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, 2016
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 $3.3 billion computed by reference to the last
sale price of the common stock on the NASDAQ Global Select Market on June 30, 2016, 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 6, 2017:
Class
Number of Shares
Common Stock, $0.0001 par value per share
69,336,418
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the registrant's 2017 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, 2016.
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 that offers affordable travel to price-conscious customers. Our all-
Airbus Fit FleetTM, the youngest fleet of any major U.S. airline, currently operates more than 420 daily flights to 59 destinations
in the United States, Caribbean and Latin America. 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 by offering customers our Bare
Fares TM, which are unbundled base fares that remove components traditionally included in the price of an airline ticket. We
then give customers Frill Control TM, which provides customers the freedom to save by paying only for the options they choose
such as bags, advance seat assignments and refreshments. We record revenue related to these options in our financial statements
as non-ticket revenue.
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, Safety, Security and Operations 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 low, unbundled base fares with a range of optional services, allowing
customers the freedom to choose only the options they value. The success of our model is driven by our low cost structure,
which permits us to offer low base fares while maintaining high profit margins.
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 address an underserved market, which helps
us to increase passenger volume, load factors and non-ticket revenue on the flights we operate. We also have high-density
seating configurations on our aircraft and a simplified onboard product designed to lower costs, which is part of our Plane
SimpleTM strategy. High 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. 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 maintain
higher 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, which does not allow 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 optional products or services.
We allow our customers to see all available options and their respective prices prior to purchasing a ticket, and this full
transparency illustrates that our total price, including options selected, is lower than other airlines on average. Through branded
4
campaigns, we educate the public on how our unbundled pricing model works and show them how it gives them a choice on
how they spend their money and saves them money compared to other airlines.
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 United States.
We believe this unit 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 7.37 cents in 2016 were significantly lower than those of the major domestic network
carriers and among the lowest of the domestic low-cost carriers. We achieve these low unit operating costs in large part due to:
•
•
high aircraft utilization;
high-density seating configurations on our aircraft, which is part of our Plane Simple TM strategy along with simplified
onboard product designed to lower costs;
• minimal hub-and-spoke network inefficiencies;
•
•
•
•
•
•
highly productive workforce;
opportunistic outsourcing of operating functions;
operating our Fit Fleet TM, a single-fleet type of Airbus A320-family aircraft that is the youngest fleet of any major
U.S. airline and operated by common flight crews;
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 generate significant non-
ticket revenue, which allows us to lower base fares and enables our passengers to identify, select and pay for only the products
and services they want to use. In implementing our unbundled strategy, we have grown average non-ticket revenue per
passenger flight segment from approximately $5 in 2006 to $52 in 2016 by:
•
•
•
charging for checked and carry-on baggage;
passing through all distribution-related expenses;
charging for premium seats and advance seat selection;
• maintaining consistent ticketing policies, including service charges for changes and cancellations;
•
•
•
•
•
generating subscription revenue from our $9 Fare Club 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 on our website;
selling third-party travel insurance through our website; and
selling onboard advertising.
Resilient Business Model and Customer Base. By focusing on price-sensitive travelers, we have maintained 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 travelers. In 2015 and 2016, low oil prices coupled with increased competition in the
U.S. drove lower unit revenues, but lower costs produced margins that remain higher than most of our domestic network peers.
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. We seek to balance growth between large domestic markets, niche markets and opportunities in the
Caribbean and Latin America according to current economic and industry conditions.
5
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
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. During 2016, 2015 and
2014, no revenue from any one foreign country represented greater than 4% of our total passenger revenue. We attribute
operating revenues by geographic region based upon the origin and destination of each passenger flight segment.
Financial Strength Achieved with Focus on Cost Discipline. We believe our ULCC business model has delivered strong
financial results in both favorable and more difficult economic times. We have generated these results by:
•
•
•
keeping a consistent focus on maintaining low unit operating costs;
ensuring our sourcing arrangements with key third parties are regularly benchmarked against the best industry
standards;
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, 2016, our route network included 200 markets served by 59 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 3,
2017 for which service has not yet started:
6
Our network expansion targets underserved and/or overpriced markets. We employ a rigorous process to identify
opportunities to deploy new aircraft where we believe they will be most 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, other low-cost carriers and ULCCs, and regional airlines. We
typically compete in markets served by traditional network airlines, and other low-cost carriers and ULCCs, and, to a lesser
extent, regional airlines.
As of December 31, 2016, our top two largest network overlaps are with Southwest Airlines and American Airlines at
approximately 58% and 54% of our markets, respectively. Our principal competitors on domestic routes are Southwest Airlines,
American Airlines, Delta Air Lines and United Airlines. Our principal competitors to our markets in the Caribbean and Latin
America are American Airlines, JetBlue Airways, Southwest Airlines and United Airlines. Our principal competitive advantage
is our low base fares. We are able to offer low fares profitably, due to our low unit operating costs, which in 2016 were among
the lowest in the U.S. airline industry. In difficult economic or competitive environments, we believe our low unit costs coupled
with our relatively stable 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 TRASM. The prevalence of discount fares can be
particularly acute when a competitor has excess capacity that it is unable to fill at higher rates. 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 each year due to more vacation travel during these periods, as 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 our
airport ticket counters, 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 are paying for their own ticket and who make their purchase
decision based largely on price. By maintaining a low 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 focusing 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 modified our online booking process to allow our customers to see all
available options and their prices prior to purchasing a ticket, and maintain a campaign that illustrates our total prices are lower,
on average, than those of 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 airlines with 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, 2016, we had a fleet of 95 Airbus single-aisle aircraft, which are commonly referred to as “A320
family” aircraft. A320 family aircraft include the A319, A320 and A321 models, which have broadly common design and
equipment but differ most notably in fuselage length, service range and seat capacity. Within the A320 family of aircraft,
models using existing engine technology may carry the suffix “ceo,” denoting the “current engine option,” while models
equipped with new-generation engines may carry the suffix “neo,” denoting the “new engine option.” As of December 31,
2016, our fleet consisted of 29 A319s, 45 A320ceos, 5 A320neos and 16 A321ceos, and the average age of the fleet was 5.2
years. As of December 31, 2016, we owned 36 of our aircraft, of which 15 aircraft are financed through senior and junior long-
term debt with terms of 12 and 7 years, respectively, 14 aircraft are financed through enhanced equipment trust certificates
(EETCs), and 7 aircraft were purchased off lease and currently unencumbered. Refer to “Notes to the Financial Statements—
11. Debt and Other Obligations” for information regarding our debt financing and “Notes to the Financial Statements—3.
Special Charges” for information regarding our aircraft purchased off lease. The remaining 59 of our aircraft are financed under
operating leases with expirations between 2017 and 2029. In addition, as of December 31, 2016, we had 11 spare engines
financed under operating leases and owned 1 spare engine.
As of December 31, 2016, firm aircraft orders consisted of 76 A320 family aircraft (10 A320ceos, 50 A320neos and 16
A321ceos) with Airbus. As of December 31, 2016, spare engine orders consisted of three V2500 SelectOne engines with IAE
and nine PurePower PW 1100G-JM engines with Pratt & Whitney. Aircraft are scheduled for delivery from 2017 through 2021
and spare engines are scheduled for delivery from 2017 through 2023. The firm aircraft orders provide for capacity growth as
well as the flexibility to add to, or replace, the 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. We also may adjust or defer
deliveries, or change models of aircraft in our delivery stream, from time to time, as a means to match our future capacity with
anticipated demand and growth trends.
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 high density seating configuration
accommodates more passengers than those of our competitors when comparing the same type of aircraft.
Maintenance and Repairs
We have a Federal Aviation Administration (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 24 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 and future deliveries
with IAE and Pratt & Whitney for our engine overhaul services and with 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 maturing fleet. Our aircraft utilization rate could decrease with the increase in aircraft maintenance.
8
Employees
Our business is labor intensive, with labor costs representing approximately 25.2%, 23.1% and 19.9% of our total
operating costs for 2016, 2015 and 2014, respectively. As of December 31, 2016, we had 1,465 pilots, 2,437 flight attendants,
42 flight dispatchers, 215 ramp service agents, 678 mechanics, 371 airport agents/other and 534 employees in administrative
roles for a total of 5,742 employees. As of December 31, 2016, approximately 73% of our employees were represented by four
labor unions. On an average full-time equivalent basis, for the full year 2016, we had 5,159 employees, compared to 4,326 in
2015.
FAA regulations require pilots to have commercial licenses with specific ratings for the aircraft to be flown and 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, our 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. 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 several years.
If no agreement is reached in mediation, the NMB in its discretion may declare at some time that an impasse exists. 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
Ramp Service Agents
Representative
Air Line Pilots Association, International (ALPA)
Association of Flight Attendants (AFA-CWA)
Transport Workers Union (TWU)
International Association of Machinists and Aerospace Workers
(IAMAW)
Amendable Date
August 2015
May 2021
August 2018
June 2020
In August 2015, the Company's collective bargaining agreement with its pilots, represented by ALPA, became
amendable. In June 2016, ALPA requested the services of the National Mediation Board (NMB) to facilitate negotiations for an
amended agreement and the Company joined ALPA in the request. The NMB has assigned a mediator and the parties continue
to meet and work toward an amended agreement with the guidance of the mediator. Under the RLA, the parties' current
agreement remains in effect until an amended agreement is reached.
In March 2016, under the supervision of the NMB, the Company and AFA-CWA reached a tentative agreement for a five-
year contract with the Company's flight attendants. In May 2016, the flight attendants voted to approve the new five-year
contract with the Company. In connection with this agreement, the Company paid a $9.6 million ratification incentive payment
to the flight attendants recorded within salaries, wages and benefits in the statement of operations.
In July 2014, certain ramp service agents directly employed by the Company voted to be represented by the IAMAW.
In May 2015, the Company entered into a five-year interim collective bargaining agreement with the IAMAW, covering
material economic terms. In June 2016, the Company and the IAMAW reached an agreement on the remaining terms of the
collective bargaining agreement, which is amendable in June 2020. As of December 31, 2016, these ramp service agents served
1 of the 59 airports where the Company operates.
9
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. 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 business, 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 our business.
Insurance
We maintain insurance policies we believe are customary in the airline industry and as required by the Department of
Transportation (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. Beginning in July 2014, we
obtained third-party war risk (terrorism) insurance from the commercial market. Prior to July 2014, we obtained this insurance
through a special program administered by the FAA, which was discontinued in late 2014. Renewing coverage from
commercial underwriters could result in a change in premium and more restrictive terms. 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. Our current war risk (terrorism) insurance policy expires in July 2017.
Management Information Systems
We have continued our commitment to technology improvements to support our ongoing operations and initiatives.
During 2015, we completed the integration of TRAX, a new scalable maintenance, repair, operations (MRO) system to improve
the tracking of all maintenance related financial transactions and in 2016, we upgraded the Sabre Flight Operating Suite to
Flight Plan Manager. We intend to continue to invest time and resources in upgrading and improving our information systems
and the security of our data.
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 Department of Transportation (DOT) and the Federal Aviation
Administration (FAA). The DOT has jurisdiction over economic and consumer issues affecting air transportation, such as
competition, route authorizations, advertising and sales practices, baggage liability and disabled passenger transportation,
tarmac delays and responding to customer complaints among other areas. In January 2017, DOT issued a Supplemental Notice
of Proposed Rulemaking of rules proposed in 2014 that would require airlines to disclose through all points of sale the fees for
first and second checked bags and a carry-on bag associated with the air transportation consumers are buying or considering
buying which may be implemented in 2017. In 2016, Congress passed a law requiring airlines to refund checked bag fees for
delayed bags if they are not delivered to the passenger within a specified number of hours. DOT is collecting information from
which to develop a rule which Congress required to be issued by July 15, 2017. Additional disabled passenger rules may be
issued in 2017. 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 which could harm our business, results of
operations and financial condition."
10
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, 2016, 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. In
2014, the FAA 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 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. FAR 117 has resulted in increased
pilot costs as we were required to hire more pilots in order to comply with the regulations. 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, Colombia, Costa Rica, Cuba, 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 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). Prior to and for the first half of 2014, this fee was $2.50 per passenger
flight segment, subject to a maximum of $5 per one-way trip. Effective July 1, 2014, the security fee was set at a flat rate of
$5.60 each way. On December 19, 2014, the law was amended to limit a round-trip fee to $11.20. 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. In addition, in the past, the TSA has assessed an Aviation Security
Infrastructure Fee, or ASIF, on each airline. This fee was eliminated by the TSA effective October 1, 2014.
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
11
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 contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act) which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our
management’s beliefs and assumptions and on information currently available to our management. All statements other than
statements of historical facts are “forward-looking statements” for purposes of these provisions. In some cases, you can
identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,”
“anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions intended to identify forward-
looking statements. Such forward-looking statements are subject to risks, uncertainties and other important factors that could
cause actual results and the timing of certain events to differ materially from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those
identified below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by
law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of
such statements. 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 little competition. Most of our competitors are
larger than us 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 has, and may continue to, 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. Beginning in 2015, and continuing
through 2016, the availability of low priced fares coupled with an increase in domestic capacity led to dramatic changes in
pricing behavior in many U.S. markets. Many domestic carriers began matching lower cost airline pricing, either with limited
or unlimited inventory.
Airlines increase or decrease capacity in markets based on perceived profitability, market share objectives, competitive
considerations and other reasons. 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, compete with us on price or if we were to experience
increased competition from other low-cost carriers, our business could be materially adversely affected.
Many of the traditional network airlines in the United States have on one or more occasions initiated bankruptcy
proceedings in attempts to restructure their debt and other obligations and reduce their operating costs. They also have
completed large mergers that have increased their scale and share of the travel market. 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 in a majority of our markets.
This merger along with earlier mergers between Delta Airlines and Northwest Airlines, between United Airlines and
Continental Airlines, Southwest Airlines and AirTran Airways, and Alaska Airlines and Virgin America, have created five very
large and powerful network airlines, which creates a challenging pricing environment for smaller airlines like us.
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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, new pricing policies designed to compete with ULCCs or new market
entrants. Any such competitor may have greater financial resources and access to less expensive sources of capital than we do,
which could enable them to operate their business with a lower cost structure, or enable them to operate with lower-marginal
revenues without substantial adverse effects, than we can. If these competitors adopt and successfully execute a ULCC business
model, we could be materially adversely affected. In 2015, Delta Airlines began to market and sell a "Basic Economy" fare
which was designed in part to provide its customers with a low base fare similar to Spirit. Most recently, United Airlines and
American Airlines announced their "Basic Economy" fare. Other major carriers have announced plans to market similar
discounted fare classes.
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, Southwest Airlines
and AirTran Airways, and Alaska Airlines and Virgin America. 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,
which could have an adverse effect on our business.
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 costs 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 sufficient 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 influenced 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 represented 23.8%, 28.3% and 38.9% of our total operating expenses for 2016, 2015 and 2014,
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 supply. 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. Fuel prices also may be affected by
geopolitical and macroeconomic conditions and events that are outside of our control, including volatility in the relative
strength of the U.S. dollar, the currency in which oil is denominated. Instability within major oil producing regions, such as the
Middle East, changes in demand from major petroleum users such as China, and secular increases in competing energy sources
are examples of these trends.
Aircraft fuel prices have been subject to high volatility, fluctuating substantially over the past several years. For example,
our fuel prices spiked at a high of $3.32 per gallon, in the second quarter of 2012, and have recently fallen as low as $1.22 per
gallon in the first quarter of 2016. We can not predict the future availability, price volatility or cost of aircraft fuel. Due to the
large proportion of aircraft fuel costs in our total operating cost base, even a relatively small increase or decrease in the price of
aircraft fuel can have a significant negative impact on our operating costs or revenues and on our business, results of operations
and financial condition.
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Our fuel derivative activity, if any, may not reduce our fuel costs.
From time to time, we may enter into fuel derivative contracts in order to mitigate the risk to our business from future
volatility in fuel prices. Our derivatives may 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 can be 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, 2016, we had no outstanding jet fuel derivatives. There can be no assurance that we will be able to
enter into fuel derivative contracts in the future if we are required or choose to do so. 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 derivative contracts will provide sufficient protection against increased fuel costs or
that our counterparties will be able to perform under our derivative 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, if any, our hedged positions could counteract
the cost benefit of lower fuel prices and may require us to post cash margin collateral. Please see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Trends and Uncertainties Affecting Our Business—Aircraft
Fuel.”
Restrictions on or increased taxes applicable to charges for ancillary products and services paid by airline passengers
and burdensome consumer protection regulations or laws could harm our business, results of operations and financial
condition.
During 2016, 2015 and 2014, we generated non-ticket revenues of $1,121.3 million, $972.1 million and $786.6 million,
respectively. Our non-ticket revenues are generated from charges for, among other things, baggage, bookings through certain of
our distribution channels, advance seat selection, itinerary changes and loyalty programs. The DOT has rules governing many
facets of the airline-consumer relationship, including, for instance, price advertising, tarmac delays, bumping of passengers
from flights, ticket refunds and the carriage of disabled passengers. 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. Adverse economic 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
15
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, furthered by 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:
•
•
•
•
•
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 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 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 included pat-downs, explosive detection testing and 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, the outbreak of
disease, new regulations or policies from the incoming presidential administration and new Congress. 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 (such as Hurricane Matthew in October 2016)
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. For example, during
2015, we experienced consecutive storm systems in Dallas, Chicago, New York and Detroit followed by Tropical Storm Bill
that sat over Houston before moving north to Dallas. The timing and location of these storm systems produced a domino effect
on our operations resulting in over 500 flight cancellations and numerous flight delays, which resulted in an adverse effect on
our results of operations. Cancellations or delays due to adverse weather conditions or natural disasters, air traffic control
problems or inefficiencies, breaches in security or other factors may affect us to a greater degree than other, larger airlines that
may be able to recover more quickly from these events, and therefore could harm our business, results of operations and
financial condition to a greater degree than other air carriers. Because of our high utilization, point-to-point network,
operational disruptions can have a disproportionate impact on our ability to recover. In addition, many airlines reaccommodate
their disrupted passengers on other airlines at prearranged rates under flight interruption manifest agreements. We have been
unsuccessful in procuring any of these agreements with our peers, which makes our recovery from disruption more challenging
16
than for larger airlines that have these agreements in place. Similarly, outbreaks of pandemic or contagious diseases, such as
ebola, measles, avian flu, severe acute respiratory syndrome (SARS), H1N1 (swine) flu and Zika virus, 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 commissions, 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
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 25.2%, 23.1% and 19.9% of our total
operating costs for 2016, 2015 and 2014, respectively. As of December 31, 2016, approximately 73% of our workforce was
represented by labor unions. 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 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
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pilots’ union executed a five-year collective bargaining agreement. This shutdown had a material adverse effect on our results
of operations for 2010.
In March 2016, under the supervision of the NMB, we reached a tentative agreement for a five-year contract with our
flight attendants. In May 2016, we entered into a five-year agreement with our flight attendants, which becomes amendable
May 2021.
In August 2015, the collective bargaining agreement with our pilots, represented by ALPA, became amendable. In June
2016, ALPA requested the services of the NMB to facilitate negotiations for an amended agreement and we joined ALPA in the
request. The NMB has assigned a mediator and the parties continue to meet and work toward an amended agreement with the
guidance of the mediator. Under the RLA, the parties' current agreement remains in effect until an amended agreement is
reached. If the NMB releases the parties to "self-help" in the absence of a new agreement, our pilots may go on strike, which
would shut down our flight operations and have a material adverse effect on our business and results of operations.
In August 2013, we entered into a five-year agreement with our flight dispatchers, which becomes amendable August
2018.
In July 2014, certain ramp service agents directly employed by us voted to be represented by the International
Association of Machinists and Aerospace Workers (IAMAW). In May 2015, we entered into a five-year interim collective
bargaining agreement with the IAMAW, including material economic terms. In June 2016, we reached an agreement on the
remaining terms of the collective bargaining agreement with the IAMAW, which is amendable in June 2020. As of
December 31, 2016, these ramp service agents served 1 of the 59 airports where we operate.
The Patient Protection and Affordable Care Act was enacted in 2010. Under the new presidential administration, this law
may be repealed in its entirety or certain aspects may be changed or replaced. If the law is repealed or modified or if new
legislation is passed, such action could significantly increase cost of the healthcare benefits provided to our U.S. employees. In
addition, the failure to comply materially with such existing and new laws, rules and regulations could adversely affect our
business, results of operations and financial conditions.
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. As of
December 31, 2016, our 95 aircraft fleet consisted of 59 aircraft financed under operating leases, 29 aircraft financed under
debt arrangements, and 7 aircraft purchased off lease and currently unencumbered. In 2016 and 2015, we paid the lessors rent
of $213.9 million and $217.0 million, respectively, and paid maintenance deposits of $45.9 million and $32.1 million,
respectively. As of December 31, 2016, we had future aircraft and spare engine operating lease obligations of approximately
$1.5 billion. In 2016 and 2015, we made scheduled principal payments of $64.4 million and $25.4 million on our outstanding
debt obligations, respectively. As of December 31, 2016, we had future principal debt obligations of $1,012.4 million, of which
$88.9 million is due in 2017. In addition, we have significant obligations for aircraft and spare engines 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 things, the success of our current business
strategy, fuel price volatility, weakening or improvement in the U.S. economy, as well as general economic and political
conditions and other factors that are beyond our control. The amount of our aircraft related fixed obligations and related need to
obtain financing could have a material adverse effect on our business, results of operations and financial condition and could:
•
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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 payments, 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;
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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 fewer 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 and debt payments and our lessors or lenders exercise their remedies under the lease and debt
agreements, including cross default provisions in certain of our leases and mortgages.
A failure to pay our operating lease, debt 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 or debt 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, 2016, we had access to lines of credit from our physical fuel delivery and derivative counterparties
and our purchase credit card issuer aggregating $70.1 million. In addition, we had a $25.2 million unsecured standby letter of
credit facility. 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. In addition, our credit card processors are entitled to withhold receipts from customer purchases from us, under
certain circumstances. 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, energy price volatility, concerns about inflation, slower economic
activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions,
geopolitical conflict 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.
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.
From time to time, we may enter into fuel derivative contracts in order to mitigate the risk to our business from future
volatility in fuel prices, 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, 2016, we had no outstanding jet fuel derivatives. There can be no assurance that we
will be able to enter into fuel derivative contracts in the future if we are required or choose to do so. 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
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requirements. Even if we are able to hedge portions of our future fuel requirements, we cannot guarantee that our derivative
contracts will provide any particular level of protection against increased fuel costs or that our counterparties will be able to
perform under our derivative contracts, such as in the case of a counterparty’s insolvency. In a falling fuel environment, we
may be required to make cash payments to our counterparties which may impair our liquidity position and increase our costs.
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 12.4 hours for 2016, and 12.7
hours for 2015 and 2014. 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, the occurrence of 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, 2016, the average age of our aircraft was approximately 5.2 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. For our leased aircraft, 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 occurring 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 maintenance reserves to the lessor in advance of the performance of major maintenance, resulting in our recording
significant prepaid deposits on our balance sheet. Depending on their recoverability, these maintenance reserves may be
classified as supplemental rent. We expect scheduled and unscheduled aircraft maintenance expenses to increase 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 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.
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We are subject to extensive and increasing regulation by the FAA, DOT, TSA 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.
DOT has been aggressive in enforcing regulations for violations of the tarmac delay rules, passenger with disability
rules, advertising rules and other consumer protection rules that could increase the cost of airline operations or reduce revenues.
Additional rules on providing scheduling, fare and fee information to travel agents and metasearch sites originally proposed in
2014 may be issued in 2017. Additional disability rules may be proposed in 2017, including with respect to access to lavatories
on single-aisle aircraft. In addition, during 2014, the FAA 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, 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.
In 2016, Congress passed the FAA Extension, Safety and Security Act of 2016, which extends FAA funding through
September 30, 2017. The ACT included a provision requiring airlines to refund fees for delayed checked bags if they are not
delivered to the passenger within a specified number of hours. DOT is collecting information from which to develop a rule
which Congress required to be issued by July 15, 2017. Congress will be considering a new FAA legislation in 2017 which may
include reorganization of air traffic control function and its funding mechanism. Congress may also consider imposing taxes on
carry-on and checked bag fees which has been proposed in previous legislation. If Congress were to enact any new FAA
reauthorization bill or similar legislation, 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. Prior to
and for the first half of 2014, the passenger security fee was $2.50 per passenger flight segment, subject to a $5 per one-way
trip cap. In July 2014, the TSA implemented an increased passenger security fee at a flat rate of $5.60. On December 19, 2014,
the law was amended to limit a round-trip fee to $11.20. 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.
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
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.
The U.S. government is under persistent pressure to implement cost cutting and efficiency initiatives. In addition, the
U.S. government has recently and may in the future experience delays in the completion of its budget process which could
delay funding for government departments and agencies that regulate or otherwise are tied to the aviation industry, including
the DOT and FAA. To the extent that any such initiatives or budgeting delays affect the operations of these government
departments and agencies, including by forcing mandatory furloughs of government employees, our operations and results of
operations could be materially adversely effected.
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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.”
Changes in legislation, regulation and government policy as a result of the 2016 U.S. presidential and congressional
elections may have a material adverse effect on our business in the future.
The recent presidential and congressional elections in the United States could result in significant changes in, and
uncertainty with respect to, legislation, regulation and government policy. While it is not possible to predict whether and when
any such changes will occur, changes at the local, state or federal level could significantly impact our business and the airline
industry. Specific legislative and regulatory proposals discussed during and after the election that could have a material impact
on us include, but are not limited to, reform of the federal tax code; infrastructure renewal programs; changes to immigration
policy; modifications to international trade policy, including withdrawing from trade agreements and taxes on imports; changes
to the financial legislation, including the partial or full repeal of the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, or Dodd-Frank Act; public company reporting requirements; environmental regulation and antitrust enforcement.
Any such changes may make it more difficult and/or more expensive for us to obtain new aircraft or engines and parts to
maintain existing aircraft or engines. For example, certain tax proposals would generally (a) make net interest expense on debt
non-deductible to borrowers and (b) increase the cost of importing (possibly including via lease) property. Certain proposals
discussed during and after the election may make it less profitable or prevent us from flying to or from some of the destinations
we currently serve.
We are currently unable to predict whether reform discussions will meaningfully change existing legislative and
regulatory environments relevant for our business. To the extent that such changes have a negative impact on us or the airline
industry, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial
condition, results of operations and cash flows
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;
obtain sufficient spare parts or related support services from our suppliers on a timely basis;
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 to deter our entry into a new market or to stop our
growth into existing markets or new markets. We cannot assure you that we will be able to profitably expand our existing
markets or establish new markets.
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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, high inflation, 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.
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. The performance and reliability of our technology are critical to our ability to operate and compete effectively. Our
Board of Directors recently approved a significant technology upgrade initiative meant to address our aging IT infrastructure.
This initiative will upgrade, replace, and enhance multiple older and outdated legacy systems and hardware. The execution of
our strategic plans could be negatively affected by (i) our ability to timely and effectively implement, transition, and maintain
related information technology systems and infrastructure; (ii) our ability to effectively balance its investment of incremental
operating expenses and capital expenditures related to its strategies against the need to effectively control cost; and (iii) our
dependence on third parties with respect to its ability to implement its strategic plans. We cannot assure you that our security
measures, change control procedures, and disaster recovery plans will be adequate to prevent disruptions or delays. Disruption
in or changes to these systems could result in an interruption to our operations or loss of important data. Any of the foregoing
could result in a material adverse effect on our business, reputation, results of operations and financial condition.
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 with a high degree of reliability. 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, cyber attacks 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. Moreover, in the event of system outages or interruptions, we may not be able to
recover from our information technology and software providers all or any portion of the costs or business losses we may incur.
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
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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.
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, such as the Fair Accurate Credit Transparency Act and Payment Card Industry legislation, 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 to address an underserved market. 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:
•
•
•
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;
24
•
•
•
•
•
•
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,
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, 2016, 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 materially 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
25
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 or otherwise 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 not having similar violations in the year after the date of the consent order.
Further, media reports about incidents on our aircraft unrelated to customer complaints could negatively impact our reputation
and our operations. If we do not meet our customers' expectations with respect to reliability and service, customers could
decide not to fly with us, which would materially adversely affect our business and reputation.
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 become
unable to perform its contractual obligations, or if we are unable to acquire or lease aircraft or engines from these or 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 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
domestic U.S., Caribbean or Latin American markets could harm our business, results of operations and financial
condition.
A significant portion of our operations are conducted to and from the domestic U.S., Caribbean or Latin American
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, public health concerns 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 third-party 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
26
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.
Beginning in July 2014, we obtained war risk insurance from the commercial market which insures against some risks of
terrorism. Previous to this date, we obtained this insurance through a special program administered by the FAA, which was
discontinued late 2014. Renewing coverage from commercial underwriters may result in higher premiums and more restrictive
terms. Our business, results of operations and financial condition could be materially adversely affected if we are unable to
obtain adequate war risk insurance. Our current war risk hull and liability insurance policy is effective until July 2017.
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
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, we may face high employee turnover. 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. 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-person life insurance on our management team.
27
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, including costs associated with public
company reporting requirements. We also have incurred and will continue to 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 is required to attest to, the effectiveness of our internal control over financial
reporting. 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;
increased price competition;
• 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;
28
•
•
•
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.
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
29
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, 2016, we believe we were in compliance with the foreign ownership rules.
As of December 31, 2016, 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 fund share repurchases under programs approved by
our Board of Directors. We 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. The timing of any share repurchases under share repurchase programs will depend
upon market conditions, our capital allocation strategy and other factors.
30
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Aircraft
As of December 31, 2016, we operated a fleet of 95 aircraft as detailed in the following table:
Aircraft Type
A319
A320ceo
A320neo
A321
Seats
145
178 - 182
182
218 - 228
Average Age
(years)
Number of
Aircraft
Number
Owned
Number
Leased
10.5
3.4
0.1
2.2
5.2
29
45
5
16
95
7
15
—
14
36
22
30
5
2
59
As of December 31, 2016, our firm aircraft orders consisted of 76 A320 family aircraft with Airbus (10 A320ceos, 50
A320neos, and 16 A321ceos). As of December 31, 2016, our future fleet plan, net of contractual lease returns, is illustrated in
the table below.
Aircraft Type
2017
2018
2019
2020
2021
A319
A320ceo
A320neo
A321
Total Aircraft
29
49
5
25
108
29
54
9
30
122
28
55
21
30
134
23
55
37
30
145
18
55
55
30
158
Note 1: Actual fleet count may differ depending on future fleet decisions, including actual lease retirements.
We also have three 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 2017 through 2023.
Ground Facilities
We lease all of our facilities at each of the airports we serve, with the exception of our newly constructed aircraft hangar
in Detroit, which we own. 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 16 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, 2016, Ft. Lauderdale/Hollywood International Airport (FLL) remained our single largest airport
served, with approximately 27% of our capacity operating from FLL during 2016. We operate primarily out of Terminal 4 at
FLL, the international terminal. We currently use up to ten gates simultaneously at Terminal 4. We have preferential access to
seven of the Terminal 4 gates, common use access to the remaining three Terminal 4 gates, and access to other Terminal 3
gates. FLL is in the middle of a concourse replacement and expansion project, which will expand the number of gates at
Terminal 4 from 10 to 14. Other airports through which we conduct significant operations include Chicago O'Hare International
Airport (ORD), McCarran International Airport (LAS) serving Las Vegas, Dallas-Fort Worth International Airport (DFW),
Detroit Metropolitan Wayne County Airport (DTW), George Bush Intercontinental Airport (IAH) and Orlando International
Airport (MCO).
Our largest maintenance facility is currently located in a leased facility at FLL under a lease that expires in January 2022.
We also conduct additional maintenance operations in leased facilities in Detroit, Michigan; Chicago, Illinois; Atlantic City,
New Jersey; Dallas, Texas; Houston, Texas; Las Vegas, Nevada; Orlando, Florida; Atlanta, Georgia; and Philadelphia,
Pennsylvania.
31
In September 2015, we executed a lease agreement with Wayne County Airport Authority (the Authority), which owns
and operates Detroit Metropolitan Wayne County Airport (DTW). Under the lease agreement, we lease a 10-acre site, adjacent
to the airfield at DTW, in order to construct, operate and maintain an approximately 126,000-square-foot hangar facility (the
project). The project allows for the development of a maintenance hangar in order to fulfill the requirements of our growing
fleet and will reduce dependence on third-party facilities and contract line maintenance. The lease agreement has a 30-year
term with two 10-year extension options. Upon termination of the lease, title of the project, which will be fully depreciated,
will automatically pass to the Authority. We estimate to complete the project during the first quarter of 2017.
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. In January 2014, we
expanded our principal executive offices and headquarters by leasing an additional facility located at 2844 Corporate Way,
Miramar, Florida 33025, consisting of approximately 15,000 square feet. 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 2020.
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.
32
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.
Fiscal year ended December 31, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 82.03
77.88
63.54
50.80
$ 69.64
59.98
46.95
33.57
$ 50.14
52.96
48.93
59.50
$ 36.53
39.37
37.23
42.12
As of February 3, 2017, there were approximately 55 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 holders.
The information under the caption “Equity Compensation Plan Information” in our 2017 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.
33
Our Repurchases of Equity Securities
The following table reflects our repurchases of our common stock during the fourth quarter of 2016. All stock
repurchases during this period were made from employees who received restricted stock grants. All employee 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 tax withholding requirements.
ISSUER PURCHASES OF EQUITY SECURITIES
Total
Number of
Shares
Purchased
(in
thousands)
Average
Price Paid
per Share
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
1,914
496
63
2,473
$
$
$
$
47.05
53.34
57.31
48.57
— $
— $
— $
—
—
—
—
Period
October 1-31, 2016 . . . . . . . . . . .
November 1-30, 2016 . . . . . . . . .
December 1-31, 2016 . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
During the first three quarters of 2016, we repurchased and retired 2.4 million shares for a total of $102.4 million.
Repurchases of equity securities during this period include repurchases made from employees who received restricted stock or
performance share awards as well as open market repurchases made under our stock repurchase authorization that became
effective in October 2015, which authorized the repurchase of up to $100 million of our common stock. As of December 31,
2016, the company had exhausted repurchases under this program.
34
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 December 31, 2011
and ending on December 31, 2016. The graph assumes an investment of $100 in our stock and the two indices, respectively, on
December 31, 2011, and further assumes the reinvestment of all dividends. Stock price performance, presented for the period
from December 31, 2011 to December 31, 2016, is not necessarily indicative of future results.
12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016
Spirit . . . . . . . . . . . . . . . . . . . . $
NYSE ARCA Airline Index. . . $
NASDAQ Composite Index . . $
100.00 $
100.00 $
113.65 $
137.67 $
291.09 $
217.84 $
484.49 $
326.88 $
255.45 $
277.26 $
100.00 $
117.70 $
164.65 $
188.87 $
202.25 $
370.90
355.80
220.13
35
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, 2016, 2015 and 2014 and the
balance sheet data as of December 31, 2016 and 2015 from our audited financial statements included in this annual report. We
derived the selected statements of operations data for the years ended December 31, 2013 and 2012 and the balance sheet data
as of December 31, 2014, 2013 and 2012 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,
2016
2015
2014
2013
2012
(in thousands, except share and per share data)
Operating revenues:
Passenger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,200,621
Non-ticket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,121,335
$ 1,169,338
$ 1,144,972
$
986,018
$
782,792
972,125
786,608
668,367
535,596
Total operating revenue
Operating expenses:
2,321,956
2,141,463
1,931,580
1,654,385
1,318,388
Salaries, wages and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft fuel (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Landing fees and other rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance, materials and repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special charges (credits) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
472,471
447,553
201,675
151,679
101,136
98,587
96,627
37,189
4,187
377,508
461,447
211,531
131,077
73,908
80,448
86,576
673
1,604
313,409
612,909
195,827
105,115
46,971
73,956
74,823
45
3,008
261,624
551,746
169,737
83,604
31,947
60,143
67,481
174
525
218,380
471,763
143,572
68,368
15,256
49,460
56,668
(8,450)
956
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
267,191
207,569
150,254
145,112
128,425
Total operating expenses
Operating income
Other expense (income):
1,878,295
1,632,341
1,576,317
1,372,093
1,144,398
443,661
509,122
355,263
282,292
173,990
Interest expense (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized interest (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income
Earnings Per Share:
41,654
(12,705)
(5,276)
528
24,201
419,460
154,581
$
264,879
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares outstanding:
3.77
3.76
20,382
(11,553)
(2,125)
15
6,719
502,403
185,183
317,220
4.39
4.38
$
$
$
2,747
(2,747)
(336)
2,605
2,269
352,994
127,530
225,464
3.10
3.08
$
$
$
214
(214)
(401)
283
(118)
282,410
105,492
176,918
2.44
2.42
$
$
$
$
$
$
1,350
(1,350)
(925)
331
(594)
174,584
66,124
108,460
1.50
1.49
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,343,935
72,207,725
72,738,961
72,592,765
72,385,574
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,507,596
72,426,060
73,293,869
72,999,221
72,590,574
(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) realized gains and losses related to fuel derivative contracts and (iii) unrealized gains and losses related to fuel derivative contracts. The
following table summarizes the components of aircraft fuel expense for the periods presented:
36
Year Ended December 31,
2016
2015
2014
2013
2012
(in thousands)
Into-plane fuel cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Realized losses (gains) related to fuel derivatives contracts, net . . . . . . . . . . . . . .
Unrealized losses (gains) related to fuel derivative contracts, net . . . . . . . . . . . . .
447,553
$
454,747
$
608,033
$
542,523
$
471,542
—
—
10,580
(3,880)
995
3,881
8,958
265
175
46
Aircraft fuel expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
447,553
$
461,447
$
612,909
$
551,746
$
471,763
(2)
(3)
(4)
Special charges (credits) include: (i) for 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; (ii) for 2013
and 2014, $0.1 million in costs related to the DCA exit; (iii) for 2015, $0.7 million related to restructuring charges for outsourcing of ramps and
passenger services; (iv) for 2016, $37.2 million related to lease termination charges recognized in connection with the purchase of seven aircraft
formerly financed under operating lease agreements.
Interest expense in 2012 and 2013 primarily relates to interest related to the TRA. Interest expense in 2014 primarily relates to interest related to the
long-term debt, commitment fees and underpayment of Federal Excise Tax for fuel purchases during the period between July 1, 2009 and August
31, 2014. Interest expense in 2015 and 2016 primarily relates to interest related to financing of purchasing aircraft.
Interest attributable to funds used to finance the acquisition of new aircraft, including PDPs is capitalized as an additional cost of the related asset.
In 2015 and 2016, capitalized interest primarily represents interest related to the financing of purchased aircraft.
The following table presents balance sheet data for the periods presented:
As of December 31,
2016
2015
2014
2013
2012
Balance Sheet Data:
(in thousands)
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $
Short-term investment securities . . . . . . . . . . . . . . . .
700,900
$
803,632
$
632,784
$
530,631
$
416,816
100,155
—
—
—
—
Total assets (5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,151,927
2,530,545
1,592,753
1,164,522
907,293
Long-term debt, including current portion . . . . . . . .
981,713
646,330
145,663
—
—
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . .
1,394,607
1,225,310
1,003,075
769,117
582,535
(5)
Prior period amounts have been reclassified to conform to ASU No. 2015-17 (ASU 2015-17), "Income Taxes" issued in November 2015.
37
Operating Statistics (unaudited) (A)
Average aircraft . . . . . . . . . . . . . . . . . . . . . .
Aircraft at end of period. . . . . . . . . . . . . . . .
Average daily aircraft utilization (hours) . . .
Average stage length (miles) . . . . . . . . . . . .
Block hours . . . . . . . . . . . . . . . . . . . . . . . . .
Departures . . . . . . . . . . . . . . . . . . . . . . . . . .
Passenger flight segments (thousands). . . . .
Revenue passenger miles (RPMs)
(thousands) . . . . . . . . . . . . . . . . . . . . . . . . . .
Available seat miles (ASMs) (thousands) . .
Load factor (%) . . . . . . . . . . . . . . . . . . . . . .
Average ticket revenue per passenger flight
segment ($). . . . . . . . . . . . . . . . . . . . . . . . . .
Average non-ticket revenue per passenger
flight segment ($) . . . . . . . . . . . . . . . . . . . . .
Total revenue per passenger segment ($). . .
Average yield (cents) . . . . . . . . . . . . . . . . . .
Total operating revenue per ASM
(TRASM) (cents) . . . . . . . . . . . . . . . . . . . . .
CASM (cents). . . . . . . . . . . . . . . . . . . . . . . .
Adjusted CASM (cents) (B). . . . . . . . . . . . .
Adjusted CASM ex fuel (cents) (C). . . . . . .
OPERATING STATISTICS
Year Ended December 31,
2016
2015
2014
2013
2012
86.2
95
12.4
979
389,914
149,514
21,618
72.7
79
12.7
987
337,956
128,902
17,921
57.7
65
12.7
980
267,305
102,594
14,294
49.9
54
12.7
958
41.2
45
12.8
909
231,148
192,403
90,284
12,414
78,582
10,423
21,581,611
17,995,311
14,159,860
12,001,088
9,663,721
25,494,645
21,246,156
16,340,142
13,861,393
11,344,731
84.7
55.54
51.87
107.41
10.76
9.11
7.37
7.21
5.45
84.7
65.25
54.24
119.49
11.90
10.08
7.68
7.69
5.50
86.7
80.11
55.03
135.14
13.64
11.82
9.65
9.55
5.88
86.6
79.43
53.84
133.27
13.79
11.94
9.90
9.89
5.91
85.2
75.11
51.39
126.50
13.64
11.62
10.09
10.15
6.00
Fuel gallons consumed (thousands) . . . . . . .
302,781
255,008
200,498
171,931
142,991
Average economic fuel cost per gallon ($) .
1.48
1.82
2.99
3.21
3.30
(A)
(B)
See “Glossary of Airline Terms” elsewhere in this annual report for definitions of terms used in this table.
Reconciliation of CASM to Adjusted CASM:
2016
2015
2014
2013
2012
(in
millions)
Per
ASM
(in
millions)
Per
ASM
(in
millions)
Per
ASM
(in
millions)
Per
ASM
(in
millions)
Per
ASM
Year Ended December 31,
CASM (cents) ......................
7.37
7.68
9.65
9.90
10.09
Less:
Unrealized losses
(gains) related to fuel
derivative contracts ..... $
Loss on disposal of
assets ...........................
Special charges
(credits)
Out of period fuel
excise tax.....................
Adjusted CASM (cents).......
—
4.2
37.2
—
— $
(3.9)
(0.02) $
3.9
0.02
$
0.02
0.15
—
7.21
1.6
0.7
—
0.01
—
—
7.69
3
—
9.3
0.02
—
0.06
9.55
0.3
0.5
0.2
—
— $
—
—
—
9.89
—
1
—
0.01
(8.5)
(0.07)
—
—
10.15
(C)
Excludes aircraft fuel expense, loss on disposal of assets and special charges.
38
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.
2016 Year in Review
The year 2016 marks our tenth consecutive year of profitability. In 2016, we increased our capacity by 20.0%, as we
grew our fleet of Airbus single-aisle aircraft from 79 to 95 aircraft, launched service to 29 new markets and added 4 new
destinations: Seattle, Washington; Akron-Canton, Ohio; Newark, New Jersey and Havana, Cuba.
During 2016, we earned net income of $264.9 million ($3.76 per share, diluted), compared to net income of $317.2
million ($4.38 per share, diluted) in 2015. The decrease in earnings was a result of a decrease of 9.6% in our average yield,
partially offset by a 20.0% increase in our capacity, year over year.
For the year ended December 31, 2016, we achieved an operating profit margin of 19.1% on $2,322.0 million in
operating revenues. Our traffic grew by 19.9% as we continued to address an underserved market with ultra-low fares.
Continued competitive pressures from major domestic network carriers aggressively discounting fares led to a 9.6% decrease in
average yield, year over year. As a result of this pricing environment, TRASM in 2016 was 9.11 cents, a decrease of 9.6%
compared to the prior year period. Total revenue per passenger flight segment decreased 10.1%, year over year, from $119.49
to $107.41 driven by a decrease of 14.9% in ticket revenue per passenger flight segment.
Our total non-ticket revenue increased by 15.3%, or $149.2 million, to $1,121.3 million in 2016. Despite the
continued competitive pressures during 2016, our average non-ticket revenue per passenger flight segment declined to a lesser
extent, by 4.4%, to $51.87. Our unbundled model provides a more stable revenue stream as demonstrated during periods of
lower passenger ticket yields.
Our operating cost structure is a primary area of focus and is at the core of our ULCC business model. Our unit
operating costs continue to be among the lowest of any airline in the United States. During 2016, our adjusted CASM ex-fuel
decreased by 0.9% to 5.45 cents. The decrease on a per-ASM basis was primarily a result of a decrease in aircraft rent expense
per ASM due to our newer aircraft being purchased under secured debt financing rather than being leased through operating
leases, as is the case with the older aircraft in our fleet. In addition, we purchased seven previously leased aircraft during the
twelve months ended December 31, 2016, which contributed to lower aircraft rent per ASM. This decrease in aircraft rent was
partially offset by higher salaries and wages expense and higher other operating expense on a per-ASM basis.
During 2016, we took delivery of 11 new aircraft financed through our EETC, purchased 7 aircraft off lease and entered
into a direct lease agreement with a third-party lessor for 5 A320neos. With the delivery of these A320neo aircraft during 2016,
we became the first U.S.-based carrier to take delivery of and operate such aircraft. In addition, we purchased 1 spare engine.
As of December 31, 2016, our 95 Airbus A320-family aircraft fleet was comprised of 29 A319s, 45 A320ceos, 5 A320neos and
16 A321ceos of which 29 aircraft are financed through secured debt, 59 are financed under operating leases and 7 are
unencumbered. As of December 31, 2016, our aircraft orders consisted of 76 A320 family aircraft with Airbus scheduled for
delivery from 2017 through 2021.
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.
Non-ticket Revenues. Non-ticket revenues are generated from air travel-related charges for baggage, passenger usage fee
(PUF) for bookings through certain of our distribution channels, advance seat selection, itinerary changes, hotel and rental car
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 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, as well as most non-ticket
revenues, are recognized once the related flight departs. Accordingly, the value of tickets and portions of non-ticket revenues
sold in advance of travel is included under our current liabilities as “air traffic liability,” or ATL, until the related air travel is
provided. Some of our non-ticket revenues are recognized at the time the ancillary products are purchased or ancillary services
39
are provided, such as 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.
Operating Expenses
Our operating expenses consist of the following line items.
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 Fuel. Aircraft fuel expense 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 activity on our fuel derivatives.
Our fuel 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).
Aircraft Rent. Aircraft rent expense consists of all minimum lease payments under the terms of the Company's aircraft
and spare engine lease agreements recognized on a straight-line basis. Aircraft rent expense also includes supplemental rent.
Supplemental rent is made up of maintenance reserves paid or expected 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. Aircraft rent expense is net of the amortization of gains and losses on sale leaseback transactions on our flight
equipment. As of December 31, 2016, 59 of our 95 aircraft and 11 of our 12 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.
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 remaining lease term.
Maintenance, Materials and Repairs. Maintenance, materials and repairs expense includes 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.
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.
Special Charges. Special charges include lease termination costs and secondary offering costs.
Loss on Disposal of Assets. Loss on disposal of assets includes the net losses on the disposal of our fixed assets.
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 related 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.
40
Other Expense (Income)
Interest Expense. Interest expense in 2016 and 2015 was primarily related to the financing of purchased aircraft. For
2014, interest expense primarily represented interest related to the financing of purchased aircraft, interest related to the
underpayment of prior year jet fuel FET and interest charged under the Tax Receivable Agreement (TRA) which was settled
during 2014.
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. The percent of interest expense
capitalized is equal to the amount of interest which could have been avoided. As such, if the amount of PDPs on deposit is less
than the amount of related debt on which interest is incurred, then only a percent of total incurred interest expense qualifies for
capitalization. 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 2016 and 2015 primarily related to the interest incurred on long-
term debt. For 2014, capitalized interest related to interest incurred on long-term debt, underpayment of prior year jet fuel FET
and interest charged under the TRA.
Interest Income. For 2016 and 2015, interest income was related to interest earned on funds required to be held in escrow
in accordance with the terms of our EETC. For a detailed discussion of the EETC, refer to “Notes to the Financial Statements—
11. Debt and Other Obligations.” In addition, for 2016, interest income includes interest earned on our cash, cash equivalents
and short-term investment securities.
Other Expense. Other expense includes realized gains and losses related to foreign currency transactions. For 2014, other
expense also included $1.4 million related to the tax receivable settlement amount in excess of the amount previously accrued
for and a $1.0 million charitable contribution that is specifically creditable against current income tax in the State of Florida, as
allowed under state law.
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.
Trends and Uncertainties Affecting Our Business
We believe our operating and business performance is driven by various factors affecting 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, reputation, code-sharing relationships, 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.
Beginning in 2015, and continuing through most of 2016, the airline industry saw greater and more persistent price
discounting than in the preceding several years. We believe that a major factor that enabled price discounting was the sharp
decline in petroleum prices on world markets during the last couple years which offset general increases in non-fuel costs. In
addition, significant airline capacity increases in certain major cities - such as Dallas and Chicago - exerted strong downward
price pressure in those markets. Finally, beginning in mid-2015 network carriers began matching low-cost carrier and ULCC
pricing on portions of their marginal unsold capacity, particularly in their key hub markets.
Absent significant increases in fuel prices and more constrained capacity, we expect the discounting trend to continue for
the foreseeable future. Moreover, the network carriers have developed a fare-class pricing approach, in which a portion of
available seats may be sold at or near ULCC prices, but without most product features available to their passengers paying at
41
higher fare levels on the same flight. Broad fare discounting may have the effect of diluting the profitability of revenues of
high-cost carriers but the fare-class approach may allow network carriers to continue offering a competitive price to ULCCs on
some flights or routes, while maintaining higher pricing to their traditional constituencies of business and more affluent
travelers. Refer to “Risk Factors—Risks Related to Our Industry—We operate in an extremely competitive industry."
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, changes 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.
Aircraft Fuel. Fuel costs represents one of our largest operating expenses, as it does for most airlines. 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, or when the threat of weather-related disruptions has caused Gulf Coast fuel prices to
spike above other regional sources. Our derivatives, from time to time, generally may 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 can be 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. 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, 2016, we had no outstanding jet fuel derivatives. As of December 31, 2016, 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 four union-represented employee groups comprising approximately 73% of our employees at December 31,
2016. 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, our flight dispatchers are represented by the Transport Workers Union
of America, or TWU, and our ramp service agents are represented by the International Association of Machinists and Aerospace
Workers, or IAMAW. 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 2015, our collective
bargaining agreement with its pilots, represented by ALPA, became amendable. In June 2016, ALPA requested the services of
the National Mediation Board (NMB) to facilitate negotiations for an amended agreement and we joined ALPA in the request.
The NMB has assigned a mediator and the parties continue to meet and work toward an amended agreement with the guidance
of the mediator. Under the RLA, the parties' current agreement remains in effect until an amended agreement is reached. In
August 2013, we entered into a five-year agreement with our flight dispatchers. In March 2016, 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. In May 2016, we were notified that the flight attendants voted to approve the
new five-year contract. In July 2014, certain ramp service agents directly employed by us voted to be represented by the
IAMAW. In May 2015, we entered into a five-year interim collective bargaining agreement with the IAMAW, covering
material economic terms. In June 2016, with the help of the IAMAW, we reached an agreement on the remaining terms of the
collective bargaining agreement, which is amendable in June 2020. We believe the five-year term of our CBAs is valuable in
42
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. Any agreement we do reach could increase our labor and related expenses.
In 2010, the Patient Protection and Affordable Care Act was passed into law. Under the new presidential administration
this law may be repealed in its entirety or certain aspects may be changed or replaced. If the law is repealed or modified or if
new legislation is passed, such action could potentially increase our operating costs, with healthcare costs increasing at a higher
rate than our employee headcount.
Maintenance Expense. Maintenance expense grew through 2016, 2015 and 2014 mainly as a result of a growing fleet and
the gradual increase of required maintenance for the older aircraft in 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 interval between heavy maintenance events, 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 2017 will be approximately $192 million. In addition, we expect to capitalize
$186 million of costs for heavy maintenance during 2017.
As a result of a significant portion of our fleet being acquired over a relatively short period of time, heavy
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. When accounting for maintenance expense under the deferral method, heavy maintenance is amortized over
the shorter of either the remaining lease term or the next estimated heavy maintenance event. As a result, deferred maintenance
events occurring closer to the end of the lease term will generally have shorter amortization periods than those occurring earlier
in the lease term. This will create higher depreciation and amortization expense specific to any aircraft related to heavy
maintenance during the final years of the lease as compared to 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 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, refer to “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 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,
passenger usage fees, advance seat selection, itinerary changes, and loyalty programs. The majority of our non-ticket revenues
are recognized once the related flight departs. Some of our non-ticket revenues, such as those related to itinerary changes, are
recognized at the time products are purchased or services are provided. These revenues also include commissions from the
43
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 unused 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 multiple-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 estimated 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, fees to redeem miles 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 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 17
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, refer to “Notes to Financial Statements—1. Summary of Significant Accounting Policies
—Frequent Flier Program”.
Accounting for property and equipment. Property and equipment is 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. 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 our 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. In accounting for property and equipment, we must make estimates about the expected
useful lives of the assets, the expected residual values of the assets, and the potential for impairment based on the fair value of
the assets and their future expected cash flows.
The depreciable lives used for the principal depreciable asset classifications are:
44
Estimated Useful Life
Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 years
Spare rotables and flight assemblies . . . . . . . . . . . . . . . . . . . . . . 7 to 15 years
Other equipment and vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 7 years
Internal use software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 10 years
Capital lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease term
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lesser of lease term or estimated useful life of the
improvement
As of December 31, 2016, we had 36 aircraft and 1 spare engine capitalized within flight equipment with depreciable
lives of 25 years. As of December 31, 2016, we had 59 aircraft financed through operating leases with terms of 12 to 18 years
and 11 spare engines financed through operating leases with terms of 10 to 13 years. Residual values for aircraft, major spare
rotable parts, avionics and assemblies are generally estimated to be 10%.
We record impairment charges on long-lived assets used in operations when events and circumstances indicate 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, we use
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 our operations, and estimated salvage values.
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 over the earlier of the next estimated heavy maintenance event or the
remaining lease term or useful life of the aircraft. Management expects that heavy maintenance events occurring closer to the
end of the lease term will be amortized over the remaining lease term rather than over the next estimated heavy maintenance
event. Amortization of engine and aircraft overhaul costs was $43.8 million, $43.1 million and $35.8 million for the years
ended December 31, 2016, 2015 and 2014, 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
$142.4 million, $123.6 million and $109.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. During
the years ended December 31, 2016, 2015 and 2014, we capitalized $35.4 million, $9.1 million and $33.6 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, current condition of the related component, the age of the related
component 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 the estimated
timing of the next maintenance event is extended or shortened, the related amortization period would be lengthened or
shortened, resulting in higher amortization expense over a shorter period or lower amortization expense over a longer period,
respectively. Heavy maintenance events include 6-year and 12-year airframe checks, engine overhauls, LLP replacement 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 either (1) the
amount of the maintenance reserves 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 aircraft maintenance
deposits in the accompanying balance sheets. We make certain assumptions to determine the recoverability of maintenance
45
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. When it is not probable we will recover amounts currently on deposit with a lessor, such amounts are expensed as
supplemental rent. We expensed $2.2 million, $2.3 million and $1.6 million of paid maintenance reserves as supplemental rent
during 2016, 2015 and 2014, respectively.
As of December 31, 2016 and 2015, we had aircraft maintenance deposits of $286.4 million and $279.9 million,
respectively, on our balance sheets. We have concluded that these aircraft 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 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 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. Contingent rent is recorded at the time a non-refundable maintenance reserve
payment is made that has been substantively determined to be contingent rent. Accordingly, management expects to incur
contingent rent after the last major maintenance events resulting in higher rent expense in the final years of applicable leases.
Maintenance reserves held by lessors that are refundable to us at the expiration of the lease are accounted for as aircraft
maintenance deposits on the balance sheet when they are paid.
Leased Aircraft Return Costs. Our aircraft lease agreements often contain provisions that require us to return aircraft
airframes and engines to the lessor in a certain condition or pay an amount to the lessor based on the airframe and engine's
actual return condition. Lease return costs include all costs that would be incurred at the return of the aircraft, including costs
incurred to repair the airframe and engines to the required condition as stipulated by the lease. Lease return costs could include,
but are not limited to redelivery cost, redelivery crew cost, fuel, final inspections, reconfiguration of the cabin, repairs to the
airframe, painting, overhaul of engines, replacement of components and checks. Lease return costs are recognized beginning
when it is probable that such costs will be incurred and they can be estimated. Incurrence of lease return costs becomes
probable and the amount of those costs can typically be estimated near the end of the lease term (that is, after the aircraft has
completed its last maintenance cycle prior to being returned). When determining probability and estimated cost, there are
various factors which need to be considered such as current condition of the aircraft, the age of the aircraft at lease expiration,
number of hours run on the engines, number of cycles run on the airframe, projected number of hours run on the engine at the
time of return, number of projected cycles run on the airframe at the time of return, the extent of repairs needed if any at return,
return locations, current configuration of the aircraft, current paint of the aircraft, estimated escalation of cost of repairs and
materials at the time of return, current flight hour agreement rates and future flight hour agreement rates. In addition, typically
near the lease return date, the lessors may allow reserves to be applied as return condition consideration or pass on certain
return provisions if they do not align with their current plans to remarket the aircraft. When costs become both probable and
estimable, they are accrued on a straight-line basis as contingent rent, a component of supplemental rent, through the remaining
lease term. Management expects return costs to be estimable near the end of the lease term, as such, contingent rent for related
aircraft will be higher near the end of the lease term.
Results of Operations
In 2016, we generated operating revenues of $2,322.0 million and operating income of $443.7 million resulting in a
19.1% operating margin and net earnings of $264.9 million. In 2015, we generated operating revenues of $2,141.5 million and
operating income of $509.1 million resulting in a 23.8% operating margin and net earnings of $317.2 million. Operating
revenues increased year over year mainly as a result of a 19.9% increase in traffic. Increased operations resulted in higher
operating expenses across the board with the exception of aircraft fuel which decreased due to lower fuel cost per gallon, period
over period, and aircraft rent which decreased due to our newer aircraft being purchased under secured debt financing rather
than being leased through operating leases, as is the case with the older aircraft in our fleet.
As of December 31, 2016, our cash and cash equivalents was $700.9 million, a decrease of $102.7 million compared to
the prior year. Cash and cash equivalents is driven by cash from our operating activities offset by cash used to fund PDPs,
capital expenditures and repurchases of common stock. In addition to cash and cash equivalents, as of December 31, 2016, we
had $100.2 million in short-term investment securities in which we invested during 2016.
46
Operating Revenues
Year Ended
2016
% change 2016
versus 2015
Year Ended
2015
% change 2015
versus 2014
Year Ended
2014
Passenger (thousands). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,200,621
Non-ticket (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,121,335
Total operating revenue (thousands) . . . . . . . . . . . . . . . . . . . $
2,321,956
Total operating revenue per ASM (TRASM) (cents) . . . . . .
Average ticket revenue per passenger flight segment. . . . . . $
Average non-ticket revenue per passenger flight segment . .
9.11
55.54
51.87
Total revenue per passenger flight segment . . . . . . . . . . . . . $
107.41
2.7%
15.3%
8.4%
(9.6)%
(14.9)%
(4.4)%
(10.1)%
$
$
$
$
1,169,338
972,125
2,141,463
10.08
65.25
54.24
119.49
2.1%
23.6%
10.9%
(14.7)%
(18.5)%
(1.4)%
(11.6)%
$
$
$
$
1,144,972
786,608
1,931,580
11.82
80.11
55.03
135.14
2016 compared to 2015
Operating revenues increased by $180.5 million, or 8.4%, to $2,322.0 million in 2016 compared to 2015, primarily due to
an increase in traffic of 19.9%, partially offset by a decrease in average yield of 9.6% to 10.76 cents. The decrease in average
yield resulted from continued competitive pressures from major U.S. carriers aggressively discounting fare prices.
TRASM for 2016 was 9.11 cents, a decrease of 9.6% compared to 2015, as a result of lower operating yields on stable
load factors. Total revenue per passenger flight segment decreased 10.1% from $119.49 in 2015 to $107.41 in 2016. The year-
over-year decrease in total revenue per passenger flight segment was driven by a decrease of 14.9% in ticket revenue per
passenger flight segment, resulting from the continued competitive pressures noted during the period.
During 2016, our average non-ticket revenue per passenger flight segment declined to a lesser extent, by 4.4%, or $2.37,
to $51.87, mostly resulting from the competitive pressures noted above. Our unbundled model provides a more stable revenue
stream as demonstrated during periods of lower passenger ticket yields. The decrease in non-ticket revenue per passenger flight
segment was primarily attributable to lower bag and change fee revenue per flight segment.
2015 compared to 2014
Operating revenues increased by $209.9 million, or 10.9%, to $2,141.5 million in 2015 compared to 2014, primarily due
to an increase in traffic of 27.1%, partially offset by a decrease in average yield of 12.8% to 11.90 cents. The decrease in
average yield resulted from increased competitive pressures from major domestic network carriers aggressively discounting
fare prices.
TRASM for 2015 was 10.08 cents, a decrease of 14.7% compared to 2014, as a result of lower operating yields on
relatively stable load factors. Total revenue per passenger flight segment decreased 11.6% from $135.14 in 2014 to $119.49 in
2015. The year-over-year decrease in total revenue per passenger flight segment was driven by a decrease of 18.5% in ticket
revenue per passenger flight segment, resulting from the increased competitive pressures noted during the period.
During 2015, our average non-ticket revenue per passenger flight segment remained relatively stable, declining by 1.4%,
or $0.79, to $54.24, despite the increased competitive pressures. Our unbundling model provides a more stable revenue stream
as demonstrated during periods of lower passenger ticket yields. The decrease in non-ticket revenue per passenger flight
segment was primarily attributable to lower bag revenue and the outsourcing of our onboard catering to a third-party provider.
The outsourcing of onboard catering resulted in improved operating margins. These declines, contributing to the decrease in
non-ticket revenue, were partially offset by higher per segment convenience charges compared to the same period last year.
47
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 United States. 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
2016
CASM
Change 2016 versus
2015
Per-ASM
Change
Percent
change
Year
Ended
2015
CASM
Change 2015 versus
2014
Per-ASM
Change
Percent
change
Year
Ended
2014
CASM
Operating revenue
Operating expenses:
Salaries, wages and benefits. . . . . .
1.85¢
Aircraft fuel (1) . . . . . . . . . . . . . . .
Aircraft rent . . . . . . . . . . . . . . . . . .
Landing fees and other rentals . . . .
Depreciation and amortization . . . .
Maintenance, materials and repairs
Distribution. . . . . . . . . . . . . . . . . . .
Special charges . . . . . . . . . . . . . . . .
Loss on disposal of assets. . . . . . . .
Other operating expenses . . . . . . . .
1.76
0.79
0.59
0.40
0.39
0.38
0.15
0.02
1.05
0.07¢
(0.41)
(0.21)
(0.03)
0.05
0.01
(0.03)
0.15
0.01
0.07
3.9%
(18.9)
(21.0)
(4.8)
14.3
2.6
(7.3)
NM
NM
7.1
Total operating expense. . . . . . . . . . . . . .
CASM . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted CASM (2). . . . . . . . . . . . . . . . .
Adjusted CASM ex fuel (3). . . . . . . . . . .
7.37¢
7.21
5.45
(0.31)¢
(0.48)
(0.05)
(4.0)
(6.2)
(0.9)%
1.78¢
(0.14)¢
(7.3)%
1.92¢
2.17
1.00
0.62
0.35
0.38
0.41
—
0.01
0.98
7.68¢
7.69
5.50
(1.58)
(0.20)
(0.02)
0.06
(0.07)
(0.05)
—
(0.01)
0.06
(1.97)
(1.86)
(0.38)
(42.1)
(16.7)
(3.1)
20.7
(15.6)
(10.9)
NM
NM
6.5
(20.4)
(19.8)
(6.5)
3.75
1.20
0.64
0.29
0.45
0.46
—
0.02
0.92
9.65¢
9.55
5.88
(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) realized gains and losses related to fuel derivative contracts and (iii) unrealized gains and losses related to fuel derivative contracts. The
following table summarizes the components of aircraft fuel expense for the periods presented:
Year Ended December 31,
2016
2015
2014
(in thousands)
Into-plane fuel cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
447,553
$
454,747
$
608,033
Realized losses (gains) related to fuel derivative contracts, net . . . . . . . . . . . . . . . . . . . .
Unrealized losses (gains) related to fuel derivative contracts, net. . . . . . . . . . . . . . . . . . .
—
—
10,580
(3,880)
995
3,881
Aircraft fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
447,553
$
461,447
$
612,909
(2)
Reconciliation of CASM to Adjusted CASM:
Year Ended December 31,
2016
2015
2014
CASM (cents).............................................................
Less:
(in
millions)
(in
millions)
Per ASM
7.37
Per ASM
7.68
(in
millions)
Per ASM
Unrealized losses (gains) related to fuel
derivative contracts............................................ $
Loss on disposal of assets..................................
Special charges ..................................................
Out of period fuel excise tax .............................
—
4.2
37.2
—
Adjusted CASM (cents) .............................................
— $
(3.9)
(0.02) $
0.02
0.15
—
7.21
1.6
0.7
—
0.01
—
—
7.69
3.9
3.0
—
9.3
(3)
Excludes aircraft fuel expense, loss on disposal of assets and special charges.
48
9.65
0.02
0.02
—
0.06
9.55
2016 compared to 2015
Operating expense increased by $246.0 million, or 15.1%, in 2016 primarily due to our 20.0% growth in capacity which
drove increases in operating expenses.
Our adjusted CASM ex fuel for 2016 decreased by 0.9% as compared to 2015. The decrease on a per-ASM basis was
primarily a result of a decrease in aircraft rent expense per ASM due to our newer aircraft being purchased under secured debt
financing rather than being leased through operating leases, as is the case with the older aircraft in our fleet. In addition, we
purchased seven previously leased aircraft during the twelve months ended December 31, 2016 which contributed to lower
aircraft rent per ASM. This decrease in aircraft rent was partially offset by higher salaries and wages expense and higher other
operating expense on a per-ASM basis.
Labor costs in 2016 increased by $95.0 million, or 25.2%, compared to 2015, due mainly to a 16.8% increase in our pilot
and flight attendant workforce required to operate the 16 new aircraft deliveries in 2016. On both a dollar and per-ASM basis,
labor costs increased as a result of a non-recurring ratification incentive in the amount of $8.4 million recorded during the first
quarter of 2016, related to the five-year collective bargaining agreement with our flight attendants, as well as an increase in
incentive compensation expense resulting from improved metric performance year over year. Scale benefits from overall
growth as well as larger gauge aircraft and a decrease in our group health care costs partially offset the increase noted above on
a per-ASM basis.
Aircraft fuel expenses includes both into-plane expense (as defined below) and realized and unrealized net gains or losses
from fuel derivatives. 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 the global oil market, refining costs, transportation taxes
and fees, which can vary by region in the United States and 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. We had no activity related to fuel
derivative instruments during 2016. Management chose not to elect hedge accounting on any fuel derivative instruments
entered into during 2015 or 2014 and, as a result, changes in the fair value of these fuel derivative contracts are recorded each
period as a component of aircraft fuel expense.
Aircraft fuel expense decreased by 3.0% from $461.4 million in 2015 to $447.6 million in 2016. The decrease was
primarily due to an 18.7% decrease in fuel prices per gallon, mostly offset by an 18.7% increase in fuel gallons consumed.
The elements of the changes in aircraft fuel expense are illustrated in the following table:
Fuel gallons consumed
Into-plane fuel cost per gallon
Into-plane fuel expense
Realized losses (gains) related to fuel derivative contracts, net
Unrealized losses (gains) related to fuel derivative contracts, net
Aircraft fuel expense (per statement of operations)
Year Ended December 31,
2016
2015
(in thousands, except per
gallon amounts)
Percent
Change
302,781
255,008
$
1.48
$
1.78
$ 447,553
$ 454,747
—
—
$ 447,553
10,580
(3,880)
$ 461,447
18.7 %
(16.9 )%
(1.6 )%
NM
NM
(3.0)%
Gulf Coast Jet indexed fuel is the basis for a substantial majority of our fuel consumption and is impacted by both the
price of crude oil as well as increases or decreases in refining margins associated with the conversion of crude oil to jet fuel.
The into-plane fuel cost per gallon decrease of 16.9% was primarily a result of a decrease in jet fuel prices.
In 2016, we did not have any realized or unrealized gains or losses related to fuel derivatives as we did not enter into any
fuel derivative instruments during the twelve months ended December 31, 2016. In 2015, total realized loss related to fuel
derivatives was $10.6 million which represents premiums paid for fuel options that expired during the twelve months ended
December 31, 2015. There was no cash received from fuel options that settled during 2015. During the twelve months ended
December 31, 2016, we did not pay any premiums to acquire fuel options. During the twelve months ended December 31,
49
2015, we paid $2.5 million, in premiums to acquire fuel options. We had unrealized gains of $3.9 million related to mark to
market adjustments in the fair value of our outstanding fuel derivatives during the twelve months ended December 31, 2015.
We track economic fuel expense, which we believe is the best measure of the effect fuel prices are currently having on
our business, because it most closely approximates the net cash outflow associated with purchasing fuel used for our operations
during the period. We define economic fuel expense as into-plane fuel expense and realized gains or losses on derivative
contracts. The key difference between aircraft fuel expense, as recorded in our statement of operations, and economic fuel
expense is unrealized mark-to-market changes in the value of aircraft fuel derivatives outstanding. Many industry analysts
evaluate airline results using economic fuel expense and it is used in our internal management reporting.
The elements of the changes in economic fuel expense are illustrated in the following table:
Into-plane fuel expense
Realized (gains) and losses related to fuel derivative contracts, net
Economic fuel expense
Fuel gallons consumed
Economic fuel cost per gallon
Year Ended December 31,
2016
2015
(in thousands, except per
gallon amounts)
Percent
Change
$ 447,553
$ 454,747
—
$ 447,553
10,580
$ 465,327
302,781
1.48
$
255,008
1.82
$
(1.6 )%
NM
(3.8)%
18.7 %
(18.7)%
Fuel gallons consumed increased 18.7% as a result of increased operations, as evidenced by a 15.4% increase in block
hours.
During 2016, aircraft rent decreased $9.9 million, or 4.7%, compared to 2015. The decrease in aircraft rent expense was
primarily driven by the purchase of seven previously leased aircraft made during the twelve months ended December 31, 2016.
For further discussion on these purchases, refer to "Notes to Financial Statements—3. Special Charges." Additionally, we
negotiated several lease extensions during 2016 which contributed to lower aircraft rent. On a per-ASM basis, aircraft rent
expense decreased due to a change in the composition of our aircraft fleet between leased aircraft (for which rent expense is
recorded under aircraft rent) and purchased aircraft (for which depreciation expense is recorded under depreciation and
amortization). Since the prior year period, we have taken delivery of 11 purchased aircraft, which increased capacity but had no
effect on aircraft rent expense, as these assets were purchased and are being depreciated over their useful life. Had the
respective aircraft been leased, the change in rent expense, on both a dollar and per-ASM basis, would have been greater than
the increase currently experienced in depreciation and amortization as a result of these purchases.
Landing fees and other rents for 2016 increased by $20.6 million, or 15.7%, compared to 2015 primarily due to a 16.0%
increase in departures. On a per-ASM basis, landing fees and other rents decreased due to scale benefits from increased volume
at our airports.
Depreciation and amortization increased by $27.2 million, or 36.8%, compared to the prior year period. The increase on
both a dollar and per-ASM basis was primarily due to depreciation expense resulting from the purchase of 11 new aircraft and
the purchase of 7 previously rented aircraft during 2016.
Maintenance, materials and repair costs increased by $18.1 million, or 22.5%, in 2016, as compared to 2015 . The
increase in maintenance costs on a dollar basis was due to more frequent maintenance checks, year over year, as well as routine
and ongoing maintenance on a growing fleet. On a per-unit basis, our growth outpaced the increase in maintenance costs during
the period, as compared to the prior year period. We expect maintenance expense, on a dollar basis, to increase as our fleet
continues to grow and age, resulting in the need for additional and more frequent repairs over time.
The increase in distribution expense of $10.1 million, or 11.6%, in 2016 compared to 2015 was primarily due to
increased sales volume. On a per-ASM basis, distribution costs decreased primarily due to lower average fare resulting in a
decrease in credit card fees, year over year.
50
The following table shows our distribution channel usage:
Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63.6% 63.5%
Third-party travel agents . . . . . . . . . . . . . . . . . . . . . . . . . .
Call center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.7
4.7
32.0
4.5
0.1
(0.3)
0.2
Year Ended
December 31,
2016
2015
Change
Special charges for the year ended 2016 consisted primarily of $37.2 million in lease termination charges recognized in
connection with the purchase of 7 aircraft previously financed under operating lease agreements. The amount recorded as lease
termination charges represents the excess of the purchase price paid over the appraised fair value of the aircraft, less previously
expensed supplemental rent and other non-cash items of $14.8 million. For further discussion on these purchases, refer to
"Notes to Financial Statements—3. Special Charges."
Other operating expenses in 2016 increased by $59.6 million, or 28.7%, compared to 2015 due primarily to an increase in
overall operations. As compared to the prior year period, we increased departures by 16.0% and had 20.6% more passenger
flight segments, which drove increases in variable operating expenses. The outsourcing of ramp service agents at certain
stations, completed in the latter part of the second quarter of 2015, also drove increases in other operating expense, on both a
dollar and per-ASM basis, year over year.
2015 compared to 2014
Operating expense increased by $56.0 million, or 3.6%, in 2015 primarily due to our 30.0% growth in capacity which
drove increases in operating expenses offset almost entirely by a significant decrease in fuel cost per gallon.
Our adjusted CASM ex fuel for 2015 decreased by 6.5% as compared to 2014. The decrease on a per-ASM basis was
primarily due to a decrease in aircraft rent and labor costs. The decrease in our aircraft rent per ASM was related to the
purchase of aircraft with lower ownership costs recorded under depreciation and amortization versus leased aircraft recorded
under aircraft rent. This decrease in aircraft rent was partially offset by higher depreciation and amortization expense related to
the depreciation of our recently purchased aircraft. Labor costs per ASM were lower in 2015, as compared to the prior period,
primarily due to scale benefits from overall growth as well as from larger gauge aircraft.
Labor costs in 2015 increased by $64.1 million, or 20.5%, compared to 2014, due mainly to a 27.9% increase in our pilot
and flight attendant workforce required to operate the 11 new aircraft deliveries in 2015, offset slightly by a decrease in bonus
expense due to a failure to achieve bonus targets in 2015. On a per-ASM basis, labor costs decreased primarily due to scale
benefits from overall growth and lower bonus expense on both a dollar and per ASM basis, offset slightly by rising health care
costs which rose more than our capacity growth during the year.
Aircraft fuel expense decreased by 24.7% from $612.9 million in 2014 to $461.4 million in 2015. The decrease was
primarily due to a 39.1% decrease in fuel prices per gallon, partially offset by a 27.2% increase in fuel gallons consumed.
The elements of the changes in aircraft fuel expense are illustrated in the following table:
Fuel gallons consumed
Into-plane fuel cost per gallon
Into-plane fuel expense
Realized losses (gains) related to fuel derivative contracts, net
Unrealized losses (gains) related to fuel derivative contracts, net
Aircraft fuel expense (per statement of operations)
51
Year Ended December 31,
2015
2014
(in thousands, except per
gallon amounts)
Percent
Change
255,008
200,498
$
1.78
$
3.03
$ 454,747
$ 608,033
10,580
(3,880)
$ 461,447
995
3,881
$ 612,909
27.2 %
(41.3 )%
(25.2 )%
NM
NM
(24.7)%
Gulf Coast Jet indexed fuel is the basis for a substantial majority of our fuel consumption and is impacted by both the
price of crude oil as well as increases or decreases in refining margins associated with the conversion of crude oil to jet fuel.
The into-plane fuel cost per gallon decrease of 41.3% was primarily a result of a decrease in jet fuel prices.
In 2015, we recognized $10.6 million of realized loss related to fuel derivatives consisting of $11.2 million of
premiums paid for fuel options that expired during the twelve months ended December 31, 2015 offset by $0.6 million of cash
received from fuel options that settled during the period. In 2014, total realized loss related to fuel derivatives was $1.0 million
which represents premiums paid for fuel options that expired during the twelve months ended December 31, 2014. There was
no cash received from fuel options that settled during 2014. During the twelve months ended December 31, 2015 and
December 31, 2014, we paid $2.5 million and $9.7 million, respectively, in premiums to acquire fuel options. We had
unrealized gains of $3.9 million and unrealized losses of $3.9 million related to mark to market adjustments in the fair value of
our outstanding fuel derivatives during the twelve months ended December 31, 2015 and December 31, 2014, respectively.
During the third quarter of 2014, we became aware of an underpayment of Federal Excise Tax (FET) for fuel purchases
during the period between July 1, 2009 and August 31, 2014. An out of period jet fuel FET amount of $9.3 million is recorded
within aircraft fuel in the statement of operations for the year ended December 31, 2014.
We track economic fuel expense, which we believe is the best measure of the effect fuel prices are currently having on
our business, because it most closely approximates the net cash outflow associated with purchasing fuel used for our operations
during the period. We define economic fuel expense as into-plane fuel expense and realized gains or losses on derivative
contracts. The key difference between aircraft fuel expense, as recorded in our statement of operations, and economic fuel
expense is unrealized mark-to-market changes in the value of aircraft fuel derivatives outstanding. In addition, in our
calculation for economic fuel price for the prior year, we are excluding the out of period additional jet fuel FET amount of $9.3
million expensed in the third quarter of 2014. Many industry analysts evaluate airline results using economic fuel expense and
it is used in our internal management reporting.
The elements of the changes in economic fuel expense are illustrated in the following table:
Into-plane fuel expense
Realized (gains) and losses related to fuel derivative contracts, net
Out of period fuel federal excise tax
Economic fuel expense
Fuel gallons consumed
Economic fuel cost per gallon
Year Ended December 31,
2015
2014
(in thousands, except per
gallon amounts)
Percent
Change
$ 454,747
$ 608,033
10,580
—
$ 465,327
255,008
1.82
$
995
(9,278)
$ 599,750
200,498
2.99
$
(25.2 )%
NM
NM
(22.4)%
27.2 %
(39.1)%
Fuel gallons consumed increased 27.2% as a result of increased operations, as evidenced by a 26.4% increase in block
hours.
During 2015, aircraft rent increased $15.7 million, or 8.0%, compared to 2014. This increase was primarily driven by the
full year's rent of the seven leased aircraft delivered throughout 2014. We did not take delivery of any leased aircraft during
2015. On a per-ASM basis, aircraft rent expense decreased due to a change in composition of our aircraft fleet between leased
aircraft (for which rent expense is recorded under aircraft rent) and purchased aircraft (for which depreciation expense is
recorded under depreciation and amortization). Since the prior year period, we have purchased and taken delivery of 14 aircraft,
which increased capacity but had no effect in aircraft rent expense, as these assets were purchased and are being depreciated
over their useful life. Had the respective aircraft been leased, the change in rent expense, on both a dollar and per-ASM basis,
would have been greater than the increase currently experienced in depreciation and amortization as a result of these purchases.
Landing fees and other rents for 2015 increased by $26.0 million, or 24.7%, compared to 2014 driven by the increased
flight volume. On a per-ASM basis, landing fees and other rents decreased slightly, year over year, primarily due to the scale
benefits from increased volume at our airports.
52
Depreciation and amortization increased by $26.9 million, or 57.3%, compared to the prior year period. The increase on
both a dollar and per-ASM basis was primarily due to depreciation expense resulting from the purchase of 14 aircraft made
during 2015.
Maintenance, materials and repair costs increased by $6.5 million, or 8.8%, in 2015, as compared to 2014 . The increase
in maintenance costs on a dollar basis was due to routine and ongoing maintenance on a growing fleet. On a per-unit basis, our
growth outpaced the increase in maintenance costs during the period, as compared to the prior year period. In addition, the
timing and mix of maintenance events resulted in lower cost events in the current year period as compared to the prior year
period. On a per-unit basis, maintenance expense decreased due to the purchase of $13.0 million in rotable inventory that was
made in the third quarter of 2014 to support our aircraft fleet. The expense for these rotables is recorded under depreciation and
amortization expense instead of maintenance expense as in the prior year period when the rotables were leased from a third
party. We expect maintenance expense to increase as our fleet continues to grow and age, resulting in the need for additional or
more frequent repairs over time.
The increase in distribution expense of $11.8 million, or 15.7%, in 2015 compared to 2014 was primarily due to
increased sales volume. On a per-ASM basis, distribution expense decreased primarily due to a decrease in credit card fees
resulting from a renegotiation with our primary credit card processor in late 2014 and a slight shift of sales from third-party
travel agents to our website.
The following table shows our distribution channel usage:
Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63.5% 61.1%
Third-party travel agents . . . . . . . . . . . . . . . . . . . . . . . . . .
Call center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32.0
4.5
34.4
4.5
2.4
(2.4)
—
Year Ended
December 31,
2015
2014
Change
Other operating expenses in 2015 increased by $57.3 million, or 38.1%, compared to 2014, primarily due to an
increase in departures of 25.6%, our overall growth and an increase in passenger re-accommodation expense year over year. On
a per-ASM basis, our other operating expenses increased primarily due to higher passenger re-accommodation expense. Re-
accommodation expense was driven by an increased number of flight cancellations, as compared to the same period last year.
For example, during the second quarter of 2015, we experienced consecutive storm systems in Dallas, Chicago, New York, and
Detroit followed by Tropical Storm Bill that sat over Houston before moving north to Dallas. The timing and location of these
storm systems produced a domino effect on our operations resulting in over 500 flight cancellations and numerous flight
delays. Our travel and lodging expense was also higher, as compared to the prior year period, due to increased operations, the
training of new pilots and flight attendants, and higher average lodging rates.
Other (Income) Expense
2016 compared to 2015
Other (income) expense, net increased from $6.7 million in 2015 to $24.2 million in 2016. This increase was primarily
driven by an increase in interest expense of $21.3 million, which primarily represented interest related to the financing of
purchased aircraft, offset by an increase in interest income of $3.2 million and an increase in the capitalization of interest of
$1.2 million. As of December 31, 2016 and 2015, we had 29 and 18 purchased aircraft financed through secured long-term debt
arrangements, respectively. Refer to “Notes to Financial Statements—11. Debt and Other Obligations” for additional
information. Interest income increased by $3.2 million, year over year, as we earned interest income on our cash, cash
equivalents and short-term investments and on funds required to be held in escrow in accordance with the terms of our EETC.
2015 compared to 2014
53
Other (income) expense, net increased from $2.3 million in 2014 to $6.7 million in 2015. This increase was primarily
driven by an increase in interest expense of $17.6 million, which primarily represented interest related to the financing of
purchased aircraft, offset by an increase in the capitalization of interest of $8.8 million. Additionally, interest income increased
by $1.8 million, year over year, as we earned interest income on funds required to be held in escrow in accordance with the
terms of our EETC. Refer to “Notes to Financial Statements—11. Debt and Other Obligations” for additional information.
Income Taxes
In 2016, our effective tax rate was 36.9% compared to 36.9% in 2015 and 36.1% in 2014. 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.
54
Quarterly Financial Data (unaudited)
March 31,
2015
June 30, 2015
September 30,
2015
December 31,
2015
March 31,
2016
June 30, 2016
September 30,
2016
December 31,
2016
(in thousands, except share and per share amounts)
Three Months Ended
Total operating revenue
$
493,355
$
553,421
$
574,841
$
519,846
$
538,143
$
584,133
$
621,329
$
Passenger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-ticket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings Per Share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding:
$
$
$
273,466
219,889
109,251
69,002
0.94
0.94
$
$
$
308,573
244,848
122,315
76,704
1.06
1.05
$
$
$
319,812
255,029
157,219
97,114
1.35
1.35
$
$
$
267,487
252,359
120,337
74,400
1.04
1.04
$
$
$
272,626
265,517
101,299
61,920
0.87
0.86
$
$
$
296,401
287,732
121,835
73,084
1.03
1.03
$
$
$
331,004
290,325
135,216
81,382
1.17
1.17
$
$
$
578,351
300,590
277,761
85,311
48,493
0.70
0.70
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73,053,535
73,369,684
72,518,019
72,800,861
71,737,697
71,883,697
71,543,409
71,671,758
71,572,194
71,776,546
70,769,810
70,913,014
69,727,012
69,807,796
69,325,023
69,551,325
55
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
Three Months Ended
Other operating statistics
Aircraft at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average daily Aircraft utilization (hours) . . . . . . . . . . . . . . . . . . . . .
Average stage length (miles). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Departures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Passenger flight segments (thousands) . . . . . . . . . . . . . . . . . . . . . . .
Revenue passenger miles (RPMs) (thousands) . . . . . . . . . . . . . . . . .
Available seat miles (ASMs) (thousands) . . . . . . . . . . . . . . . . . . . . .
Load factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average ticket revenue per passenger flight segment ($) . . . . . . . . .
Average non-ticket revenue per passenger flight segment ($) . . . . .
Total operating revenue per ASM (TRASM) (cents) . . . . . . . . . . . .
CASM (cents) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted CASM (cents) (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted CASM ex fuel (cents) (2). . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel gallons consumed (thousands) . . . . . . . . . . . . . . . . . . . . . . . . .
Average economic fuel cost per gallon ($) . . . . . . . . . . . . . . . . . . . .
(1) Reconciliation of CASM to Adjusted CASM:
70
12.7
991
29,044
3,980
4,017,559
4,729,463
84.9
68.71
55.25
10.43
8.12
8.06
5.72
56,723
1.95
73
12.9
974
32,164
4,514
4,481,064
5,213,299
86.0
68.35
54.24
10.62
8.27
8.33
5.80
63,134
2.08
76
12.8
983
34,032
4,776
4,768,692
5,597,997
85.2
66.96
53.39
10.27
7.46
7.45
5.39
67,684
1.71
79
12.5
1,000
33,662
4,651
4,727,996
5,705,398
82.9
57.52
54.26
9.11
7.00
7.03
5.15
67,467
1.57
Three Months Ended
83
12.8
995
35,160
4,988
5,070,313
5,983,005
84.7
54.65
53.23
10.61
7.30
7.03
5.59
70,550
1.22
87
12.7
971
38,025
5,606
5,549,411
6,419,419
86.4
52.87
51.32
10.53
7.20
7.07
5.30
77,013
1.47
89
12.3
968
38,310
5,674
5,599,370
6,507,204
86.0
58.34
51.17
11.10
7.47
7.35
5.48
78,288
1.56
95
11.7
981
38,019
5,350
5,362,518
6,585,018
81.4
56.19
51.92
8.78
7.49
7.36
5.44
76,930
1.64
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
(in
millions)
Per
ASM
(in
millions)
Per
ASM
(in
millions)
Per
ASM
(in
millions)
Per
ASM
(in
millions)
Per
ASM
(in
millions)
Per
ASM
(in
millions)
Per
ASM
(in
millions)
Per
ASM
CASM (cents)...................................................
Less:
Unrealized losses (gains) related to fuel
derivative contracts ................................ $
Loss on disposal of assets ......................
Special charges.......................................
1.7
0.6
0.4
Adjusted CASM (cents) ...................................
8.12
0.04
0.01
0.01
8.06
8.27
7.46
7.00
7.30
7.20
7.47
$
(3.7)
(0.07)
$
0.4
0.3
0.01
0.01
8.33
0.1
0.3
0.1
— $
(2.0)
(0.03)
$
0.01
—
7.45
0.3
—
0.01
—
7.03
—
0.02
16.2
—
0.05
8.1
— $
—
0.27
7.03
—
0.4
7.4
— $
0.01
0.13
7.07
—
3.0
5.6
— $
0.01
0.11
7.35
7.49
—
0.05
0.08
7.35
(2) Excludes aircraft fuel expense, loss on disposal of assets and special charges.
56
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash provided by operations and capital from debt financing. Primary
uses of liquidity are for working capital needs, capital expenditures, aircraft and engine pre-delivery deposit payments (PDPs),
debt obligations and maintenance reserves. Our total cash at December 31, 2016 was $700.9 million, a decrease of $102.7
million from December 31, 2015. In addition to cash and cash equivalents, as of December 31, 2016, we had $100.2 million in
short-term investment securities in which we invested during 2016.
Currently, our single largest capital need is funding the acquisition costs of our aircraft. Aircraft are acquired through debt
financing, sale leaseback transactions, direct leases or cash purchases. In debt financing transactions, capital is needed to make
equity investments in capital assets and payments on debt obligations (principal and interest) after the acquisition of the
aircraft. During the twelve months ended December 31, 2016, we purchased 11 aircraft through debt financing transactions and
made $115.0 million in debt payment obligations (principal, interest and fees). The debt entered into in the current year had
maturity dates ranging from 2024 to 2028 and interest rates ranging from 4.100% to 4.450%. Capital resources required under
debt financing transactions will generally be higher than those involving sale leaseback transactions. In sale leaseback
transactions, capital is needed to fund the initial purchase of the aircraft prior to the sale to the lessor. During 2016, we entered
into no sale leaseback transactions. During the twelve months ended December 31, 2016, we purchased seven A319 aircraft
which were previously financed under operating leases for $147.7 million, comprised of cash payments of $107.1 million and
the applications of maintenance security deposits held by the previous lessors of $40.6 million. In addition, we took delivery of
five A320neos financed through direct operating leases.
PDPs relating to future deliveries under our agreement with Airbus are required at various times prior to each delivery
date. During 2016, we paid $173.9 million in PDPs for future deliveries of aircraft and spare engines. As of December 31,
2016, we had $325.7 million of PDPs on our balance sheet.
As of December 31, 2016, we had secured financing for four aircraft, scheduled for delivery in 2017, and did not have
financing commitments in place for the remaining 72 Airbus firm aircraft orders, scheduled for delivery between 2017 through
2021. In January 2017, we secured financing for one additional aircraft, scheduled for delivery in 2017. Future aircraft
deliveries may be paid in cash, leased or otherwise financed based on market conditions, our prevailing level of liquidity, and
capital market availability.
In addition to funding the acquisition of our future fleet, we are required to make maintenance reserve payments for some
of the aircraft in our current fleet. Maintenance reserves are paid to aircraft lessors and are held as collateral in advance of our
performance of major maintenance activities. During the twelve months ended December 31, 2016, we paid $57.1 million in
maintenance reserves and as of December 31, 2016, we have $286.5 million ($87.0 million in aircraft maintenance deposits
and $199.4 million in long-term aircraft maintenance deposits) on our balance sheet.
On October 26, 2015, our Board of Directors authorized a repurchase program of up to $100 million in aggregate value of
shares of our Common Stock, par value $0.0001 per share, from time to time in open market or privately negotiated
transactions. As of December 31, 2016, we exhausted repurchases under this program.
As of December 31, 2016, we were 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, 2016 and December 31, 2015, was $234.6 million and $250.2
million, respectively.
Net Cash Flows Provided By Operating Activities. Operating activities in 2016 provided $473.7 million in cash compared
to $473.0 million provided in 2015. Cash provided by operating activities remained relatively flat, year over year, despite lower
net income, primarily due to the non-cash lease termination costs in 2016 of $37.2 million recorded within special charges on
the statement of operations. Other notable differences include $65.0 million of federal income tax payments made in 2015 and
refunded in 2016 and lower deferral of income taxes, year over year.
Operating activities in 2015 provided $473.0 million in cash compared to $261.8 million provided in 2014. The increase
resulted from higher net income, larger cash collections on flights sold but not yet flown, and higher deferrals of income taxes
year over year.
Net Cash Flows Used In Investing Activities. During 2016, investing activities used $826.3 million, compared to $701.3
million used in 2015. The increase was mainly driven by the purchase of short-term available-for-sale investment securities of
57
$103.3 million made during 2016. In addition, there was an increase in paid PDPs, net of refunds, driven by timing of future
aircraft deliveries. During 2016, our main investing activities were in expenditures for flight equipment consisting primarily of
the purchase of 11 new aircraft, 7 previously leased aircraft and 1 spare engine.
During 2015, investing activities used $701.3 million, compared to $303.7 million used in 2014. The increase was mainly
due to the purchase of 14 aircraft and 1 spare engine sale leaseback transaction during 2015 and a slight increase in paid PDPs,
as compared to 2014, driven by the timing of aircraft deliveries.
Net Cash Provided By Financing Activities. During 2016, financing activities provided $249.9 million. We received
$417.3 million in connection with the debt financing of 11 aircraft delivered during 2016. We spent $102.5 million to
repurchase common stock primarily under our stock repurchase authorization, which became effective in October 2015, and we
paid $64.4 million in debt principal payment obligations related to the financing of our aircraft.
During 2015, financing activities provided $399.1 million. We received $7.3 million in proceeds from the sale of one
spare engine as part of a sale leaseback transaction, $536.8 million in connection with the debt financing of 14 aircraft, and
retained $8.9 million as a result of excess tax benefits related to share-based payments. We spent $15.2 million in debt issuance
costs to secure the financing of 14 aircraft purchases, spent $112.3 million to repurchase common stock and made $26.4 million
in debt and capital lease payments.
During 2014, financing activities provided $144.0 million. We received $7.2 million in proceeds from the sale of one
spare engine as part of a sale leaseback transaction, $148.0 million in connection with the debt financing of four aircraft,
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. We spent $4.7 million in debt issuance costs to secure the financing of 4 aircraft delivered in 2014 and
11 aircraft delivered in 2015.
In 2014, we agreed on a settlement amount of $7.0 million related to a Tax Receivable Agreement (TRA). This agreed
upon settlement was in excess of the outstanding liability of $5.6 million at the time of settlement. The $5.6 million payment is
recorded as cash used in financing activities in the statement of cash flows and the excess payment of $1.4 million is recorded
within other expense in the statement operations and recorded as cash from operations in the statement of cash flows.
Commitments and Contractual Obligations
We have contractual obligations and commitments primarily with regard to future purchases of aircraft and engines,
payment of debt, and lease arrangements. The following table discloses aggregate information about our contractual obligations
as of December 31, 2016 and the periods in which payments are due (in millions):
Long-term debt (1)
Interest commitments (2)
Operating lease obligations
Flight equipment purchase obligations
Other (3)
2017
2018 - 2019
2020 - 2021
2022 and
beyond
Total
$
89
42
258
660
16
$
165
$
158
$
600
$
1,012
73
457
1,328
4
58
371
1,602
—
97
612
25
—
270
1,698
3,615
20
Total future payments on contractual obligations
$
1,065
$
2,027
$
2,189
$
1,334
$
6,615
(1)
Includes principal only associated with senior term loans due through 2027, junior term loans due through 2022 and
Class A and Class B enhanced equipment trust certificates due through 2028 and 2024, respectively. Refer to “Notes to
the Financial Statements—11. Debt and Other Obligations.”
(2) Related to senior and junior term loans and Class A and Class B enhanced equipment trust certificates only.
(3) Primarily related to the construction of our maintenance hangar, our A320ceos seating reconfiguration project, and our
reservation system. Refer to “Notes to the Financial Statements—16. Commitments and Contingencies.”
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 utilization. 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 $7.7 million in 2017, $7.0 million in 2018, $5.7 million in 2019, $5.4
million in 2020, $5.5 million in 2021 and $17.7 million in 2022 and beyond.
58
In August 2015, we created two separate pass-through trusts which issued $576.6 million aggregate face amount of Series
2015-1 Class A and Class B EETCs in connection with the financing of 12 new Airbus A321 aircraft and 3 new Airbus A320
aircraft. The proceeds from the issuance of EETCs were initially held in escrow by a depositary and, upon satisfaction of
certain terms and conditions, are released and used to purchase equipment notes which are issued by the Company and secured
by the Company's aircraft. As of December 31, 2016, $538.1 million of the proceeds from the sale of the 2015-1 EETCs had
been used to purchase equipment notes in connection with the financing of 3 Airbus A320 aircraft and 11 Airbus A321 aircraft.
The remaining one aircraft, under the EETC, was delivered in January 2017.
We evaluated whether the pass-through trusts formed are variable interest entities (VIEs) required to be consolidated by
the Company under applicable accounting guidance. We determined that the pass-through trusts are VIEs and that we do not
have a variable interest in the pass-through trusts. As such, we are not required to consolidate these pass-through trusts.
As of December 31, 2016, principal and interest commitments related to our future secured debt financing for four aircraft
are $10.9 million in 2017, $13.0 million in 2018, $13.7 million in 2019, $13.2 million in 2020, $13.3 million in 2021, and
$119.1 million in 2022 and beyond.
In September 2015, we executed a lease agreement with Wayne County Airport Authority (the Authority), which owns
and operates Detroit Metropolitan Wayne County Airport (DTW). Under the lease agreement, we lease a 10-acre site, adjacent
to the airfield at DTW, in order to construct, operate and maintain an approximately 126,000 square foot hangar facility. The
lease agreement has a 30-year term with two 10-year extension options. Upon termination of the lease, title of the project,
which will be fully depreciated, will automatically pass to the Authority. We estimate we will complete the project during the
first quarter of 2017. Future commitment amounts for the project are included within operating lease obligations, for future rent
obligations and within other, for future construction cost obligations in the table above.
Off-Balance Sheet Arrangements
We have significant obligations for aircraft and spare engines as 59 of our 95 aircraft and 11 of our 12 spare engines are
financed under operating leases and therefore are not reflected on our balance sheets. These leases expire between 2017 and
2029. Aircraft rent payments were $213.9 million and $217.0 million for 2016 and 2015, respectively. Our aircraft lease
payments for 57 of our aircraft are fixed-rate obligations. Two 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. As of December 31, 2016, our firm aircraft orders consisted of the following:
2017
2018
2019
2020
2021
Airbus
A320ceo
A320neo
A321ceo
Total
4
5
1
10
4
12
16
18
50
11
5
16
15
14
13
16
18
76
We also have three 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 2017 through 2023.
Committed expenditures for these aircraft and spare engines, including estimated amounts for contractual price escalations and
aircraft PDPs, are expected to be $660.3 million in 2017, $649.8 million in 2018, $678.3 million in 2019, $824.4 million in
2020, $777.9 million in 2021, and $24.6 million in 2022 and beyond.
As of December 31, 2016, we had lines of credit related to corporate credit cards of $23.6 million from which we had
drawn $9.9 million.
As of December 31, 2016, we had lines of credit with counterparties for both physical fuel delivery and derivatives in the
amount of $46.5 million. As of December 31, 2016, we had drawn $8.0 million on these lines of credit. We are required to post
59
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, 2016, we did not hold any
derivatives.
As of December 31, 2016, we have $6.6 million in uncollateralized surety bonds and a $25.2 million unsecured standby
letter of credit facility, representing an off balance-sheet commitment, of which $19.7 million had been drawn upon for issued
letters of credit.
60
Set forth below is a glossary of industry terms:
GLOSSARY OF AIRLINE TERMS
“Adjusted CASM” means operating expenses, excluding unrealized gains or losses related to fuel derivative contracts,
out of period fuel federal excise tax, 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 unrealized gains or losses related to
fuel derivative contracts and out of period fuel federal excise tax, 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.
"EETC" means enhanced equipment trust certificate.
“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).
"IAMAW" means the International Association of Machinists and Aerospace Workers.
“Into-plane fuel cost per gallon” means into-plane fuel expense divided by number of fuel gallons consumed.
61
“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).
“NMB” means the National Mediation Board.
“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.
“Total operating revenue per ASM,” “TRASM” or “unit revenue” means operating revenue divided by ASMs.
"TRA" means Tax Receivable Agreement.
“TWU” means the Transport Workers Union of America.
“TSA” means the United States Transportation Security Administration.
“ULCC” means “ultra low-cost carrier.”
62
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) and interest rates. We
purchase the majority of our jet fuel at prevailing market prices and seek to manage market risk through execution of our
hedging strategy and other means. We have market-sensitive instruments in the form of fixed-rate debt instruments, and
financial derivative instruments used to hedge our exposure to jet fuel price increases and interest rate increases. We do not
purchase or hold any derivative financial instruments for trading purposes. 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, 2016, 2015 and 2014 represented approximately 23.8%, 28.3% and
38.9% of our operating expenses, respectfully. Volatility 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. Gulf Coast Jet indexed fuel is the basis for a substantial
majority of our fuel consumption. Based on our annual fuel consumption, a hypothetical 10% increase in the average price per
gallon of aircraft fuel would have increased into-plane aircraft fuel cost for 2016 by $44.8 million.
As of December 31, 2016 and 2015, we did not have any outstanding fuel derivatives. We measure our financial
derivative instruments at fair value. Fair value of the instruments is determined using standard option valuation models.
Changes in the related commodity derivative instrument cash flows may change by more or less than the amount based upon
further fluctuations in future prices. Outstanding financial derivative instruments expose us to credit loss in the event of
nonperformance by the counterparties to the agreements. However, we do not expect the counterparties to fail to meet their
obligations.
Interest Rates. We have market risk associated with our short-term investment securities, which had a fair market value
of $100.2 million as of December 31, 2016. As of December 31, 2015, we had no outstanding investment securities, since we
did not purchase them until the third quarter of 2016. We also have market risk associated with changing interest rates due to
LIBOR-based lease rates on two of our aircraft. A hypothetical 10% change in interest rates in 2016 would affect total aircraft
rent expense in 2017 by less than $0.1 million per annum.
Fixed-Rate Debt. As of December 31, 2016, we had $1,012.4 million outstanding in fixed-rate debt related to the
purchase of 15 Airbus A320 aircraft and 14 Airbus A321 aircraft, which had a fair value of $1,033.7 million. As of December
31, 2015, we had $659.3 million outstanding in fixed-rate debt related to the purchase of 12 Airbus A320 aircraft and 6 Airbus
A321 aircraft, which had a fair value of $652.4 million.
63
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Comprehensive Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
65
66
67
68
69
70
96
64
Spirit Airlines, Inc.
Statements of Operations
(In thousands, except per share data)
Operating revenues:
Passenger
Non-ticket
Total operating revenues
Operating expenses:
Salaries, wages and benefits
Aircraft fuel
Aircraft rent
Landing fees and other rents
Depreciation and amortization
Maintenance, materials and repairs
Distribution
Special charges
Loss on disposal of assets
Other operating
Total operating expenses
Operating income
Other (income) expense:
Interest expense
Capitalized interest
Interest income
Other expense
Total other (income) expense
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2016
2015
2014
$1,200,621
1,121,335
2,321,956
$1,169,338
972,125
2,141,463
$1,144,972
786,608
1,931,580
472,471
447,553
201,675
151,679
101,136
98,587
96,627
37,189
4,187
267,191
1,878,295
377,508
461,447
211,531
131,077
73,908
80,448
86,576
673
1,604
207,569
1,632,341
313,409
612,909
195,827
105,115
46,971
73,956
74,823
45
3,008
150,254
1,576,317
443,661
509,122
355,263
41,654
(12,705)
(5,276)
528
24,201
20,382
(11,553)
(2,125)
15
6,719
2,747
(2,747)
(336)
2,605
2,269
419,460
154,581
502,403
185,183
352,994
127,530
$ 264,879
$ 317,220
$ 225,464
$
$
3.77
3.76
$
$
4.39
4.38
$
$
3.10
3.08
See accompanying Notes to Financial Statements.
65
Spirit Airlines, Inc.
Statements of Comprehensive Income
(In thousands)
Net income
Unrealized gain (loss) on interest rate derivative instruments, net of
deferred taxes of $0, ($550) and ($423)
Unrealized gain (loss) on short-term investment securities, net of
deferred taxes of ($13), $0 and $0
Interest rate derivative losses reclassified into earnings, net of taxes of
$130, $50, and $0
Other comprehensive income (loss)
Comprehensive income
Year Ended December 31,
2016
2015
2014
$
264,879
$
317,220
$
225,464
—
(23)
224
201
265,080
$
$
(910)
—
(718)
—
82
(828) $
$
316,392
—
(718)
224,746
$
$
See accompanying Notes to Financial Statements.
66
Spirit Airlines, Inc.
Balance Sheets
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Short-term investment securities
Accounts receivable, net
Aircraft maintenance deposits
Prepaid income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment:
Flight equipment
Ground property and equipment
Less accumulated depreciation
Deposits on flight equipment purchase contracts
Long-term aircraft maintenance deposits
Deferred heavy maintenance, net
Other long-term assets
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
Air traffic liability
Current maturities of long-term debt
Other current liabilities
Total current liabilities
Long-term debt, less current maturities
Long-term deferred income taxes
Deferred gains and other long-term liabilities
Shareholders’ equity:
Common stock: Common stock, $0.0001 par value, 240,000,000 shares authorized
at December 31, 2016 and 2015, respectively; 73,549,872 and 73,402,877 issued
and 69,326,202 and 71,541,788 outstanding as of December 31, 2016 and 2015,
respectively
Additional paid-in-capital
Treasury stock, at cost: 4,223,670 and 1,861,089 shares as of December 31, 2016
and 2015, respectively
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Financial Statements.
67
December 31, 2016
December 31, 2015
$
$
$
$
$
$
700,900
100,155
41,136
87,035
—
46,619
975,845
1,461,525
126,206
(122,509)
1,465,222
325,688
199,415
75,534
110,223
3,151,927
15,193
206,392
84,354
226,011
531,950
897,359
308,143
19,868
7
551,004
(218,692)
1,063,633
(1,345)
1,394,607
803,632
—
28,266
73,415
72,278
48,749
1,026,340
834,927
74,814
(65,524)
844,217
286,837
206,485
89,127
77,539
2,530,545
17,043
216,831
49,637
182,729
466,240
596,693
221,481
20,821
7
544,277
(116,182)
798,754
(1,546)
1,225,310
$
3,151,927
$
2,530,545
Spirit Airlines, Inc.
Statements of Cash Flows
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operations:
Unrealized losses on open derivative contracts, net
Losses reclassified from other comprehensive income
Equity-based compensation
Allowance for doubtful accounts (recoveries)
Amortization of deferred gains and losses and debt issuance costs
Depreciation and amortization
Deferred income tax expense
Loss on disposal of assets
Lease termination costs
Changes in operating assets and liabilities:
Accounts receivable
Aircraft maintenance deposits
Long-term deposits and other assets
Prepaid income taxes
Accounts payable
Air traffic liability
Other liabilities
Other
Net cash provided by operating activities
Investing activities:
Purchase of short-term investment securities
Proceeds from the maturity of short-term investment securities
Proceeds from sale of property and equipment
Pre-delivery deposits for flight equipment, net of refunds
Capitalized interest
Purchase of property and equipment
Net cash used in investing activities
Financing activities:
Proceeds from issuance of long-term debt
Proceeds from stock options exercised
Payments on debt and capital lease obligations
Proceeds from sale leaseback transactions
Payments to pre-IPO shareholders pursuant to tax receivable agreement
Excess tax (deficiency) benefit from equity-based compensation
Repurchase of common stock
Debt issuance costs
Net cash provided by financing activities
Net (decrease) 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:
Interest, net of capitalized interest
Income taxes paid, net of refunds
Non-cash transactions:
Capital expenditures funded by capital lease borrowings
See accompanying Notes to Financial Statements.
68
Year Ended December 31,
2016
2015
2014
$
264,879
$
317,220
$
225,464
—
354
7,105
80
5,732
101,136
86,146
4,187
37,189
(12,951)
(45,869)
(75,780)
72,278
(6,823)
(11,582)
47,391
206
473,678
(103,258)
2,842
50
(173,947)
(10,834)
(541,122)
(826,269)
417,275
92
(64,421)
—
—
(470)
(102,510)
(107)
249,859
(102,732)
803,632
700,900
2,202
132
9,222
12
1,165
73,908
155,614
1,604
—
(5,592)
(32,101)
(103,613)
—
2,706
36,387
14,119
—
472,985
—
—
—
(142,323)
(10,159)
(548,800)
(701,282)
536,780
32
(26,364)
7,300
—
8,850
(112,261)
(15,192)
399,145
170,848
632,784
803,632
$
$
39,963
(5,579) $
7,061
95,933
—
—
8,797
(45)
(185)
46,971
34,118
3,008
—
606
(31,925)
(48,382)
—
(10,034)
21,135
12,302
—
261,830
—
—
—
(115,802)
(1,318)
(186,569)
(303,689)
148,000
174
(1,233)
7,200
(5,643)
1,871
(1,630)
(4,727)
144,012
102,153
530,631
632,784
—
89,104
$
$
$
(31) $
— $
(173)
$
$
$
$
Spirit Airlines, Inc.
Statements of Shareholders’ Equity
(In thousands)
Common
Stock
Additional
Paid-In
Capital
Treasury Stock
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
256,070
$
— $
769,117
Balance at December 31, 2013 $
Share-based compensation
Repurchase of common stock
Proceeds from options
exercised
Excess tax benefits from share-
based compensation
Changes in comprehensive
income
Net income
Balance at December 31, 2014 $
Share-based compensation
Repurchase of common stock
Proceeds from options
exercised
Excess tax benefits from share-
based compensation
Changes in comprehensive
income
Net income
Balance at December 31, 2015 $
Share-based compensation
Repurchase of common stock
Proceeds from options
exercised
Excess tax deficiency from
share-based compensation
Changes in comprehensive
income
Net income
7
—
—
—
—
—
—
7
—
—
—
—
—
7
—
—
—
—
—
$
515,331
$
8,797
174
1,871
—
—
$
526,173
$
9,222
32
8,850
—
(2,291) $
—
(1,630)
—
—
—
—
(3,921) $
—
(112,261)
—
—
—
—
—
—
—
—
225,464
481,534
$
—
—
—
—
317,220
$
544,277
$
(116,182) $
798,754
$
7,105
—
(102,510)
92
(470)
—
—
—
—
—
—
—
—
264,879
—
—
—
—
8,797
(1,630)
174
1,871
(718)
—
(718)
225,464
(718) $ 1,003,075
9,222
—
—
—
—
(112,261)
32
8,850
(828)
—
(828)
317,220
(1,546) $ 1,225,310
7,105
—
—
—
—
201
—
(102,510)
92
(470)
201
264,879
Balance at December 31, 2016 $
7
$
551,004
$
(218,692) $
1,063,633
$
(1,345) $ 1,394,607
See accompanying Notes to Financial Statements.
69
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 accordance with generally accepted accounting principles in the United States
of America requires the Company's management to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. The Company's estimates and assumptions are based on historical experience
and changes in the business environment. However, actual results may differ from estimates under different conditions,
sometimes materially. Critical accounting policies and estimates are defined as those that both (i) are most important to the
portrayal of the Company's financial condition and results and (ii) require management's most subjective judgments. The
Company's most critical accounting policies and estimates are described below.
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. Cash and cash
equivalents are stated at cost, which approximates fair value.
Short-term Investment Securities
The Company's short-term investment securities consist of available-for-sale asset-backed securities with contractual
maturities of twelve months or less. These securities are stated at fair value within current assets on the Company's balance
sheet. For all short-term investments, at each reset period or upon reinvestment, the Company accounts for the transaction as
proceeds from the maturity of short-term investment securities for the security relinquished, and purchase of short-term
investment securities for the security purchased, in the Company's statement of cash flows. Realized gains and losses on sales
of investments, if any, are reflected in non-operating income (expense) in the statements of operations. Unrealized gains and
losses on investment securities are reflected as a component of accumulated other comprehensive income.
Accounts Receivable
Accounts receivable primarily consist of amounts due from credit card processors associated with the sales of tickets and
amounts due from the Internal Revenue Service related to federal excise fuel tax. 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 as well as aging trends. The allowance for doubtful accounts was immaterial as of December 31, 2016 and 2015.
In addition, the provision for doubtful accounts and write-offs for 2016, 2015 and 2014 were each immaterial.
Property and Equipment
Property and equipment is 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. Residual values for
aircraft, major spare rotable parts, avionics and assemblies are generally estimated to be 10%. 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.
70
Notes to Financial Statements—(Continued)
The depreciable lives used for the principal depreciable asset classifications are:
Aircraft
Spare rotables and flight assemblies
Other equipment and vehicles
Internal use software
Capital lease
Leasehold improvements
Estimated Useful Life
25 years
7 to 15 years
5 to 7 years
3 to 10 years
Lease term
Lesser of lease term or estimated useful life of the
improvement
As of December 31, 2016, the Company had 36 aircraft and 1 spare engine capitalized within flight equipment with
depreciable lives of 25 years. As of December 31, 2016, the Company had 59 aircraft financed through operating leases with
lease terms from 12 to 18 years and 11 spare engines financed through operating leases with lease terms from 10 to 13 years.
The following table illustrates the components of depreciation and amortization expense:
Depreciation
Amortization of heavy maintenance
Total depreciation and amortization
Year Ended December 31,
2016
2015
2014
$ 57,325
43,811
$101,136
(in thousands)
$ 30,797
43,111
$ 73,908
$ 11,169
35,802
$ 46,971
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 $9.4 million and $8.8 million at December 31, 2016 and
2015, respectively.
Amortization of capitalized software costs is charged to depreciation on a straight-line method basis. Amortization of
capitalized software costs was $3.2 million, $3.1 million and $3.5 million for the years ended 2016, 2015 and 2014,
respectively. The Company placed in service internal-use software of $4.1 million, $4.3 million and $2.7 million, during the
years ended 2016, 2015 and 2014, 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.
Passenger Revenue Recognition
Tickets sold are initially deferred as “air traffic liability.” Passenger revenue is recognized at time of departure when
transportation is provided. All tickets sold by the Company are nonrefundable. An unused 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
71
Notes to Financial Statements—(Continued)
estimated based on historical experience. Estimating the amount of credits that will go unused involves some level of
subjectivity and judgment. However, given the relatively short period of time to expiration, this does not have a significant
impact on the Company's financial statements.
The Company is also required to collect certain taxes and fees from customers on behalf of government agencies and
airports and remit 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 international 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.
Frequent Flier Program
Flown Miles. The Company records unrecognized revenue 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. During 2015, the Company extended its agreement with the administrator of the FREE SPIRIT
affinity credit card program, which was scheduled to expire in April 2016. The renegotiated program was extended through
2022. As part of the new agreement, the Company received a $10.7 million signing bonus that is being deferred over the
contract term and has been reflected in the table below as consideration received from credit card mileage programs in 2015.
This extension is considered a material change and thus at the inception of this new 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. 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 multiple-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. 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. Arrangement consideration was
allocated based on relative selling price. At inception of the arrangement, the Company established the estimated 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 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, 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 17 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, 2016, 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.
72
Notes to Financial Statements—(Continued)
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:
Year Ended
December 31, 2016
December 31, 2015
December 31, 2014
Consideration received
from credit card mile
programs
Portion of proceeds
recognized immediately
as marketing component
$
(in thousands)
$
48,882
58,005
33,819
36,640
35,938
28,140
Total unrecognized revenue from future FREE SPIRIT award redemptions and the sale of mileage credits was $15.3
million and $14.9 million at December 31, 2016 and 2015, 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.
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
2016
2015
2014
Year Ended December 31,
Baggage
Passenger usage fee
Advance seat selection
Service charges for changes and cancellations When itinerary is changed
Other
Non-ticket revenue
Time of departure
Time of departure
Time of departure
$ 434,269
358,920
110,966
42,823
174,357
$1,121,335
(in thousands)
$ 381,386
298,092
97,786
43,756
151,105
$ 972,125
$ 318,103
221,992
76,270
38,388
131,855
$ 786,608
Charges for services recognized at time of departure are initially recorded as a liability, within air traffic liability, until
time of departure. The passenger usage fee is charged for tickets sold through the Company’s primary sales distribution
channels. 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 travel insurance, use of the Company’s call center or travel agents, and commissions on sale of on-board
products, 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 under the deferral method whereby the cost of heavy
maintenance and major overhaul is deferred and amortized until the earlier of the end of the useful life of the related asset, the
end of the remaining lease term or the next scheduled heavy maintenance event.
Amortization of heavy maintenance and major overhaul costs charged to depreciation and amortization expense was
$43.8 million, $43.1 million and $35.8 million for the years ended 2016, 2015 and 2014, respectively. During the years ended
2016, 2015 and 2014, the Company deferred $35.4 million, $9.1 million and $33.6 million, respectively, of costs for heavy
maintenance. At December 31, 2016 and 2015, the Company had deferred heavy maintenance balance of $238.3 million and
$208.1 million, and accumulated heavy maintenance amortization of $162.8 million and $118.9 million, respectively.
73
Notes to Financial Statements—(Continued)
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:
Flight hour-based maintenance expense
Non-flight hour-based maintenance expense
Total maintenance, materials and repairs
Leased Aircraft Return Costs
Year Ended December 31,
2016
2015
2014
(in thousands)
$ 48,471
$ 41,818
$ 35,675
50,116
38,630
38,281
$ 98,587
$ 80,448
$ 73,956
The Company's aircraft lease agreements often contain provisions that require the Company to return aircraft
airframes and engines to the lessor in a certain condition or pay an amount to the lessor based on the airframe and engine's
actual return condition. Lease return costs include all costs that would be incurred at the return of the aircraft, including costs
incurred to repair the airframe and engines to the required condition as stipulated by the lease. Lease return costs could include,
but are not limited to redelivery cost, fuel, final inspections, reconfiguration of the cabin, repairs to the airframe, painting,
overhaul of engines, replacement of components, and checks. Lease return costs are recognized beginning when it is probable
that such costs will be incurred and they can be estimated. Incurrence of lease return costs becomes probable and the amount of
those costs can typically be estimated near the end of the lease term (that is, after the aircraft has completed its last maintenance
cycle prior to being returned). When determining probability and estimated cost, there are various other factors which need to
be considered such as current condition of the aircraft, the age of the aircraft at lease expiration, number of hours run on the
engines, number of cycles run on the airframe, projected number of hours run on the engine at the time of return, number of
projected cycles run on the airframe at the time of return, the extent of repairs needed if any at return, return locations, current
configuration of the aircraft, current paint of the aircraft, estimated escalation of cost of repairs and materials at the time of
return, current flight hour agreement rates and future flight hour agreement rates. In addition, typically near the lease return
date, the lessors may allow reserves to be applied as return condition consideration or pass on certain return provisions if they
do not align with their current plans to remarket the aircraft. When costs become both probable and estimable, they are accrued
on a straight-line basis as contingent rent, a component of supplemental rent, through the remaining lease term. Management
expects return costs to be estimable near the end of the lease term, as such, contingent rent for related aircraft will be higher
near the end of the lease term.
Aircraft Fuel
Aircraft fuel expense includes jet fuel and associated “into-plane” costs, taxes, and oil, and realized and unrealized gains
and losses associated with fuel derivative contracts, if any.
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. During the third quarter of 2015, the Company settled six forward interest rate
swaps having a total notional amount of $120 million. These interest rate swaps fixed the benchmark interest rate component of
interest payments on the debt related to three Airbus A321 aircraft, which the Company took delivery of during the third quarter
of 2015. These instruments limited the Company's exposure to changes in the benchmark interest rate in the period from the
trade date through the date of maturity. The interest rate swaps were designated as cash flow hedges. The Company accounts
for interest rate swaps at fair value and recognizes them in the balance sheet in prepaid expenses and other current assets or
other current liabilities with changes in fair value recorded within accumulated other comprehensive income (AOCI). Realized
gains and losses from cash flow hedges are recorded in the statement of cash flows as a component of cash flows from
operating activities. Subsequent to the issuance of each debt instrument, amounts remaining in AOCI are amortized over the
life of the fixed-rate debt instrument.
74
Notes to Financial Statements—(Continued)
For the years ended 2016, 2015 and 2014, the Company did not hold fuel derivative instruments that were designated as
cash flow hedges for accounting purposes. As a result, changes in the fair value of such fuel 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. For
additional information, refer to Note 13, Financial Instruments and Risk Management.
Advertising
The Company expenses advertising and the production costs of advertising as incurred. Marketing and advertising
expenses of $3.2 million, $3.5 million and $3.0 million for the years ended 2016, 2015 and 2014, respectively, were recorded
within distribution expense in the statement of operations.
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. As of December 31, 2016 and 2015, the Company had no valuation allowance
recorded against any deferred tax assets.
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. 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. For additional information, refer to Note 9, Stock-Based Compensation.
Concentrations of Risk
The Company’s business may be adversely affected by increases in the price of aircraft fuel, the volatility of the price of
aircraft fuel, or both. Aircraft fuel, one of the Company’s largest expenditures, represented approximately 24%, 28% and 39%
of total operating expenses in 2016, 2015 and 2014, 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
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 or create air traffic control problems. These events may result in decreased
revenue and/or increased 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.
As of December 31, 2016, the Company had four union-represented employee groups that together represented
approximately 73% of all employees. As of December 31, 2015, the Company had four union-represented employee groups
that together represented approximately 73% of all employees. 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 16, Commitments and Contingencies.
2. Recent Accounting Developments
Revenue from Contracts with Customers
75
Notes to Financial Statements—(Continued)
In May 2014, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No.
2014-09, (ASU 2014-09), "Revenue from Contracts with Customers." The objective of ASU 2014-09 is to establish a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 will
supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU
2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09
applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards
Codification. The new guidance is effective for the Company in the first quarter of 2018. Early adoption is permitted, but not
before the first quarter of 2017. Entities have the option to use either a full retrospective or modified approach to adopt ASU
2014-09. The Company is currently evaluating the new guidance and has neither determined the full impact this standard may
have on its financial statements nor decided upon the planned method of adoption. While the Company is still evaluating the
impact, it expects the accounting for its frequent flier program to be impacted as ASU 2014-09 will no longer allow use of the
incremental cost method when recording revenue related to the Company's loyalty programs. The Company also expects the
adoption of ASU 2014-09 to impact the classification and timing of recognition of certain ancillary fees as well as the timing of
recognition of certain costs to obtain a contract.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10).” ASU 2016-01
makes several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity
investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in
fair value recognized in net income. ASU 2016-01 is effective for interim and annual periods beginning after December 15,
2017 and is not expected to have a material impact on the Company’s financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This standard will require all leases with
durations greater than twelve months to be recognized on the balance sheet and is effective for the Company in the first quarter
of 2019, with early adoption permitted. The Company is currently evaluating the new guidance and believes adoption of this
standard will have a significant impact on its balance sheets although adoption is not expected to significantly change the
recognition, measurement or presentation of lease expenses within the statements of operations and cash flows. Refer to Note
16, Commitments and Contingencies for information regarding the Company's undiscounted future lease payments and the
timing of those payments.
Share-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting,"
which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for
income taxes, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows.
The new guidance is effective for the Company in the first quarter of 2017, with early adoption permitted. The Company
expects that any excess tax benefits or deficiencies will be recorded within the Company's statement of operations instead of
being recorded within additional paid in capital on its balance sheet. The new standard may cause volatility in the Company’s
effective tax rates and diluted earnings per share due to the tax effects related to share-based payments being recorded within
the income statement. The Company will continue to evaluate the impact of adoption of this guidance on its financial
statements.
Accounting for Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses." The standard requires the use
of an "expected loss" model on certain types of financial instruments. The standard also amends the impairment model for
available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to
amortized cost of the securities. This standard is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2019, with early adoption permitted. The Company is evaluating the new guidance, but does not expect it to
have a material impact on its financial statements.
Statement of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows." The standard is intended to reduce
diversity in practice in how certain transactions are classified in the statement of cash flows. This standard is effective for fiscal
76
Notes to Financial Statements—(Continued)
years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. The Company
is evaluating the new guidance, but does not expect it to have a material impact on its financial statements.
3.
Special Charges
During the twelve months ended December 31, 2016, the Company purchased seven A319 aircraft which were
previously financed under operating lease agreements. The purchase price for the seven aircraft was $147.7 million, comprised
of cash payments of $107.1 million and the application of maintenance and security deposits held by the previous lessors of
$40.6 million. The Company estimated the fair value of the aircraft to be $95.7 million and has recorded the seven purchased
aircraft within flight equipment on the balance sheets. The Company determined the valuation of the aircraft based on a third-
party appraisal considering the condition of each aircraft (a Level 3 measurement). The Company recognized $37.2 million as a
cost of terminating the leases within special charges on the statement of operations, made up of the excess of the purchase price
paid over the fair value of the aircraft, less previously expensed supplemental rent and other non-cash items of $14.8 million.
During the twelve months ended December 31, 2015, the Company incurred $0.7 million in special charges related to
restructuring charges for outsourcing of ramps and passenger services.
4. Letters of Credit
As of December 31, 2016 and 2015, the Company had a $25.2 million and $25.1 million unsecured standby letter of
credit facility, of which $19.7 million and $13.0 million had been drawn upon for issued letters of credit, respectively.
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.
The Company's credit card processors do not require the Company to maintain cash collateral provided that the Company
satisfies certain liquidity and other financial covenants. Failure to meet these covenants would provide the processors the right
to place a holdback, resulting in a commensurate reduction of unrestricted cash. As of December 31, 2016 and 2015, the
Company was in compliance with such liquidity and other financial covenants in its credit card processing agreements, and the
processors were holding back no 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, 2016 and 2015, was $234.6 million and $250.2 million, respectively.
6.
Short-term Investment Securities
The Company's short-term investment securities consist of available-for-sale asset-backed securities with contractual
maturities of twelve months or less. These securities are stated at fair value within current assets on the Company's balance
sheet. Realized gains and losses on sales of investments, if any, are reflected in non-operating income (expense) in the
statements of operations. Unrealized gains and losses on investment securities are reflected as a component of accumulated
other comprehensive income, (AOCI).
As of December 31, 2016, the Company had $100.2 million in short-term available-for-sale investment securities, earning
interest income at a weighted-average fixed rate of approximately 1.1%. For the twelve months ended December 31, 2016, an
unrealized loss of $23 thousand, net of deferred taxes of $13 thousand, was recorded within AOCI related to these investment
securities. The Company has not recognized any realized gains or losses related to these securities as the Company has not
transacted any sales of these securities.
77
Notes to Financial Statements—(Continued)
7. Accrued Liabilities
Accrued liabilities included in other current liabilities as of December 31, 2016 and 2015 consist of the following:
Salaries and wages
Airport obligations
Federal excise and other passenger taxes and fees payable
Aircraft maintenance
Fuel
Aircraft and facility lease obligations
Interest payable
Other
Other current liabilities
As of December 31,
2016
2015
(in thousands)
54,578
43,989
42,064
30,233
14,828
10,378
8,499
21,442
226,011
$
$
34,123
30,849
38,254
21,688
7,084
24,014
12,355
14,362
182,729
$
$
8. 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
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.
78
Notes to Financial Statements—(Continued)
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.
As of December 31, 2016 and 2015, 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,
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, 2016 and 2015,
there were no shares of preferred stock outstanding.
9. 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.
On December 16, 2014, the Company's Board of Directors approved the 2015 Incentive Award Plan, or 2015 Plan, which
was subsequently approved by the Company's stockholders on June 16, 2015. The number of shares reserved for issuance or
transfer pursuant to awards under the 2015 Plan will be increased by the number of shares represented by awards outstanding
under the Company's former equity plan, the 2011 Equity Incentive Award Plan (2011 Plan), that are forfeited or lapse
unexercised and which, following the effective date of the 2015 Plan, are not issued under the Company's 2011 Plan. No further
awards will be granted under the 2011 Stock Plan, and all outstanding awards will continue to be governed by their existing
terms. As of December 31, 2016 and December 31, 2015, 2,358,283 and 2,428,990 shares of the Company’s common stock,
respectively, remained available for future issuance under the 2015 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 $7.1 million, $9.2 million and $8.8
million for 2016, 2015 and 2014, respectively. During 2016, 2015 and 2014, there was $2.6 million, $3.4 million and $3.2
million tax benefit recognized in income related to stock-based compensation, respectively.
Restricted Stock and Restricted Stock Units
Restricted stock and restricted stock unit awards are valued at the fair value of the shares on the date of grant. Generally,
granted shares and units vest 25% per year on each anniversary of issuance. Each restricted stock unit represents the right to
receive one share of common stock upon vesting of such restricted stock unit. Vesting of restricted stock units is based on time-
based service conditions. In order to vest, the participant must still be employed by the Company, with certain contractual
exclusions, at each vesting event. Generally, within 30 days after vesting, the shares underlying the award will be issued to the
participant. In the event a successor corporation in a change in control situation fails to assume or substitute for the restricted
stock units, the restricted stock units will automatically vest in full as of immediately prior to the consummation of such change
in control. In the event of death or permanent disability of a participant, the restricted stock units will automatically vest in full.
Compensation expense, net of forfeitures, is recognized on a straight-line basis over the requisite service period.
79
Notes to Financial Statements—(Continued)
A summary of the status of the Company’s restricted stock shares (restricted stock awards and restricted stock unit
awards) as of December 31, 2016 and changes during the year ended December 31, 2016 is presented below:
Outstanding at December 31, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Number of
Shares
294,680
237,001
(138,949)
(118,087)
274,645
Weighted-
Average
Grant Date Fair
Value ($)
49.19
42.91
39.34
47.26
49.55
There were 237,001 and 74,772 restricted stock shares granted during the years ended December 31, 2016 and
December 31, 2015, respectively. As of December 31, 2016 and December 31, 2015, there was $9.2 million and $9.8 million,
respectively, of total unrecognized compensation cost related to nonvested restricted stock to be recognized over 2.5 years and
2.4 years, respectively.
The weighted-average fair value of restricted stock granted during the years ended December 31, 2016, 2015 and 2014
was $42.91, $75.40 and $55.14, respectively. The total fair value of restricted stock shares vested during the years ended
December 31, 2016, 2015 and 2014 was $6.6 million, $9.2 million and $6.5 million respectively.
Stock Options
Stock option awards are granted with an exercise price equal to the fair market value of the Company’s common stock at
the date of grant, vest over four years of continuous service and have ten-year contractual terms. The fair value of each stock
option award is estimated on the date of grant using the Black Scholes model. There were no options granted during 2016,
2015, or 2014. The Company has not granted options since 2011, at which time the Company’s weighted average assumptions
for expected volatility, dividends, term and risk-free interest rate were 46.25%, 0%, 6.25 years and 2.03%,
respectively. Expected volatilities are based on the historical volatility of a group of peer entities within the same industry. The
expected term of options is based upon the simplified method, which represents the average of the vesting term and the
contractual term. The risk-free interest rate is based on U.S. Treasury yields for securities with terms approximating the
expected term of the option.
Prior to the Company's IPO, to the extent a market price was not available, the fair value of the Company’s common
stock was estimated using a discounted cash flow analysis and market multiples, based on management’s estimates of revenue,
driven by assumed market growth rates, and estimated costs as well as appropriate discount rates. These estimates were
consistent with the plans and estimates management used to manage the Company’s business.
A summary of share option activity as of December 31, 2016 and changes during the year ended December 31, 2016 is
presented below:
Outstanding at December 31, 2015
Exercised
Forfeited or expired
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Vested at December 31, 2016
Weighted-
Average
Exercise
Price ($)
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
($000)
8.20
7.98
7.80
8.37
8.37
8.37
4.7
3.7
3.7
3.7
890
804
804
804
Number
of Options
28,125
(11,500)
(375)
16,250
16,250
16,250
The total intrinsic value of share options exercised during the years ended December 31, 2016, 2015 and 2014 was $0.4
million, $0.2 million and $1.3 million, respectively. There were no options that vested during the year ended December 31,
2016. The total fair value of options vested during the years ended December 31, 2015 and 2014 was $4 thousand and $100
thousand, respectively.
80
Notes to Financial Statements—(Continued)
As of December 31, 2016 and 2015, there was no unrecognized compensation cost related to options as all option
awards were fully vested. As of December 31, 2014, there was $3 thousand of total unrecognized compensation cost related to
options expected to be recognized over 0.7 years.
Performance Share Awards
The Company grants certain senior-level executives performance stock units that vest based on market and time-based
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 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 death or
permanent disability 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 death or permanent disability.
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 is recognized assuming that the requisite service is rendered regardless of whether the market
conditions are achieved.
The grant date fair value of the performance share awards is 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 Twelve
Months Ended
December 31, 2016
Weighted-Average at
Grant Date for Twelve
Months Ended
December 31, 2015
0.39
1.12 %
2.94
— %
0.36
0.91 %
2.55
— %
For grants awarded in 2016, 2015 and 2014, the volatility was based upon a weighted average historical volatility for the
Company. The Company chose to use historical volatility to value these awards because historical 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, 2016:
Outstanding at December 31, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Number of
Awards
Weighted-Average
Fair Value at Grant
Date ($)
86,778
119,508
(27,579)
(44,800)
133,907
66.44
51.40
77.57
67.01
50.54
As of December 31, 2016 and 2015, there was $4.3 million and $2.9 million, respectively, of total unrecognized
compensation cost related to performance share awards expected to be recognized over 1.90 years and 1.51 years, respectively.
81
Notes to Financial Statements—(Continued)
10. Net Income per Share
The following table sets forth the computation of basic and diluted earnings per common share:
Numerator:
Net income
Denominator:
Year Ended December 31,
2016
2015
2014
(in thousands, except per share amounts)
$
264,879
$
317,220
$
225,464
Weighted-average shares outstanding, basic
Effect of dilutive stock awards
Adjusted weighted-average shares outstanding, diluted
70,344
164
70,508
72,208
218
72,426
Net Income per Share:
Basic earnings per common share
Diluted earnings per common share
$
$
3.77
3.76
$
$
4.39
4.38
$
$
Anti-dilutive weighted-average shares
66
52
72,739
555
73,294
3.10
3.08
29
11. Debt and Other Obligations
Long-term debt
As of December 31, 2016, the Company held non public and public debt instruments. The Company's indebtedness
includes the 2014 Framework Agreement, the 2015 Facility Agreements, 2015-1 EETCs and 2016 Facility Agreement described
below.
2014 Framework Agreement
During 2014, the Company entered into a Framework Agreement, with a bank syndicate, which as of December 31,
2016, provided $379.0 million of debt financing for seven Airbus A320 aircraft and three Airbus A321 aircraft. Each loan
extended under the Framework Agreement was funded on or about the delivery date of each aircraft and is secured by a first-
priority security interest in the individual aircraft. Each loan amortizes on a mortgage-style basis, which requires quarterly
payments, with senior loans having a 12-year term and junior loans having a 7-year term. Loans bear interest payable quarterly
on a fixed-rate basis. As of December 31, 2016, the Company has taken delivery of all Airbus A320 and Airbus A321 aircraft
financed through the Framework Agreement.
2015 Facility Agreements
During 2015, the Company entered into two Facility Agreements, which as of December 31, 2016, provided $185.0
million of debt financing for five Airbus A320 aircraft. Each loan extended under the Facility Agreements was funded on or near
the delivery date of each aircraft and was secured by a first-priority security interest on the individual aircraft. Each loan
amortizes on a mortgage-style basis, which requires quarterly payments, with senior loans having a 12-year term and junior
loans having a 7-year term. Loans bear interest payable quarterly on a fixed-rate basis. As of December 31, 2016, the Company
has taken delivery of all Airbus A320 aircraft financed through the Facility Agreements.
2015-1 EETCs
In August 2015, the Company created two separate pass-through trusts, which issued approximately $576.6 million
aggregate face amount of Series 2015-1 Class A and Class B enhanced equipment trust certificates (EETCs) in connection with
the financing of 12 new Airbus A321 aircraft and 3 new Airbus A320 aircraft. Each class of certificates represents a fractional
undivided interest in the respective pass-through trusts and is not an obligation of the Company. The proceeds from the issuance
of these certificates are initially held in escrow by a depositary and, upon satisfaction of certain terms and conditions, are
82
Notes to Financial Statements—(Continued)
released and used to purchase equipment notes which are issued by the Company and secured by the Company's aircraft. Interest
on the issued and outstanding equipment notes are payable semiannually on April 1 and October 1 of each year, which
commenced on April 1, 2016, and principal on such equipment notes is scheduled for payment on April 1 and October 1 of
certain years, which commenced on October 1, 2016. Issued and outstanding Series A and Series B equipment notes mature in
April 2028 and April 2024, respectively, and accrue interest at a rate of 4.100% per annum and 4.450% per annum, respectively.
As of December 31, 2016, $538.1 million of the proceeds from the sale of the 2015-1 EETCs had been used to purchase
equipment notes in connection with the financing of 3 Airbus A320 aircraft and 11 Airbus A321 aircraft. The remaining $38.5
million of escrowed proceeds held by the pass-through trusts were used to purchase equipment notes when the remaining new
Airbus A321 aircraft was delivered in January 2017. Equipment notes that are issued are reported as debt on the Company's
balance sheets.
The Company evaluated whether the pass-through trusts formed are variable interest entities (VIEs) required to be
consolidated by the Company under applicable accounting guidance. The Company determined that the pass-through trusts are
VIEs and that it does not have a variable interest in the pass-through trusts. Based on this analysis, the Company determined that
it is not required to consolidate these pass-through trusts.
2016 Facility Agreement
In December 2016, the Company entered into a Facility Agreement, which will provide up to $106.0 million of debt
financing for two Airbus A320 aircraft and one Airbus A321 aircraft. Each loan extended under the Facility Agreement is funded
on or near the delivery date of each aircraft and is secured by a first-priority security interest on the individual aircraft. Each loan
amortizes on a mortgage-style basis and has a 10-year term. Loans bear interest payable quarterly on a fixed-rate basis. The two
Airbus A320 aircraft and one Airbus A321 aircraft under the Company's existing Facility Agreement are scheduled for delivery
between March 2017 and April 2017.
Long-term debt is comprised of the following:
As of December 31,
Year Ended December 31,
2016
2015
2016
2015
(in millions)
(weighted-average interest rates)
Fixed-rate senior term loans due through 2027
Fixed-rate junior term loans due through 2022
Fixed-rate class A enhanced equipment trust certificates
due through 2028
Fixed-rate class B enhanced equipment trust certificates
due through 2024
Long-term debt
Less current maturities
Less unamortized discount, net
Total
$
$
$
451.9
47.1
409.8
103.6
1,012.4
84.4
30.6
897.4
$
$
$
484.2
54.3
95.8
25.0
659.3
49.6
13.0
596.7
4.10%
6.90%
4.10%
4.45%
4.10%
6.90%
4.03%
4.37%
During the year ended December 31, 2016 and 2015, the Company made scheduled principal payments of $64.4 million
and $25.4 million on its outstanding debt obligations, respectively.
At December 31, 2016, long-term debt principal payments for the next five years and thereafter are as follows:
83
Notes to Financial Statements—(Continued)
2017
2018
2019
2020
2021
2022 and thereafter
Total debt principal payments
December 31, 2016
(in millions)
$
$
88.9
83.1
81.5
79.7
78.2
601.0
1,012.4
Interest Expense
Interest expense related to long-term debt consists of the following:
Senior term loans
Junior term loans
Class A enhanced equipment trust certificates
Class B enhanced equipment trust certificates
Commitment fees
Amortization of deferred financing costs
Total
Year Ended December 31,
2016
2015
(in thousands)
$
$
19,759
3,568
11,509
3,243
127
3,435
41,641
$
$
15,429
2,997
494
140
54
1,165
20,279
As of December 31, 2016 and 2015, the Company had a line of credit for $23.6 million and $18.6 million related to
corporate credit cards. Respectively, the Company had drawn $9.9 million and $7.3 million as of December 31, 2016 and 2015,
which is included in accounts payable.
As of December 31, 2016 and 2015, the Company had lines of credit with counterparties for derivatives and physical fuel
delivery in the amount of $46.5 million and $38.0 million, respectively. As of December 31, 2016 and 2015, the Company had
drawn $8.0 million and $6.9 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 fuel 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, 2016 and
2015, the Company did not have any outstanding fuel derivatives.
12. Leases and Aircraft 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 12 to 18 years for aircraft and up to 30
years for other leased equipment and property.
Total rental expense for all leases charged to operations for the years ended 2016, 2015 and 2014 was $283.9 million,
$282.7 million and $254.3 million, respectively. Total rental expense charged to operations for aircraft and engine operating
leases for the years ended December 31, 2016, 2015 and 2014 was $201.7 million, $211.5 million and $195.8 million,
respectively. Supplemental rent is made up of maintenance reserves paid or expected 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 $9.0 million, $7.7 million and $7.5 million of supplemental rent recorded within aircraft
rent during 2016, 2015 and 2014, 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. Substantially all of
these maintenance reserve payments are calculated based on a utilization measure, such as flight hours or cycles, while some
84
Notes to Financial Statements—(Continued)
maintenance reserve payments are fixed contractual amounts. Fixed maintenance reserve payments for these aircraft and related
flight equipment, including estimated amounts for contractual price escalations, are expected to be $7.7 million in 2017, $7.0
million in 2018, $5.7 million in 2019, $5.4 million in 2020, $5.5 million in 2021, and $17.7 million in 2022 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 either (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. 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. As of December 31, 2016, 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 aircraft
maintenance deposits in the accompanying balance sheets. The Company makes certain assumptions 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, 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. When it is not probable the
Company will recover amounts currently on deposit with a lessor, such amounts are expensed as supplemental rent. The
Company expensed $2.2 million, $2.3 million and $1.6 million of paid maintenance reserves as supplemental rent during 2016,
2015 and 2014, respectively.
As of December 31, 2016 and 2015, the Company had short-term and long-term aircraft maintenance deposits of $286.4
million and $279.9 million, respectively, on its balance sheets. The Company has concluded that these aircraft 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 some 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. Supplemental rent is recorded at the time a non-refundable maintenance reserve
payment is made that has been substantively determined to be contingent rent.
As of December 31, 2016, the Company had a fleet consisting of 95 A320 family aircraft. As of December 31, 2016, the
Company owned 36 of these aircraft and financed 59 aircraft under operating leases with expirations between 2017 and 2029.
In addition, as of December 31, 2016, the Company had 11 spare engines financed under operating leases with lease term
expiration dates ranging from 2018 to 2027 and owned 1 spare engine. Two of the Company's leased aircraft have variable rent
payments, which fluctuate based on changes in LIBOR (London Interbank Offered Rate). The Company entered into sale
leaseback transactions with third-party aircraft lessors for the majority of these aircraft and engine leases. Deferred losses
resulting from these sale leaseback transactions are included in other long-term assets on the accompanying balance sheet.
Deferred losses are recognized as an increase to rent expense on a straight-line basis over the term of the respective operating
leases. Deferred gains are included in deferred gains and other long-term liabilities on the accompanying balance sheet.
Deferred gains are recognized as a decrease to rent expense on a straight-line basis over the term of the respective operating
leases.
During the twelve months ended December 31, 2016, the Company took delivery of 11 aircraft under secured debt
arrangements, purchased 7 previously leased aircraft and entered into a direct lease agreement with a third-party lessor for 5
A320neos. In addition, the Company purchased one spare engine. All of the Company's aircraft and engine leases 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.
85
Notes to Financial Statements—(Continued)
Future minimum lease payments under noncancellable operating leases with initial or remaining terms in excess of one
year at December 31, 2016 were as follows:
2017
2018
2019
2020
2021
2022 and thereafter
Total minimum lease payments
Aircraft
and Spare Engine
Leases
Operating Leases
Property Facility
Leases
(in thousands)
Total Operating
Leases
$
$
218,484
203,465
184,566
176,590
166,967
558,038
1,508,110
$
$
39,189
38,048
30,451
18,928
8,969
53,734
189,319
$
$
257,673
241,513
215,017
195,518
175,936
611,772
1,697,429
13. Financial Instruments and Risk Management
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 and interest rates. 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
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. The
Company records financial derivative instruments at fair value, which includes an evaluation of each counterparty's credit risk.
As of December 31, 2016 and 2015, the Company did not hold any derivatives.
Fuel Derivative Instruments
From time to time, the Company may enter into fuel derivative contracts in order to mitigate the risk of future volatility in
fuel prices. The Company's fuel 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 accounts for its fuel derivative contracts at fair value and recognizes them in the balance sheet in prepaid
expenses and other current assets or other current liabilities. The Company did not enter into any fuel derivative instruments
during 2016. The Company did not elect hedge accounting on any fuel derivative instruments entered into during 2015 and
2014 and, as a result, changes in the fair value of these fuel derivative contracts are recorded in aircraft fuel expense. In 2016,
the Company did not pay any premiums to acquire jet fuel options. The Company paid $2.5 million and $9.7 million in
premiums to acquire jet fuel options during 2015 and 2014, respectively.
86
Notes to Financial Statements—(Continued)
The following table summarizes the components of aircraft fuel expense for the years ended December 31, 2016, 2015
and 2014:
Into-plane fuel cost
Realized losses (gains) related to fuel derivative contracts, net
Unrealized losses (gains) related to fuel derivative contracts, net
Aircraft fuel
Year Ended December 31,
2016
2015
2014
$
$
447,553
—
—
447,553
(in thousands)
454,747
$
10,580
(3,880)
461,447
$
$
$
608,033
995
3,881
612,909
Premiums and settlements received or paid on fuel derivative contracts are reflected in the accompanying statements of
cash flows in net cash provided by operating activities.
During the third quarter of 2014, the Company became aware of an underpayment of Federal Excise Tax (FET) for fuel
purchases during the period between July 1, 2009 and August 31, 2014. The commencement of the period in which the
Company underpaid FET coincided with a change in its fuel service provider that took place in July 2009. The out of period jet
fuel FET amount of $9.3 million is recorded within aircraft fuel in the statement of operations for the year ended December 31,
2014.
As of December 31, 2016 and 2015, the Company did not have any outstanding fuel derivatives and had no fuel hedging
activity for the twelve months ended December 31, 2016.
Interest Rate Swaps
During 2015, the Company settled six forward interest rate swaps that were designed to fix the benchmark interest rate
component of the interest payments on the debt related to three Airbus A321 aircraft, which the company took delivery of
during the third quarter of 2015. These instruments limited the Company's exposure to changes in the benchmark interest rate
in the period from the trade date through the date of maturity. The interest rate swaps were designated as cash flow hedges. The
Company accounts for these interest rate swaps at fair value and recognizes them in the balance sheet in prepaid expenses and
other current assets or other current assets or other current liabilities with changes in fair value recorded within accumulated
other comprehensive income (AOCI). As of December 31, 2016 and 2015, the Company did not have any outstanding interest
rate swaps.
Realized gains and losses from cash flow hedges are recorded in the statement of cash flows as a component of cash
flows from operating activities. Subsequent to the issuance of each debt instrument, amounts remaining in AOCI are amortized
over the life of the fixed-rate debt instrument. During the twelve months ended December 31, 2016, there were no unrealized
gains or losses recorded within AOCI related to these instruments as they settled in 2015. During the twelve months ended
December 31, 2015, an unrealized loss of $0.9 million, net of deferred taxes of $0.6 million, was recorded within AOCI related
to these instruments. During the twelve months ended December 31, 2016, the Company reclassified interest rate swap losses
of $224 thousand, net of tax of $130 thousand, into earnings. During the twelve months ended December 31, 2015, the
Company reclassified interest rate swap losses of $82 thousand, net of tax of $50 thousand, into earnings. As of December 31,
2016 and December 31, 2015, $1.3 million and $1.5 million, net of tax, remained in AOCI related to these instruments.
14. 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 is for all employees that are not covered by the pilots’ collective bargaining agreement,
who have at least 60 days of service and have attained the age of 21. The Company may make a Qualified Discretionary
Contribution, as defined in the plan, or provide matching contributions to this plan. For flight attendants and dispatchers
participating in the first plan, the Company currently matches 100% of the employee's contribution, up to a maximum of 6% of
the employee's annual compensation. Prior to May 1, 2016, the Company matched 50% of the flight attendant and dispatcher's
contribution, up to a maximum of 6% of the employee's annual compensation. For all other employees participating in the first
plan, the Company matches 50% of the employee’s contribution, up to a maximum of 6% of the employee’s annual
compensation.
87
Notes to Financial Statements—(Continued)
The second plan is for the Company’s pilots, and contains the same service requirements as the first plan. Throughout
2016, the Company matched 100% of the pilot's contribution, up to 9% 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 $18,000 for 2016.
The third plan is for all Company employees residing in Puerto Rico and was adopted on April 16, 2012. It contains the
same service requirements as the first and second plans. For pilots participating in the Puerto Rico plan, the Company matched
100% of their contribution, up to 9% of the individual pilot's annual compensation, but subject to the annual Puerto Rico pre-
tax elective deferral limit, which was $18,000 for 2016. For all other employees participating in the Puerto Rico plan, the
Company matches 50% of the employee's contribution, up to 6% of the employee's annual compensation.
Matching contributions made to all plans were $16.2 million, $12.5 million and $9.7 million in 2016, 2015 and 2014,
respectively, and were included within salaries, wages and benefits in the accompanying statements of operations.
15. 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)
Year Ended December 31,
2016
2015
2014
(in thousands)
$
$
60,079
6,322
2,034
68,435
82,455
3,691
86,146
154,581
$
$
21,632
6,702
1,235
29,569
149,583
6,031
155,614
185,183
$
$
85,966
5,389
2,057
93,412
34,240
(122)
34,118
127,530
The income tax provision differs from that computed at the federal statutory corporate tax rate as follows:
Expected provision at federal statutory tax rate
State tax expense, net of federal benefit
Income tax credits
Other
Total income tax expense (benefit)
Year Ended December 31,
2016
2015
2014
35.0%
1.6%
—%
0.3%
36.9%
35.0%
1.7%
—%
0.2%
36.9%
35.0 %
1.0 %
(0.4)%
0.5 %
36.1 %
88
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, 2016 and 2015, the significant components of the Company's deferred taxes consisted of the
following:
Deferred tax assets:
Deferred revenue
Nondeductible accruals
Deferred manufacturing credits
Accrued maintenance
Equity compensation
Other
Deferred tax assets
Deferred tax liabilities:
Capitalized interest
Deferred gain (loss) on leases, net
Accrued rent
Prepaid expenses
Property, plant and equipment
Deferred financing costs
Accrued aircraft and engine maintenance
Deferred tax liabilities
Net deferred tax assets (liabilities)
December 31,
2016
2015
(in thousands)
3,057
20,547
910
1,854
3,882
4,026
34,276
—
2,435
14,025
1,217
278,872
5,358
40,512
342,419
(308,143) $
$
3,381
11,056
822
830
4,485
2,751
23,325
286
2,393
6,724
2,151
168,813
—
64,439
244,806
(221,481)
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 2016 has not been recorded. Management will continue to monitor the status of Spirit’s operations and reassess
the need for a valuation allowance on a quarterly basis.
In accordance with ASC 718, excess tax benefits are only recognized in the financial statements upon actual
realization of the related tax benefit. The Company recognized a tax deficiency of $0.5 million and an excess tax benefit of $8.9
million for tax years ended December 31, 2016 and 2015, respectively. The excess tax benefit/(deficiency) was recorded as a
reduction/(increase) to income tax payable and a corresponding entry to additional paid in capital.
In December 2015, bonus depreciation was extended with the passage of the Protecting Americans from Tax Hikes
Act (the Act). The Company made estimated payments during 2015 excluding the impact of a potential extension of bonus
depreciation. The passage of the Act allowed the Company to claim bonus depreciation deductions in 2015 on all bonus eligible
acquisitions, including purchased aircraft. These deductions resulted in an overpayment of current year federal income taxes of
$72.3 million as of December 31, 2015 which is recorded as a component of current assets on the balance sheet.
The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of
selling, general and administrative expenses. For tax years ended December 31, 2016, 2015 and 2014, the Company did not
recognize any liabilities for uncertain tax positions nor any interest and penalties on unrecognized tax benefits.
For tax years 2016, 2015 and 2014, the entire income before income taxes for the Company is subject to domestic income
taxes.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company's
federal income tax returns for 2013 through 2015 tax years are still subject to examination in the U.S. Various state and foreign
89
Notes to Financial Statements—(Continued)
jurisdiction tax years remain open to examination. The Company believes that any potential assessment would be immaterial to
its financial statements.
16. 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. As of December 31, 2016, the Company's firm aircraft orders consisted of the
following:
2017
2018
2019
2020
2021
Airbus
A320ceo
A320neo
A321ceo
Total
4
5
1
10
4
12
16
18
50
11
5
16
15
14
13
16
18
76
On April 27, 2016, the Company entered into an amendment to the Airbus A320 Family Purchase Agreement, by and
between the Company and Airbus S.A.S., dated May 5, 2004 (Airbus Amendment), which included the conversion of ten
Airbus A321neo orders to Airbus A320neo orders. The Company has three 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 2017 through 2023. Purchase commitments for these aircraft and engines, including estimated
amounts for contractual price escalations and pre-delivery payments, are expected to be $660.3 million in 2017, $649.8 million
in 2018, $678.3 million in 2019, $824.4 million in 2020, $777.9 million in 2021, and $24.6 million in 2022 and beyond. As of
December 31, 2016, the Company had secured financing commitments of $144.5 million for four aircraft, scheduled for
delivery in 2017, and did not have financing commitments in place for the remaining 72 Airbus aircraft currently on firm order,
which are scheduled for delivery in 2017 through 2021. In January 2017, the Company secured financing of $39.0 million for
one additional aircraft, scheduled for delivery in 2017.
Interest commitments related to the secured debt financing of 29 delivered aircraft as of December 31, 2016 are $42.2
million in 2017, in $38.2 million 2018, $34.6 million in 2019, $30.9 million in 2020, $27.4 million in 2021, and $96.8 million
in 2022 and beyond. For principal commitments related to these financed aircraft, refer to Note 11, Debt and Other Obligations.
As of December 31, 2016, principal and interest commitments related to the Company's future secured debt financing of one
undelivered aircraft under an EETC and three undelivered aircraft under bank debt are approximately $10.9 million in 2017,
$13.0 million in 2018, $13.7 million in 2019, $13.2 million in 2020, $13.3 million in 2021, and $119.1 million in 2022 and
beyond.
In July 2015, the Company executed an upgrade service agreement with Airbus Americas Customer Services Inc.
(Airbus) to reconfigure the seating and increase capacity in 40 of the Company’s A320ceos from 178 to 182 seats
(reconfiguration). The reconfiguration of the aircraft commenced in the first quarter of 2016 and is expected to be completed in
the fourth quarter of 2017 for a remaining committed cost of $2.6 million, as of December 31, 2016. These amounts will be
capitalized within flight equipment on the balance sheet.
In September 2015, the Company executed a lease agreement with Wayne County Airport Authority (the Authority),
which owns and operates Detroit Metropolitan Wayne County Airport (DTW). Under the lease agreement, the Company leases
a 10-acre site, adjacent to the airfield at DTW, in order to construct, operate and maintain an approximately 126,000-square-foot
hangar facility (the project). The project allows for the development of a maintenance hangar in order to fulfill the requirements
of the Company's growing fleet and will reduce dependence on third-party facilities and contract line maintenance. The lease
agreement has a 30-year term with two 10-year extension options. Upon termination of the lease, title of the project, which will
be fully depreciated, will automatically pass to the Authority. The Company estimates it will complete the project during the
first quarter of 2017 for a remaining committed cost of $7.3 million, as of December 31, 2016.
90
Notes to Financial Statements—(Continued)
The Company is contractually obligated to pay the following minimum guaranteed payments for its reservation system,
advertising media, data center, weather system and call center as of December 31, 2016: $5.7 million in 2017, $3.9 million in
2018, $0.3 million in 2019, $0.3 million in 2020, $0.1 million in 2021, and $0.0 million in 2022 and beyond. The Company's
current agreement with its reservation system provider expires in 2018.
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 four union-represented employee groups that together represent approximately 73% of all employees at
December 31, 2016. The Company had four union-represented employee groups that together represented approximately 73%
of all employees at December 31, 2015. The table below sets forth the Company's employee groups and status of the collective
bargaining agreements as of December 31, 2016.
Employee Groups
Pilots
Flight Attendants
Dispatchers
Representative
Air Line Pilots Association, International (ALPA)
Association of Flight Attendants (AFA-CWA)
Transport Workers Union (TWU)
Ramp Service Agents
International Association of Machinists and Aerospace Workers
(IAMAW)
Amendable Date
August 2015
May 2021
August 2018
June 2020
Percentage of
Workforce
26%
42%
1%
4%
In August 2015, the Company's collective bargaining agreement with its pilots, represented by ALPA, became amendable.
In June 2016, ALPA requested the services of the National Mediation Board (NMB) to facilitate negotiations for an amended
agreement and the Company joined ALPA in the request. The NMB has assigned a mediator and the parties continue to meet
and work toward an amended agreement with the guidance of the mediator. Under the RLA, the parties' current agreement
remains in effect until an amended agreement is reached.
In March 2016, under the supervision of the National Mediation Board (NMB), the Company and AFA-CWA reached a
tentative agreement for a five-year contract with the Company's flight attendants. In May 2016, the flight attendants voted to
approve the new five-year contract with the Company. In connection with this agreement, the Company paid a $9.6 million
ratification incentive payment to the flight attendants recorded within salaries, wages and benefits in the statement of
operations.
In July 2014, certain ramp service agents directly employed by the Company voted to be represented by the IAMAW.
In May 2015, the Company entered into a five-year interim collective bargaining agreement with the IAMAW, covering
material economic terms. In June 2016, the Company and the IAMAW reached an agreement on the remaining terms of the
collective bargaining agreement, which is amendable in June 2020. As of December 31, 2016, these ramp service agents served
1 of the 59 airports where the Company operates.
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 $5.7 million and $3.7
million, for health care claims as of December 31, 2016, and 2015, respectively.
91
Notes to Financial Statements—(Continued)
17. Fair Value Measurements
Under ASC 820, Fair Value Measurements and Disclosures, disclosures relating to how fair value is determined for
assets and liabilities are required, 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.
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.
Fuel Derivative Instruments
From time to time, the Company may enter into fuel derivative contracts in order to mitigate the risk of future volatility
in fuel prices. The Company’s fuel 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 fuel derivative instruments, if any. The market
approach uses prices and other relevant information generated by market transactions involving identical or comparable assets
or liabilities.
The Company does not elect hedge accounting on its fuel derivative instruments. As a result, the Company records the
fair value adjustment of its 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. Fair values of the fuel derivative 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 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.
The fair value of the Company's jet fuel swaps are determined based on inputs that are readily available in public markets
or can be derived from information available in publicly quoted markets; therefore, the Company categorizes these instruments
as Level 2. 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 concluded that holding
other inputs constant, a significant increase (decrease) in implied volatility would result in significantly higher (lower)
determination of fair value measurement for the Company's aircraft fuel derivatives. As of December 31, 2016 and 2015, the
Company had no outstanding jet fuel derivatives.
92
Notes to Financial Statements—(Continued)
Long-Term Debt
The estimated fair value of the Company's non publicly held debt agreements has been determined to be Level 3 as
certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes a discounted cash
flow method to estimate the fair value of the Level 3 long-term debt. The estimated fair value of the Company's publicly held
debt agreements has been determined to be Level 2 as the Company utilizes quoted market prices to estimate the fair value of
it's public long-term debt.
The carrying amounts and estimated fair values of the Company's long-term debt, including current maturities, at
December 31, 2016 and December 31, 2015, were as follows:
Senior long-term debt
Junior long-term debt
Class A enhanced equipment trust certificates
Class B enhanced equipment trust certificates
As of December 31,
2016
2015
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
(in millions)
$
451.9
$
463.9
$
484.2
$
477.8
47.1
409.8
103.6
48.1
416.0
105.7
54.3
95.8
25.0
54.6
94.8
25.2
Fair value
level
hierarchy
Level 3
Level 3
Level 2
Level 2
Total long-term debt
$
1,012.4
$
1,033.7
$
659.3
$
652.4
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2016 and December 31, 2015 are comprised of liquid money market funds
and cash and are categorized as Level 1 instruments. The Company maintains cash with various high-quality financial
institutions.
Short-term Investment Securities
Investment securities at December 31, 2016 are comprised of short-term available-for-sale securities and are categorized
as Level 1 instruments, as the Company uses quoted market prices in active markets when determining the fair value of these
securities. As of December 31, 2015, the Company had no outstanding investment securities.
Assets and liabilities measured at gross fair value on a recurring basis are summarized below:
Cash and cash equivalents
Short-term investment securities
Total assets
Total liabilities
Fair Value Measurements as of December 31, 2016
Total
Level
1
Level
2
Level
3
(in millions)
700.9
100.2
801.1
$
$
700.9
100.2
801.1
$
$
— $
—
— $
— $
— $
— $
—
—
—
—
$
$
$
93
Notes to Financial Statements—(Continued)
Cash and cash equivalents
Total assets
Total liabilities
Fair Value Measurements as of December 31, 2015
Total
Level
1
Level
2
Level
3
(in millions)
803.6
803.6
$
$
803.6
803.6
$
$
— $
— $
— $
— $
— $
—
—
—
$
$
$
The Company had no transfers of assets or liabilities between any of the above levels during the years ended
December 31, 2016 or 2015.
The Company's Valuation Group, which reports to the Chief Financial Officer, is made up of individuals from the
Company's Treasury and Corporate Accounting departments. The Valuation Group is responsible for the execution of the
Company's valuation policies and procedures. The Valuation Group compares the results of the Company's internally developed
valuation methods with counterparty reports at each balance sheet date, assesses the Company's valuation methods for
accurateness and identifies any needs for modification. For additional information, refer to Note 6, Short-term Investment
Securities.
18. 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
2016
2015
2014
$
$
2,136.2
185.8
2,322.0
(in millions)
1,940.2
$
201.3
2,141.5
$
$
$
1,728.8
202.8
1,931.6
During 2016, 2015 and 2014, 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.
94
19. Quarterly Financial Data (Unaudited)
Quarterly results of operations for the years ended December 31, 2016 and 2015 are summarized below:
2016
Operating revenue
Operating income
Net income
Basic earnings per share
Diluted earnings per share
2015
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)
$
538,143
$
584,133
$
621,329
$
578,351
101,299
61,920
0.87
0.86
121,835
73,084
1.03
1.03
135,216
81,382
1.17
1.17
$
493,355
$
553,421
$
574,841
$
109,251
69,002
0.94
0.94
122,315
76,704
1.06
1.05
157,219
97,114
1.35
1.35
85,311
48,493
0.70
0.70
519,846
120,337
74,400
1.04
1.04
95
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, 2016 and 2015, and the related
statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2016. 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, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2016, 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, 2016, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 13, 2017 expressed an unqualified opinion thereon.
Miami, Florida
February 13, 2017
/s/ Ernst & Young LLP
Certified Public Accountants
96
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, 2016 based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 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 Annual 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, 2016, 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, 2016 and 2015, and the related statement of
operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2016 of Spirit Airlines, Inc. and our report dated February 13, 2017 expressed an unqualified opinion thereon.
Miami, Florida
February 13, 2017
/s/ Ernst & Young LLP
Certified Public Accountants
97
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, 2016. 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, 2016, 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
2013 framework established 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, 2016.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, which also audited our Financial Statements for the year ended
December 31, 2016. Ernst & Young LLP's report on our internal control over financial reporting is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during 2016 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
98
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 2017 Proxy Statement is incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information under the captions, “Director Compensation” and “Executive Compensation” in our 2017 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 2017
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 2017 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 2017 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 2017 Proxy Statement, our 2017 Proxy Statement shall not be deemed to be filed as part of this Report.
99
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.
100
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 13, 2017
SPIRIT AIRLINES, INC.
By:
/s/ Edward M. Christie
Edward M. Christie
Executive Vice President and Chief Financial Officer
101
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Robert Fornaro, 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, Chief Executive Officer and Director (Principal
Executive Officer)
February 13, 2017
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
February 13, 2017
Vice President, Controller (Principal Accounting Officer)
February 13, 2017
Director (Chairman of the Board)
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
/s/ Robert L. Fornaro
Robert L. Fornaro
/s/ Edward M. Christie
Edward M. Christie
/s/ Edmundo Miranda
Edmundo Miranda
/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
Director
Director
Director
Director
/s/ Dawn M. Zier
Director
Dawn M. Zier
/s/ Myrna M. Soto
Director
Myrna M. Soto
102
Exhibit No.
Description of Exhibit
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
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.
Pass Through Trust Agreement, dated as of August 11, 2015, between Spirit Airlines, Inc. and Wilmington
Trust, National Association, filed as Exhibit 4.1 to the Company’s Form 8-K dated August 11, 2015, is
hereby incorporated by reference.
Trust Supplement No. 2015-1A, dated as of August 11, 2015, between Spirit Airlines, Inc. and Wilmington
Trust, National Association, as Trustee, to the Pass Through Trust Agreement, dated as of August 11, 2015,
filed as Exhibit 4.2 to the Company’s Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Trust Supplement No. 2015-1B, dated as of August 11, 2015, between Spirit Airlines, Inc. and Wilmington
Trust, National Association, as Trustee, to the Pass Through Trust Agreement, dated as of August 11, 2015,
filed as Exhibit 4.3 to the Company’s Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Revolving Credit Agreement (2015-1A), dated as of August 11, 2015, between Wilmington Trust, National
Association, as Subordination Agent (as agent and trustee for the trustee of Spirit Airlines Pass Through
Trust 2015-1A), as Borrower, and Natixis, acting via its New York Branch, as Liquidity Provider, filed as
Exhibit 4.4 to the Company’s Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Revolving Credit Agreement (2015-1B), dated as of August 11, 2015, between Wilmington Trust, National
Association, as Subordination Agent (as agent and trustee for the trustee of Spirit Airlines Pass Through
Trust 2015-1B), as Borrower, and Natixis, acting via its New York Branch, as Liquidity Provider, filed as
Exhibit 4.5 to the Company’s Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Intercreditor Agreement (2015-1), dated as of August 11, 2015, among Wilmington Trust, National
Association, as Trustee of the Spirit Airlines Pass Through Trust 2015-1A and as Trustee of the Spirit
Airlines Pass Through Trust 2015-1B, Natixis, acting via its New York Branch, as Class A Liquidity
Provider and Class B Liquidity Provider, and Wilmington Trust, National Association, as Subordination
Agent, filed as Exhibit 4.6 to the Company’s Form 8-K dated August 11, 2015, is hereby incorporated by
reference.
Deposit Agreement (Class A), dated as of August 11, 2015, between Wilmington Trust Company, as Escrow
Agent, and Natixis, acting via its New York Branch, as Depositary, filed as Exhibit 4.7 to the Company’s
Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Deposit Agreement (Class B), dated as of August 11, 2015, between Wilmington Trust Company, as Escrow
Agent, and Natixis, acting via its New York Branch, as Depositary, filed as Exhibit 4.8 to the Company’s
Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Escrow and Paying Agent Agreement (Class A), dated as of August 11, 2015, among Wilmington Trust
Company, as Escrow Agent, Citigroup Global Markets Inc., Morgan Stanley & Co. LLC and Credit Suisse
Securities (USA) LLC, as Underwriters, Wilmington Trust, National Association, not in its individual
capacity, but solely as Pass Through Trustee for and on behalf of Spirit Airlines Pass Through Trust
2015-1A, and Wilmington Trust, National Association, as Paying Agent, filed as Exhibit 4.9 to the
Company’s Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Escrow and Paying Agent Agreement (Class B), dated as of August 11, 2015, among Wilmington Trust
Company, as Escrow Agent, Citigroup Global Markets Inc., Morgan Stanley & Co. LLC and Credit Suisse
Securities (USA) LLC, as Underwriters, Wilmington Trust, National Association, not in its individual
capacity, but solely as Pass Through Trustee for and on behalf of Spirit Airlines Pass Through Trust
2015-1B, and Wilmington Trust, National Association, as Paying Agent, filed as Exhibit 4.10 to the
Company’s Form 8-K dated August 11, 2015, is hereby incorporated by reference.
103
4.12
4.13
4.14
4.15
4.16
4.17
10.1+
10.2+
10.3+
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
Note Purchase Agreement, dated as of August 11, 2015, among Spirit Airlines, Inc., Wilmington Trust,
National Association, as Pass Through Trustee under each of the Pass Through Trust Agreements,
Wilmington Trust, National Association, as Subordination Agent, Wilmington Trust Company, as Escrow
Agent, and Wilmington Trust National Association, as Paying Agent, filed as Exhibit 4.11 to the Company’s
Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Form of Participation Agreement (Participation Agreement among Spirit Airlines, Inc., Wilmington Trust,
National Association, as Pass Through Trustee under each of the Pass Through Trust Agreements,
Wilmington Trust, National Association, as Subordination Agent, Wilmington Trust, National Association,
as Loan Trustee, and Wilmington Trust, National Association, in its individual capacity as set forth therein)
(Exhibit B to Note Purchase Agreement), filed as Exhibit 4.12 to the Company’s Form 8-K dated August
11, 2015, is hereby incorporated by reference.
Form of Indenture and Security Agreement (Indenture and Security Agreement between Spirit Airlines, Inc.
and Wilmington Trust, National Association, as Loan Trustee) (Exhibit C to Note Purchase Agreement),
filed as Exhibit 4.13 to the Company’s Form 8-K dated August 11, 2015, is hereby incorporated by
reference.
Form of Pass Through Trust Certificate, Series 2015-1A (included in Exhibit A to Exhibit 4.2), filed as
Exhibit 4.14 to the Company’s Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Form of Pass Through Trust Certificate, Series 2015-1B (included in Exhibit A to Exhibit 4.3), filed as
Exhibit 4.15 to the Company’s Form 8-K dated August 11, 2015, is hereby incorporated by reference.
Form of Series 2015-1 Equipment Notes (included in Section 2.01 of Exhibit 4.13), filed as Exhibit 4.16 to
the Company’s Form 8-K dated August 11, 2015, is hereby incorporated by reference.
General Release, dated January 14, 2014, between Spirit Airlines, Inc. and Ben Baldanza, filed as Exhibit
10.1 to the Company's Form 10-K dated February 20, 2014, is hereby incorporated by reference.
Amended and Restated Employment Agreement, dated as of January 8, 2014, between Spirit Airlines, Inc.
and Ben Baldanza, filed as Exhibit 10.2 to the Company's Form 10-K dated February 20, 2014, is hereby
incorporated by reference.
Offer Letter, dated September 7, 2013, between Spirit Airlines, Inc. and John Bendoraitis, filed as Exhibit
10.3 to the Company's Form 10-K dated February 20, 2014, is hereby incorporated by reference.
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.
104
10.10†
10.11†
10.12
10.13†
10.14†
10.15†
10.16
10.17†
10.18+
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.
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; and
Amendment No. 15 dated as of November 21, 2013, filed as Exhibit 10.1 to the Company's Form 10-Q
dated July 29, 2016; Amendment No. 16 dated as of December 17, 2013, filed as Exhibit 10.2 to the
Company's Form 10-Q dated July 29, 2016; Amendment No. 17 dated as of March 11, 2014, filed as
Exhibit 10.3 to the Company's Form 10-Q dated July 29, 2016; Amendment No. 18 dated as of July 31,
2014, filed as Exhibit 10.4 to the Company's Form 10-Q dated July 29, 2016; Amendment No. 19 dated as
of August 21, 2015, filed as Exhibit 10.5 to the Company's Form 10-Q dated July 29, 2016; and
Amendment No. 20 dated as of April 27, 2016, filed as Exhibit 10.6 to the Company's Form 10-Q dated
July 29, 2016 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.
105
10.19+
10.20+
10.21+
10.22
10.23+
10.24†
10.25†
10.26+
10.27+
10.28+
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
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.
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, filed as
Exhibit 10.27 to the Company's Form 10-K dated February 20, 2014, is hereby incorporated by reference.
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.
Framework Agreement, dated as of October 1, 2014 by and between Spirit Airlines, Inc., BNP Paribas, New
York Branch, Landesbank Hessen-Thuringen Girozentrale, Natixis, New York Branch, KfW IPEX-Bank
GmbH, Investec Bank PLC and Wilmington Trust Company, filed as Exhibit 10.1 to the Company's Form
10-Q dated October 28, 2014, is hereby incorporated by reference.
Form of Performance Share Award Grant Notice and Performance Share Award Agreement for awards
under the Spirit Airlines, Inc. 2015 Incentive Award Plan, filed as Exhibit 10.2 to the Company’s Form 10-
Q dated July 24, 2015, is hereby incorporated by reference.
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement for awards
under the Spirit Airlines, Inc. 2015 Incentive Award Plan, filed as Exhibit 10.3 to the Company’s Form 10-
Q dated July 24, 2015, is hereby incorporated by reference.
Form of Annual Cash Award Grant Notice and Annual Cash Award Agreement for awards under the Spirit
Airlines, Inc. 2015 Incentive Award Plan, filed as Exhibit 10.4 to the Company’s Form 10-Q dated July 24,
2015, is hereby incorporated by reference.
Non-Employee Director Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit
Award Agreement for awards under the Spirit Airlines, Inc. 2015 Incentive Award Plan, filed as Exhibit
10.5 to the Company’s Form 10-Q dated July 24, 2015, is hereby incorporated by reference.
Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement for awards under the
Spirit Airlines, Inc. 2011 Equity Incentive Award Plan, filed as Exhibit 10.6 to the Company’s Form 10-Q
dated July 24, 2015, is hereby incorporated by reference.
Robert L. Fornaro Employment Agreement.
B. Ben Baldanza Separation Agreement.
106
10.37
10.38
12.1
23.1
31.1
31.2
32.1*
B. Ben Baldanza General Release.
Theodore Botimer Severance and Release Agreement
Computation of Ratio of Earnings to Fixed Charges.
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.
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
101.DEF
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
†
+
*
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.
Indicates a management contract or compensatory plan or arrangement.
Exhibits 32.1 is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act,
or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in
any registration statement or other document filed under the Securities Act or the Exchange Act, except as otherwise
specifically stated in such filing.
107