accounted for as maintenance deposits to the extent they are expected to be recoverable and are reflected as prepaid
maintenance deposits in the accompanying balance sheets. When it is not probable the Company will recover amounts currently
on deposit with a lessor, such amounts are expensed as supplemental rent. As of December 31, 2013 and 2012, the Company
had aircraft maintenance deposits of $220.7 million and $198.5 million, respectively, on its balance sheets of which $59.2
million and $76.1 million, respectively, are included within prepaid expenses and other current assets on its balance sheets. The
Company has concluded that these prepaid maintenance deposits are probable of recovery primarily due to the rate differential
between the maintenance reserve payments and the expected cost for the related next maintenance event that the reserves serve
to collateralize.
The Company’s master lease agreements also provide that most maintenance reserves held by the lessor at the expiration
of the lease are nonrefundable to the Company and will be retained by the lessor. Consequently, any usage-based maintenance
reserve payments after the last major maintenance event are not substantively related to the maintenance of the leased asset and
therefore are accounted for as contingent rent. The Company accrues for contingent rent beginning when it becomes probable
and reasonably estimable the Company will incur such nonrefundable maintenance reserve payments. The Company makes
certain assumptions at the inception of the lease and at each balance sheet date to determine the recoverability of maintenance
deposits. These assumptions are based on various factors such as the estimated time between the maintenance events, the date
the aircraft is due to be returned to the lessor, and the number of flight hours the aircraft is estimated to be utilized before it is
returned to the lessor. The Company expensed $1.9 million, $2.0 million and $1.5 million of paid maintenance reserves as
supplemental rent during 2013, 2012 and 2011, respectively. Maintenance reserves held by lessors that are refundable to the
Company at the expiration of the lease are accounted for as prepaid maintenance deposits on the balance sheet when they are
paid.
At December 31, 2013, the Company had its entire fleet of 54 aircraft and nine spare engines financed under operating
leases with lease term expiration dates ranging from 2016 to 2025. Five of the leased aircraft have variable rent payments,
which fluctuate based on changes in LIBOR (London Interbank Offered Rate). During the second quarter of 2013, the
Company extended the operating leases on 14 of its Airbus A319 aircraft, which were previously set to expire in 2017 through
2019. The Company has the option to renew three leases for three-year periods with contractual notice required in the tenth
year. Twenty-three of the aircraft leases and all of the engine leases were the result of sale and leaseback transactions. Deferred
gains or losses from sale and leaseback transactions are amortized over the term of the lease as a reduction in rent or additional
rent, respectively. Losses are deferred when the fair value of the aircraft or engine is higher than the price it was sold for, which
is in substance, a prepayment of rent. A loss on disposal is recorded at the time of sale for the excess of the carrying amount
over the fair value of the aircraft or engine. The costs of returning aircraft to lessors, or lease return conditions, are accounted
for in a manner similar to the accounting for contingent rent. These costs are recognized over the remaining life of the lease as
aircraft hours accumulate, beginning from the time when the Company determines it is probable such costs will be incurred and
can generally be estimated. Such estimated costs exclude the costs of maintenance events that are covered by reserves on
deposit with the relevant lessor, or routine maintenance costs that are recorded in maintenance expense.
75
Notes to Financial Statements—(Continued)
During 2013, the Company entered into sale and leaseback transactions with third-party aircraft lessors for the sale and
leaseback of seven Airbus A320 aircraft that resulted in net deferred losses of $3.1 million, which are included in other long-
term assets within the balance sheet. Deferred losses are amortized as rent expense on a straight-line basis over the term of the
respective operating leases. The Company had agreements in place prior to the delivery of these aircraft which resulted in the
settlement of the purchase obligation by the lessor and the refund of $36.7 million in pre-delivery deposits from Airbus during
2013. The refunded pre-delivery deposits have been disclosed in the statement of cash flows as investing activities within pre-
delivery deposits, net of refunds. In addition, the Company entered into a sale and leaseback transaction with a third-party
lessor for the sale and leaseback of one V2500 IAE International Aero Engines AG engine. Cash outflows related to the
purchase of the engine have been disclosed in the statement of cash flows as investing activities within purchases of property
and equipment and the cash inflows from the sale of the engine as financing activities within proceeds received on sale lease
back transactions. All of the leases from these sale and leaseback transactions are accounted for as operating leases. Under the
terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under the lease
agreements are fixed for the term of the lease. The lease agreements contain standard termination events, including termination
upon a breach of the Company's obligations to make rental payments and upon any other material breach of the Company's
obligations under the leases, and standard maintenance and return condition provisions. Upon a termination of the lease due to
a breach by the Company, the Company would be liable for standard contractual damages, possibly including damages suffered
by the lessor in connection with remarketing the aircraft or while the aircraft is not leased to another party. During the fourth
quarter of 2013, the Company entered into an agreement for the lease of two QEC kits, classified as capital leases. Payments
under the lease agreement are fixed for the three year term of the lease.
The Company had two QEC kits classified as capital leases at December 31, 2013, compared to no capital leases at
December 31, 2012. Amounts applicable to these QEC kits that are included in property and equipment were:
(in thousands)
Flight equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated amortization . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
$
$
3,234
54
3,180
$
$
—
—
—
Future minimum lease payments under capital leases and noncancellable operating leases with initial or remaining terms
in excess of one year at December 31, 2013 were as follows:
Capital Leases
Aircraft
and Spare Engine
Leases
Property Facility
Leases
Total Operating
Leases
Operating Leases
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 and thereafter . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . .
Less amount representing interest . . . . . . . . . . . .
Present value of minimum lease payments . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . .
Long term portion . . . . . . . . . . . . . . . . . . . . . . . .
$
$
12. Financial Instruments and Risk Management
$
$
1,200
1,200
1,000
—
—
—
3,400
366
3,034
1,400
1,634
(in thousands)
184,131
184,694
182,984
163,673
139,740
502,102
1,357,324
$
$
18,535
16,308
11,610
8,795
6,445
24,406
86,099
$
$
202,666
201,002
194,594
172,468
146,185
526,508
1,443,423
As part of the Company’s risk management program, the Company from time to time uses a variety of financial
instruments to reduce its exposure to fluctuations in the price of jet fuel. The Company does not hold or issue derivative
financial instruments for trading purposes.
The Company is exposed to credit losses in the event of nonperformance by counterparties to these financial instruments.
The Company periodically reviews and seeks to mitigate exposure to the financial deterioration and nonperformance of any
76
Notes to Financial Statements—(Continued)
counterparty by monitoring the absolute exposure levels, each counterparty's credit ratings and the historical performance of the
counterparties relating to hedge transactions. The credit exposure related to these financial instruments is limited to the fair
value of contracts in a net receivable position at the reporting date. The Company also maintains security agreements that
require the Company to post collateral if the value of selected instruments falls below specified mark-to-market thresholds. As
of December 31, 2013, the Company held none of these instruments and, therefore, was not required to post collateral.
The Company records financial derivative instruments at fair value, which includes an evaluation of each counterparty's
credit risk. The Company's derivative contracts generally consist of United States Gulf Coast jet fuel swaps (jet fuel swaps) and
United States Gulf Coast jet fuel options (jet fuel options). 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. Fair value of the instruments is determined using standard option valuation models.
The Company chose not to elect hedge accounting on any derivative instruments entered into during 2013, 2012 and 2011
and, as a result, changes in the fair value of these fuel hedge contracts are recorded each period in aircraft fuel expense.
The following table summarizes the components of aircraft fuel expense for the years ended December 31, 2013, 2012
and 2011:
Into-plane fuel cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Settlement losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized mark-to-market losses (gains) . . . . . . . . . . . . . . . . . . . . . . .
Aircraft fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
542,523
8,958
265
551,746
(in thousands)
471,542
$
175
46
471,763
$
$
$
392,278
(7,436)
3,204
388,046
Year Ended December 31,
2013
2012
2011
All realized gains and losses are reflected in the statements of cash flows in cash flow from operating activities.
As of December 31, 2013, the Company had no outstanding fuel hedges in place. As of December 31, 2012, the
Company had fuel hedges using U.S. Gulf Coast jet fuel options as the underlying commodity. As of December 31, 2012, the
Company had agreements in place to protect 7.8 million gallons or approximately 5% of its 2013 fuel consumption at a
weighted-average ceiling and floor price of $3.09 and $2.84 per gallon, respectively.
13. Defined Contribution 401(k) Plan
The Company sponsors three defined contribution 401(k) plans, Spirit Airlines, Inc. Employee Retirement Savings Plan
(first plan), Spirit Airlines, Inc. Pilots’ Retirement Savings Plan (second plan) and Spirit Airlines, Inc. Puerto Rico Retirement
Savings Plan (third plan). The first plan was adopted on February 1, 1994. Essentially, all employees that are not covered by
the pilots’ collective bargaining agreement, who have at least one year of service, have worked at least 1,000 hours during the
year and have attained the age of 21 may participate in this plan. The Company may make a Qualified Discretionary
Contribution, as defined in the plan, or provide matching contributions to this plan. Effective July 1, 2007, the Company
amended this plan to change the service requirement to 60 days and provided for matching contribution to the plan at 50% of
the employee’s contribution up to a maximum employer contribution of 3% of the employee’s annual compensation.
The second plan is for the Company’s pilots, and contained the same service requirements as the first plan and was
amended effective July 1, 2007, to change the service requirements to 60 days and having attained the age of 21. The Company
matches 100% of the pilot’s contribution, up to 8% of the individual pilot’s annual compensation. Both the first and the second
plans are subject to the annual IRS elective deferral limit, which was $17,500 for 2013.
The third plan is for all Company employees residing in Puerto Rico and was adopted on April 16, 2012. It contains the
same amended service requirements as the first and second plans. For pilots participating in the Puerto Rico plan, the Company
matches 100% of their contribution, up to 8% of the individual pilot's annual compensation, but subject to the annual Puerto
Rico pre-tax elective deferral limit, which was $17,500 for 2013. For all other employees participating in the Puerto Rico plan,
the Company provides for matching contribution to the plan at 50% of the employee's contribution up to a maximum employer
contribution of 3% of the employee's annual compensation.
Matching contributions made to all plans were $7.7 million , $6.6 million and $4.9 million in 2013, 2012 and 2011,
respectively, and were included within salaries, wages and benefits in the accompanying statements of operations.
77
Notes to Financial Statements—(Continued)
14. Income Taxes
Significant components of the provision for income taxes from continuing operations are as follows:
Current:
Federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred expense (benefit). . . . . . . . . . . . . . . . . . . .
Total income tax expense (benefit) . . . . . . . . . . . . . . . . . $
For the Years Ended December 31,
2013
2012
2011
(in thousands)
86,437
6,595
413
93,445
11,658
389
12,047
105,492
$
$
32,656
3,250
963
36,869
27,870
1,385
29,255
66,124
$
$
1,866
74
263
2,203
42,148
2,032
44,180
46,383
The reconciliation of income tax expense computed at the federal statutory tax rates to income tax expense from
continuing operations is as follows:
For the Years Ended December 31,
2013
2012
2011
(in thousands)
Expected provision at federal statutory tax rate . . . . . . . . . . . . . . . . $
State and foreign tax expense, net of federal benefit . . . . . . . . . . . .
Interest and dividend on preferred stock . . . . . . . . . . . . . . . . . . . . .
Meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fines and penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to deferred tax assets and liabilities . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . $
98,843
4,695
—
772
134
(58)
(54)
1,160
105,492
$
$
61,104
3,726
—
649
84
(182)
(3)
746
66,124
$
$
42,991
2,255
710
469
(36)
(103)
(3)
100
46,383
78
Notes to Financial Statements—(Continued)
The Company accounts for income taxes using the asset and liability method. Deferred taxes are recorded based on
differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit
carryforwards. At December 31, 2013 and 2012, the significant components of the Company's deferred taxes consisted of the
following:
Deferred tax assets:
Net operating loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Capitalized interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel hedging. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued engine maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred taxes included within:
Assets:
December 31,
2013
2012
(in thousands)
$
188
1,428
6,241
9,734
2,767
20,358
736
—
—
45,911
6,384
53,031
(32,673) $
83
—
5,829
6,744
1,073
13,729
1,125
364
97
29,497
3,271
34,354
(20,625)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,243
Liabilities:
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
48,916
$
$
12,591
33,216
In assessing the realizability of the deferred tax assets, management considered whether it is more likely than not that
some or all of the deferred tax assets would be realized. In evaluating the Company’s ability to utilize its deferred tax assets, it
considered all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction
basis. Management does not believe that the realization of deferred tax assets is in jeopardy and thus a valuation allowance for
2013 will not be necessary.
During 2013, the Company filed an amended 2009 income tax return in order to correct its net operating loss
carryforward (NOL) as of December 31, 2009. See Note 18. The amendment of the 2009 tax return resulted in a decrease to the
Company's NOL of $7.9 million as of December 31, 2009. In addition, during the preparation of its 2012 tax return, the
Company uncovered certain adjustments relating to the NOL carryforward balance as of December 31, 2011. These
adjustments resulted in an increase to the NOL carryforward of $3.7 million. The net decrease to the NOL carryforwards of
$4.2 million changed the NOL carryforwards as of December 31, 2011 from $20.8 million, as previously reported in 2012 and
2011, to $16.6 million. At December 31, 2011, the Company had available for federal income tax purposes an alternative
minimum tax (AMT) credit carryforward of $3.2 million and federal NOL carryforwards of $16.6 million which were fully
utilized against federal taxable income during 2012. As of December 31, 2013 and 2012, the Company did not have any NOLs
or AMT credits to utilize against federal taxable income. As of December 31, 2013, the Company had approximately $4.7
million of State NOLs which can be used to offset future state taxable income. State net operating losses begin to expire in
2017.
Excess tax benefits are recognized in the financial statements upon actual realization of the related tax benefit which
occurred in 2012 upon utilization of the remaining NOLs and AMT credit carryforwards during the year. During 2013, the
Company recognized a windfall tax benefit of $1.9 million which was recorded as a reduction to income tax payable and a
corresponding entry to additional paid in capital.
79
Notes to Financial Statements—(Continued)
During 2013, the Company recorded a foreign tax credit of $0.4 million against its 2013 federal income tax liability
which was fully utilized during the year. Previously the Company deducted income taxes paid in foreign countries in arriving at
federal taxable income.
On September 13, 2013, the United States Treasury and Internal Revenue Service issued final tangible personal property
regulations that broadly apply to amounts paid to acquire, produce or improve tangible property, as well as dispositions of such
property. In review of these regulations, the Company has concluded that there is no material impact on its financial position,
results of operations or cash flows.
On January 25, 2012, the Company experienced a subsequent ownership change under the principles of IRC §382, as a
result of the secondary offering outlined in more detail in Note 3. Although the Company was subject to the limitations of IRC
§382 on the utilization of its NOL and the tax credit carryforwards in 2012, the limitation was sufficiently in excess of the tax
attribute carryforwards as not to prohibit complete utilization during the year.
The Company accrues interest related to unrecognized tax benefits in its provision for income taxes, and any associated
penalties are recorded in selling, general and administrative expenses.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company's
tax years from 2006 through 2012 are still subject to examination in the United States due to net operating loss carryovers
generated in such years. Various state and foreign jurisdiction tax years remain open to examination and the Company was
under examination in certain jurisdictions during 2012, and the outcome of these audits were immaterial to the financial
statements. The Company believes that the effect of any additional assessment(s) will be immaterial to its financial statements.
15. Commitments and Contingencies
Aircraft-Related Commitments and Financing Arrangements
The Company’s contractual purchase commitments consist primarily of aircraft and engine acquisitions through
manufacturers and aircraft leasing companies. On June 20, 2013, the Company entered into an amendment to the Airbus A320
Family Purchase Agreement, by and between the Company and Airbus S.A.A., dated May 5, 2004 (Airbus Amendment) for the
order of an additional 20 Airbus A321 aircraft. These aircraft are in addition to the 92 aircraft not yet delivered under Spirit's
existing order with Airbus. In addition, the Company is committed to take delivery of an additional five aircraft directly from a
third-party lessor. During the year, the Company converted ten Airbus A320 orders to Airbus A321 orders and converted five
Airbus A321 orders to Airbus A321neo orders. On October 1, 2013, the Company entered into agreements with International
Aero Engines AG (IAE) and Pratt & Whitney (collectively, the IAE & P&W Agreement) for the provision and servicing of
engines to power its fleet of Airbus A320 family aircraft.
As of December 31, 2013, the Company's aircraft orders consisted of the following:
2014
2015
2016
2017
2018
2019
2020
2021
Airbus
Third-Party
Lessor
A320
A320NEO
A321
A321NEO
A320NEO
Total
11
11
5
10
37
2
8
10
5
25
6
8
13
18
45
5
5
1
4
5
11
14
17
20
11
13
13
18
117
The Company also has six spare engine orders for V2500 SelectOne engines with IAE and nine spare engine orders for
PurePower PW 1100G-JM engines with Pratt & Whitney. Spare engines are scheduled for delivery from 2014 through 2024.
Purchase commitments for these aircraft and engines, including estimated amounts for contractual price escalations and pre-
delivery payments, will be approximately $559.3 million in 2014, $619.1 million in 2015, $633.1 million in 2016, $804.5
million in 2017, $543.1 million in 2018 and $2,197.1 million in 2019 and beyond. The Company has secured financing
80
Notes to Financial Statements—(Continued)
commitments with third parties for seven aircraft deliveries from Airbus, scheduled for delivery in 2014 and for the five aircraft
to be leased directly from a third party. The Company does not have financing commitments in place for the remaining 105
Airbus firm aircraft orders scheduled for delivery between 2014 and 2021.
Litigation
The Company is subject to commercial litigation claims and to administrative and regulatory proceedings and reviews
that may be asserted or maintained from time to time. The Company believes the ultimate outcome of such lawsuits,
proceedings and reviews will not, individually or in the aggregate, have a material adverse effect on its financial position,
liquidity or results of operations.
Employees
The Company has three union-represented employee groups that together represent approximately 59% of all employees
at December 31, 2013 and 54% of all employees at December 31, 2012. The table below sets forth the Company's employee
groups and status of the collective bargaining agreements as of December 31, 2013.
Employee Groups
Pilots
Flight Attendants
Dispatchers
Representative
Air Line Pilots Association, International (ALPA)
Association of Flight Attendants (AFA-CWA)
Transport Workers Union (TWU)
Amendable Date
August 2015
August 2007
August 2018
Percentage of Workforce
24%
34%
1%
In December 2013, with the help of the National Mediation Board (NMB), the Company reached a tentative agreement
for a five-year contract with the Company's flight attendants. The tentative agreement was subject to ratification by the flight
attendant membership. On February 7, 2014, the Company was notified that the flight attendants voted to not ratify the
tentative agreement. The Company will continue to work together with the AFA and the NMB with a goal of reaching a
mutually beneficial agreement.
The Company is self-insured for health care claims, subject to a stop-loss policy, for eligible participating employees and
qualified dependent medical claims, subject to deductibles and limitations. The Company’s liabilities for claims incurred but
not reported are determined based on an estimate of the ultimate aggregate liability for claims incurred. The estimate is
calculated from actual claim rates and adjusted periodically as necessary. The Company has accrued $2.1 million and $1.9
million, for health care claims as of December 31, 2013, and 2012, respectively.
Other
The Company is contractually obligated to pay the following minimum guaranteed payments to the provider of its
reservation system as of December 31, 2013: $3.9 million in 2014, $3.9 million in 2015, $3.9 million in 2016, $3.9 million in
2017, $2.6 million in 2018 and $0.0 million in 2019 and thereafter.
The Company entered into a Tax Receivable Agreement (TRA) with the Company's Pre-IPO Stockholders (as defined in
the TRA) that became effective immediately prior to the consummation of the IPO. In accordance with the TRA, the Company
paid $27.2 million, including $0.3 million of applicable interest, in the second quarter of 2012. As of December 31, 2013, the
Company has $5.6 million accrued related to the TRA and $0.2 million of applicable interest. See Note 18.
16. Fair Value Measurements
Under ASC 820, Fair Value Measurements and Disclosures, disclosures are required about how fair value is determined
for assets and liabilities, and a hierarchy for which these assets and liabilities must be grouped is established, based on
significant levels of inputs, as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
81
Notes to Financial Statements—(Continued)
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. The Company utilizes several valuation techniques in order to assess the fair value of the Company’s
financial assets and liabilities. The Company’s derivative contracts generally consist of jet fuel swaps and jet fuel options.
These instruments are valued using energy and commodity market data, which is derived by combining raw inputs with
quantitative models and processes to generate forward curves and volatilities.
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market
approach uses prices and other relevant information generated by market transactions involving identical or comparable assets
or liabilities.
Assets and liabilities measured at gross fair value on a recurring basis are summarized below:
Fair Value Measurements as of December 31, 2013
Total
Level
1
Level
2
Level
3
(in millions)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
530.6
530.6
$
$
530.6
530.6
$
$
— $
— $
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
— $
—
—
—
Fair Value Measurements as of December 31, 2012
Total
Level
1
Level
2
Level
3
(in millions)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Jet fuel options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
416.8
0.3
417.1
$
$
416.8
—
416.8
$
$
— $
—
— $
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
— $
—
0.3
0.3
—
Cash and cash equivalents at December 31, 2013 and December 31, 2012 are comprised of liquid money market funds
and cash. The Company maintains cash with various high-quality financial institutions. The company had no outstanding
derivatives as of December 31, 2013. The Company had no transfers of assets or liabilities between any of the above levels
during the years ended December 31, 2013 and 2012.
The Company did not elect hedge accounting on any of the derivative instruments, and as a result, changes in the fair
values of these fuel hedge contracts are recorded each period in fuel expense. Fair values of the instruments are determined
using standard option valuation models. The Company also considers counterparty risk and its own credit risk in its
determination of all estimated fair values. The Company offsets fair value amounts recognized for derivative instruments
executed with the same counterparty under a master netting arrangement. The Company determines the fair value of jet fuel
options utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived
from information available in publicly quoted markets. The Company has consistently applied these valuation techniques in all
periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it
holds.
Due to the fact that certain inputs utilized to determine the fair value of jet fuel options are unobservable (principally
implied volatility), the Company categorizes these derivatives as Level 3. Implied volatility of a jet fuel option is the volatility
of the price of the underlying commodity that is implied by the market price of the option based on an option pricing model.
Thus, it is the volatility that, when used in a particular pricing model, yields a theoretical value for the option equal to the
current market price of that option. Implied volatility, a forward-looking measure, differs from historical volatility because the
latter is calculated from known past returns. At each balance sheet date, the Company substantiates and adjusts unobservable
inputs. The Company routinely assesses the valuation model's sensitivity to changes in implied volatility. Based on the
Company's assessment of the valuation model's sensitivity to changes in implied volatility, it noted that holding other inputs
82
Notes to Financial Statements—(Continued)
constant, a significant increase (decrease) in implied volatility would result in a significantly higher (lower) determination of
fair value measurement for the Company's aircraft fuel derivatives.
The Company's Valuation Group is made up of individuals from the Company's Risk Management, Treasury and
Corporate Accounting departments. The Valuation Group is responsible for the Company's valuation policies, procedures and
execution thereof. The Company's Valuation Group reports to the Company's Chief Financial Officer and Finance Committee
who approve all derivative transactions. The Valuation Group compares the results of the Company's internally developed
valuation methods with counterparty reports at each balance sheet date and assesses the Company's valuation methods for
accurateness and identifies any needs for modification.
The following table presents the Company’s activity for assets and liabilities measured at gross fair value on a recurring
basis using significant unobservable inputs (Level 3):
Jet Fuel Options
(in millions)
Balance at January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total realized or unrealized gains (losses) included in earnings, net . . . . . . . . . . . . .
Settlements, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized or unrealized gains (losses) included in earnings, net . . . . . . . . . . . . .
Settlements, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized or unrealized gains (losses) included in earnings, net . . . . . . . . . . . . .
Settlements, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.5
4.2
(7.4)
0.3
(0.2)
0.2
0.3
0.1
(0.4)
—
The Company records the fair value adjustment of its aircraft fuel derivatives in the accompanying statement of
operations within aircraft fuel and on the balance sheet within prepaid expenses and other current assets or other current
liabilities, depending on whether the net fair value of the derivatives is in an asset or liability position as of the respective date.
17. Operating Segments and Related Disclosures
The Company is managed as a single business unit that provides air transportation for passengers. Operating revenues by
geographic region as defined by the Department of Transportation (DOT) area are summarized below:
DOT—domestic . . . . . . . . . . . . . . . . . . . . . . . . . $
DOT—Latin America . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,467.5
186.9
1,654.4
(in millions)
1,135.1
$
183.3
1,318.4
$
$
$
900.1
171.1
1,071.2
2013
2012
2011
During 2013, 2012 and 2011, no revenue from any one foreign country represented greater than 4% of the Company’s
total passenger revenue. The Company attributes operating revenues by geographic region based upon the origin and
destination of each passenger flight segment. The Company’s tangible assets consist primarily of flight equipment, which are
mobile across geographic markets and, therefore, have not been allocated.
18. Initial Public Offering and Tax Receivable Agreement
On June 1, 2011, the Company raised $187.2 million of gross proceeds from an initial public offering of 15,600,000
shares of its common stock at a price of $12.00 per share. The resulting proceeds to the Company were approximately $176.9
million, after deducting underwriter commissions. The Company retained $150.0 million of the net proceeds, after paying
$20.6 million of debt, $0.5 million to pay three unaffiliated holders of its subordinated notes and $5.9 million in direct costs of
the offering. In accordance with a Recapitalization Agreement, all of the principal and accrued and unpaid interest on
outstanding notes, to the extent not paid, totaling $279.2 million, as well as all of the Class A and B preferred stock outstanding
immediately prior to the offering along with accrued and unpaid dividends totaling $81.7 million, were exchanged for
30,079,420 shares of common stock at a share price of $12.00 per share. Each share of Class B Common Stock was exchanged
83
Notes to Financial Statements—(Continued)
for one share of common stock. In addition, interest expense was reduced by $0.4 million due to a write off of the unamortized
portion of prepaid loan fees and deferred interest.
In connection with the IPO, the Company entered into the TRA and thereby distributed immediately prior to the
completion of the IPO to the holders of common stock as of such time, or the Pre-IPO Stockholders, the right to receive an
amount equal to 90% of the cash savings in federal income tax realized by it by virtue of the use of the federal net operating
loss, deferred interest deductions and alternative minimum tax credits held by the Company as of March 31, 2011, which is
defined as the Pre-IPO NOL. Cash tax savings generally will be computed by comparing actual federal income tax liability to
the amount of such taxes that the Company would have been required to pay had such Pre-IPO NOLs (as defined in the TRA)
not been available. Upon consummation of the IPO and execution of the TRA, the Company recorded a liability with an
offsetting reduction to additional paid in capital. The amount and timing of payments under the TRA will depend upon a
number of factors, including, but not limited to, the amount and timing of taxable income generated in the future and any future
limitations that may be imposed on the Company's ability to use the Pre-IPO NOLs. The term of the TRA will continue until
the first to occur (a) the full payment of all amounts required under the agreement with respect to utilization or expiration of all
of the Pre-IPO NOLs, (b) the end of the taxable year including the tenth anniversary of the IPO or (c) a change in control of the
Company.
In accordance with the TRA, the Company is required to submit a Tax Benefit Schedule showing the proposed TRA
payout amount to the Stockholder Representatives within 45 calendar days after the Company files its tax return. Stockholder
Representatives are defined as Indigo Pacific Partners, LLC and OCM FIE, LLC, representing the two largest ownership
interest of pre-IPO shares. The Tax Benefit Schedule shall become final and binding on all parties unless a Stockholder
Representative, within 45 calendar days after receiving such schedule, provides the Company with notice of a material
objection to such schedule. If the parties, for any reason, are unable to successfully resolve the issues raised in any notice
within 30 calendar days of receipt of such notice, the Company and the Stockholder Representatives have the right to employ
the TRA's reconciliation procedures. If the Tax Benefit Schedule is accepted, the Company has five days after acceptance to
make payments to the Pre-IPO stockholders. Pursuant to the TRA's reconciliation procedures, any disputes that cannot be
settled amicably, are settled by arbitration conducted by a single arbitrator jointly selected by both parties.
During the second quarter of 2012, the Company paid $27.2 million, or 90% of the 2011 tax savings realized from the
utilization of NOLs, including $0.3 million of applicable interest. During 2012, management adjusted for an immaterial error in
the original estimate of the liability. This adjustment reduced the liability with an offset to additional paid in capital.
During 2013, the Company filed an amended 2009 income tax return in order to correct its NOL carry forward as of
December 31, 2009. See Note 14. As a result, the Company's NOL carry forward as of March 31, 2011 was consequently
reduced by $7.8 million, which corresponds to a reduction in the estimated TRA benefit of $2.4 million with an offset to
additional paid in capital. On September 13, 2013, the Company filed its 2012 federal income tax return, and on October 14,
2013, the Company submitted a Tax Benefit Schedule to the Stockholder Representatives. On November 27, 2013, pursuant to
the TRA, the Company received an objection notice to the Tax Benefit Schedule from the Stockholder Representatives. As of
December 31, 2013, the Company estimated the TRA liability to be $5.6 million. The Company and the Stockholder
Representatives are in discussions attempting to resolve the objection related to the Tax Benefit Schedule and have not
employed the TRA's reconciliation procedures.
19. Quarterly Financial Data (Unaudited)
Quarterly results of operations for the year ended December 31, 2013 are summarized below:
84
2013
Operating revenue . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . .
2012
Operating revenue . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . .
Three Months Ended
March 31
June 30
September 30 December 31
(in thousands, except per share amounts)
$
370,437
$
407,339
$
456,625
$
419,984
49,669
30,554
0.42
0.42
66,758
42,068
0.58
0.58
97,804
61,103
0.84
0.84
68,061
43,193
0.59
0.59
$
301,495
$
346,308
$
342,317
$
328,268
37,244
23,419
0.32
0.32
55,132
34,591
0.48
0.48
49,681
30,884
0.43
0.43
31,933
19,566
0.27
0.27
85
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Spirit Airlines, Inc.
We have audited the accompanying balance sheets of Spirit Airlines, Inc. as of December 31, 2013 and 2012, and the related
statements of operations, shareholders' equity (deficit), and cash flows for each of the three years in the period ended December
31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Spirit
Airlines, Inc. at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Spirit Airlines, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992
framework) and our report dated February 20, 2014 expressed an unqualified opinion thereon.
Miami, Florida
February 20, 2014
/s/ Ernst & Young LLP
Certified Public Accountants
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Spirit Airlines, Inc.
We have audited Spirit Airlines, Inc's internal control over financial reporting as of December 31, 2013 based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (1992 framework), as applicable (the COSO criteria). Spirit Airlines, Inc's management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Spirit Airlines, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the accompanying balance sheet of Spirit Airlines, Inc. as of December 31, 2013 and 2012, and the related statement of
operations, shareholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 2013 of
Spirit Airlines, Inc. and our report dated February 20, 2014 expressed an unqualified opinion thereon.
Miami, Florida
February 20, 2014
/s/ Ernst & Young LLP
Certified Public Accountants
87
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2013. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to our management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-
benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of
December 31, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally accepted in the United States of
America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
1992 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO Framework). Based on that evaluation, management believes that our internal control over
financial reporting was effective as of December 31, 2013.
The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, which also audited our Consolidated Financial Statements for
the year ended December 31, 2013. Ernst & Young LLP's report on our internal control over financial reporting, which is
included herein.
Changes in Internal Control over Financial Reporting
During the first quarter of 2013, we implemented SAP, a new Enterprise Resource Planning (ERP) system that replaced
our financial reporting module. We have made appropriate changes to our internal controls over financial reporting to
accommodate the implementation of the ERP system.
There were no other changes in our internal control over financial reporting during 2013 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
88
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information under the captions, “Election of Directors,” “Corporate Governance,” “Committee and Meetings of the
Board of Directors,” “Executive Officers,” “Code of Ethics” and “Section 16(a) Beneficial Ownership Reporting Compliance”
in our 2014 Proxy Statement is incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information under the captions, “Director Compensation” and “Executive Compensation” in our 2014 Proxy
Statement is incorporated herein by reference.
ITEM 12.
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
The information under the captions, “Security Ownership” and “Equity Compensation Plan Information” in our 2014
Proxy Statement is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the captions, “Certain Relationships and Related Transactions” and “Corporate Governance” in
our 2014 Proxy Statement is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the captions, “Ratification of Independent Registered Public Accounting Firm” in our 2014 Proxy
Statement is incorporated herein by reference.
With the exception of the information specifically incorporated by reference in Part III to this Annual Report on Form 10-
K from our 2014 Proxy Statement, our 2014 Proxy Statement shall not be deemed to be filed as part of this Report.
89
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) 1. Financial Statements:
The financial statements included in Item 8. Financial Statements and Supplementary Data above are filed as part of
this annual report.
2. Financial Statement Schedules:
There are no financial statement schedules filed as part of this annual report, since the required information is included
in the Financial Statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not
present.
3. Exhibits:
The exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index included after the
signature page.
90
Pursuant to the requirements of Section 13 or Section 15(d) 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.
SIGNATURES
Date: February 20, 2014
SPIRIT AIRLINES, INC.
By:
/s/ B. Ben Baldanza
B. Ben Baldanza
President and Chief Executive Officer
91
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints B. Ben Baldanza, Edward Christie and Thomas Canfield, and each of them, their true and lawful attorneys-in-fact,
each with full power of substitution, for them in any and all capacities, to sign any amendments to this report on Form 10-K
and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the registrant in the capacities and on the dates indicated
Signature
Title
Date
President and Chief Executive Officer (principal
executive officer)
February 20, 2014
Chief Financial Officer (principal financial and
accounting officer)
February 20, 2014
Director (Chairman of the Board)
February 20, 2014
/s/ B. Ben Baldanza
B. Ben Baldanza
/s/ Edward M. Christie
Edward M. Christie
/s/ H. McIntyre Gardner
H. McIntyre Gardner
/s/ Carlton D. Donaway
Carlton D. Donaway
/s/ David G. Elkins
David G. Elkins
/s/ Robert D. Johnson
Robert D. Johnson
/s/ Barclay G. Jones
Barclay G. Jones
/s/ Stuart I. Oran
Stuart I. Oran
Director
Director
Director
Director
Director
/s/ Horacio Scapparone
Director
Horacio Scapparone
92
February 20, 2014
February 20, 2014
February 20, 2014
February 20, 2014
February 20, 2014
February 20, 2014
Exhibit No.
Description of Exhibit
EXHIBIT INDEX
3.1
3.2
4.1
Amended and Restated Certificate of Incorporation of Spirit Airlines, Inc., dated as of June 1, 2011, filed as
Exhibit 3.1 to the Company's Current Report on Form 8-K dated June 1, 2011, is hereby incorporated by
reference.
Amended and Restated Bylaws of Spirit Airlines, Inc., dated as of June 1, 2011, filed as Exhibit 3.2 to the
Company's Current Report on Form 8-K dated June 1, 2011, is hereby incorporated by reference.
Specimen Common Stock Certificate, filed as Exhibit 4.1 to the Company's Form S-1 Registration
Statement (No. 333-178336), is hereby incorporated by reference.
10.1+ General Release, dated January 14, 2014, between Spirit Airlines, Inc. and Ben Baldanza.
10.2+
Amended and Restated Employment Agreement, dated as of January 8, 2014, between Spirit Airlines, Inc.
and Ben Baldanza.
10.3+ Offer Letter, dated September 7, 2013, between Spirit Airlines, Inc. and John Bendoraitis.
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12
Amended and Restated V2500 General Terms of Sale, dated as of October 1, 2013, by and between Spirit
Airlines, Inc. and IAE International Aero Engines AG, as supplemented by Side Letter No. 1 dated as of
October 1, 2013, filed as Exhibit 10.1 to the Company's Form 10-Q/A dated February 20, 2014, is hereby
incorporated by reference.
Amended and Restated Fleet Hour Agreement, dated as of October 1, 2013, by and between Spirit Airlines,
Inc. and IAE International Aero Engines AG, as supplemented by Side Letter No. 1 dated as of October 1,
2013, filed as Exhibit 10.2 to the Company's Form 10-Q/A dated February 20, 2014, is hereby incorporated
by reference.
V2500 General Terms of Sale, dated as of October 1, 2013, by and between Spirit Airlines, Inc. and IAE
International Aero Engines AG, as supplemented by Side Letter No. 1 dated as of October 1, 2013 and Side
Letter No. 2 dated as of October 1, 2013, filed as Exhibit 10.3 to the Company's Form 10-Q/A dated
February 20, 2014, is hereby incorporated by reference.
Fleet Hour Agreement, dated of as October 1, 2013, by and between Spirit Airlines, Inc. and IAE
International Aero Engines AG, as supplemented by Side Letter No. 1 dated as of October 1, 2013, filed as
Exhibit 10.4 to the Company's Form 10-Q/A dated February 20, 2014, is hereby incorporated by reference.
PurePower PW1100G Engine Purchase Support Agreement, dated as of October 1, 2013, by and between
the Company and United Technologies Corporation, acting through its Pratt & Whitney Division, filed as
Exhibit 10.5 to the Company's Form 10-Q dated October 30, 2013, is hereby incorporated by reference.
Hosted Services Agreement, dated as of February 28, 2007, between Spirit Airlines, Inc. and Navitaire Inc.,
as amended by Amendment No. 1 dated as of October 23, 2007, Amendment No. 2 dated as of May 15,
2008, Amendment No. 3 dated as of November 21, 2008, Amendment No. 4 dated as of August 17, 2009
and Amendment No. 5 dated November 4, 2009, filed as Exhibit 10.3 to the Company's Amendment No. 4
to Form S-1 Registration Statement (No. 333-169474), is hereby incorporated by reference.
Signatory Agreement, dated as of May 21, 2009, between Spirit Airlines, Inc. and U.S. Bank National
Association, as amended by First Amendment dated January 18, 2010, filed as Exhibit 10.4 to the
Company's Amendment No. 4 to Form S-1 Registration Statement (No. 333-169474), is hereby
incorporated by reference.
Terms and Conditions for Worldwide Acceptance of the American Express Card by Airlines, dated
September 4, 1998, between Spirit Airlines, Inc. and American Express Travel Related Services Company,
Inc., as amended January 1, 2003 and August 28, 2003, filed as Exhibit 10.6 to the Company's Amendment
No. 4 to Form S-1 Registration Statement (No. 333-169474), is hereby incorporated by reference.
Tax Receivable Agreement, dated as of June 1, 2011 between Spirit Airlines, Inc., Indigo Pacific Partners
LLC, and OCM FIE, LLC, filed as Exhibit 10.12 to the Company's Form S-1 Registration Statement (No.
333-178336), is hereby incorporated by reference.
93
10.13†
10.14††
10.15††
10.16
10.17†
10.18+
10.19+
10.20+
10.21+
10.22
10.23+
Lease, dated as of June 17, 1999, between Sunbeam Development Corporation and Spirit Airlines, Inc., as
amended by Lease Modification and Contraction Agreement dated as of May 7, 2009, filed as Exhibit 10.13
to the Company's Amendment No. 4 to Form S-1 Registration Statement (No. 333-169474), is hereby
incorporated by reference.
Lease Modification and Extension Agreement, dated as of September 26th, 2013, between Sunbeam
Development Corporation and Spirit Airlines, Inc.
Lease, dated as of September 26th, 2013, between Sunbeam Development Corporation and Spirit Airlines,
Inc.
Airline-Airport Lease and Use Agreement, dated as of August 17, 1999, between Broward County and
Spirit Airlines, Inc., as supplemented by Addendum dated August 17, 1999, filed as Exhibit 10.14 to the
Company's Amendment No. 3 to Form S-1 Registration Statement (No. 333-169474), is hereby
incorporated by reference.
Airbus A320 Family Purchase Agreement, dated as of May 5, 2004, between AVSA, S.A.R.L. and Spirit
Airlines, Inc.; as amended by Amendment No. 1 dated as of December 21, 2004, Amendment No. 2 dated
as of April 15, 2005, Amendment No. 3 dated as of June 30, 2005, Amendment No. 4 dated as of October
27, 2006 (as amended by Letter Agreement No. 1, dated as of October 27, 2006, to Amendment No. 4 and
Letter Agreement No. 2, dated as of October 27, 2006, to Amendment No. 4), Amendment No. 5 dated as of
March 5, 2007, Amendment No. 6 dated as of March 27, 2007, Amendment No. 7 dated as of June 26, 2007
(as amended by Letter Agreement No. 1, dated as of June 26, 2007, to Amendment No. 7), Amendment No.
8 dated as of February 4, 2008, Amendment No. 9 dated as of June 24, 2008 (as amended by Letter
Agreement No. 1, dated as of June 24, 2008, to Amendment No. 9) and Amendment No. 10 dated July 17,
2009 (as amended by Letter Agreement No. 1, dated as of July 17, 2009, to Amendment No. 10), and as
supplemented by Letter Agreement No. 1 dated as of May 5, 2004, Letter Agreement No. 2 dated as of May
5, 2004, Letter Agreement No. 3 dated as of May 5, 2004, Letter Agreement No. 4 dated as of May 5, 2004,
Letter Agreement No. 5 dated as of May 5, 2004, Letter Agreement No. 6 dated as of May 5, 2004, Letter
Agreement No. 7 dated as of May 5, 2004, Letter Agreement No. 8 dated as of May 5, 2004, Letter
Agreement No. 9 dated as of May 5, 2004, Letter Agreement No. 10 dated as of May 5, 2004 and Letter
Agreement No. 11 dated as of May 5, 2004, all filed as Exhibit 10.15 to the Company's Amendment No. 4
to Form S-1 Registration Statement (No. 333-169474); as further amended by Amendment No. 11 dated as
of December 29, 2011 (as amended by Letter Agreement No. 1 dated as of December 29, 2011, Letter
Agreement No. 2 dated as of December 29, 2011, Letter Agreement No. 3 dated as of December 29, 2011,
Letter Agreement No. 4 dated as of December 29, 2011, Letter Agreement No. 5 dated as of December 29,
2011, Letter Agreement No. 6 dated as of December 29, 2011, Letter Agreement No. 7 dated as of
December 29, 2011 and Letter Agreement No. 8 dated as of December 29, 2011) all filed as Exhibit 10.1 to
the Company's Form 8-K dated January 5, 2012; Amendment No. 12, dated as of June 29, 2012, filed as
Exhibit 10.1 to the Company's Form 10-Q dated July 26, 2013; Amendment No. 13, dated as of January 10,
2013, filed as Exhibit 10.2 to the Company's Form 10-Q dated July 26, 2013; and Amendment No. 14,
dated as of June 20, 2013, filed as Exhibit 10.3 to the Company's Form 10-Q dated July 26, 2013 is hereby
incorporated by reference.
Spirit Airlines, Inc. Executive Severance Plan, filed as Exhibit 10.16 to the Company's Amendment No. 3 to
Form S-1 Registration Statement (No. 333-169474), is hereby incorporated by reference.
Amended and Restated Spirit Airlines, Inc. 2005 Stock Incentive Plan and related documents, filed as
Exhibit 10.17 to the Company's Amendment No. 3 to Form S-1 Registration Statement (No. 333-169474),
is hereby incorporated by reference.
Spirit Airlines, Inc. 2011 Equity Incentive Award Plan, filed as Exhibit 10.2 to the Company's Form S-8
Registration Statement (No. 333-174812), is hereby incorporated by reference.
Offer Letter, dated September 10, 2007, between Spirit Airlines, Inc. and Thomas Canfield, filed as Exhibit
10.22 to the Company's Amendment No. 3 to Form S-1 Registration Statement (No. 333-169474), is hereby
incorporated by reference.
Form of Indemnification Agreement between Spirit Airlines, Inc. and its directors and executive officers,
filed as Exhibit 10.24 to the Company's Amendment No. 3 to Form S-1 Registration Statement (No.
333-169474), is hereby incorporated by reference.
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the
Spirit Airlines, Inc. 2011 Equity Incentive Award Plan, filed as Exhibit 10.4 to the Company's Form S-8
Registration Statement (No. 333-174812), is hereby incorporated by reference.
94
10.24†
10.25†
10.26+
10.27+
10.28+
14.1
21.1
23.1
31.1
31.2
Addendum and Amendment to the Agreement Governing Acceptance of the American Express Card by
Airlines, dated as of June 24, 2011, by and between Spirit Airlines, Inc. and American Express Travel
Related Services Company, Inc., filed as Exhibit 10.1 to the Company's Form 10-Q dated July 28, 2011, is
hereby incorporated by reference.
Second Amendment to Signatory Agreement, effective as of September 6, 2011, by and between the
Company and U.S. Bank, National Association, filed as Exhibit 10.1 to the Company's Form 10-Q/A dated
December 22, 2011, is hereby incorporated by reference.
Letter Agreement, effective April 16, 2012, by and between Spirit Airlines, Inc. and Edward M. Christie,
III, filed as Exhibit 10.2 to the Company's Form 10-Q dated May 1, 2012, is hereby incorporated by
reference.
Letter Agreement, dated January 16, 2012, by and between Spirit Airlines, Inc. and Jim Lynde
Separation and Transition Agreement with Tony Lefebvre, dated April 29, 2013, filed as Exhibit 10.4 to the
Company's Form 10-Q dated July 26, 2013, is hereby incorporated by reference.
Code of Business Conduct and Ethics, filed as Exhibit 14.1 to the Company's Form S-1 Registration
Statement (No. 333-178336), is hereby incorporated by reference.
List of subsidiaries.
Consent of Ernst & Young LLP, independent registered public accounting firm.
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS***
101.SCH***
101.CAL***
101.DEF***
101.LAB***
101.PRE***
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Extension Label Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
†
††
+
**
Confidential treatment granted for certain portions of this Exhibit pursuant to Rule 406 under the Securities Act or Rule
24b-2 under the Exchange Act, which portions are omitted and filed separately with the Securities and Exchange
Commission.
Confidential treatment has been requested for certain portions of this Exhibit pursuant to Rule 406 under the Securities
Act or Rule 24b-2 under the Exchange Act which portions are omitted and filed separately with the Securities and
Exchange Commission.
Indicates a management contract or compensatory plan or arrangement.
Exhibit 32.1 is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall
such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the
Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing.
*** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not otherwise subject to liability
under these Sections.
95